China has been a challenging market for Uber, which has been burning through more than $1 billion a year in a price war with Didi. Uber is profitable in the United States, Canada and about 100 other cities.
“It makes huge sense. Uber faces an uphill task in China especially since Didi is multiple times larger by transaction value and city coverage,” said Hong Kong-based Richard Ji, co-founder of All-Stars Investment Ltd, which manages about $900 million and owns Didi stock.
“This will lead to favorable outcomes for both companies. The biggest benefit is cost savings, they no longer have to give out subsidies to drivers and passengers. It will give pricing power as the new entity will become the dominant player. That means profitability will come sooner than later,” he added.
Under the deal, Didi will also invest $1 billion in Uber, which operates globally outside China, the source said, adding to a series of deals and joint ventures Didi has struck in recent years.
INTERNATIONAL AMBITION
Analysts said Didi’s latest move is a signal of its readiness to step beyond its home market.
“This clearly shows Didi’s global ambitions and its desire to work together with Uber to tap Chinese travelers, who are going out in big numbers. There’s a possibility the two could work together in other markets,” All-Stars Investment’s Ji said.
Didi said in its posting it will look to expand its international business and enter markets like Hong Kong, Taiwan, Macau, Japan, South Korea, Europe and Russia.
Didi – itself created last year from a merger of two firms backed respectively by e-commerce giant Alibaba Group (BABA.N) and social network firm Tencent (0700.HK) – has invested $100 million in Lyft, Uber’s main rival in the United States.
It has also formed an alliance with Lyft, India’s ride service Ola and Southeast Asia’s ride-hailing startup Grab in an effort to compete with Uber’s global dominance.
The deal is the latest sign of a global Internet or technology company struggling to break into China’s cut-throat market, where local entrepreneurs have built formidable businesses, partly helped by a supportive government.
All of China’s technology heavyweights will be stakeholders in Didi, as Uber shareholder Baidu (BIDU.O) will gain a stake. Apple Inc (AAPL.O) recently made a rare $1 billion investment in Didi.
China last week issued guidelines that establish a long-awaited framework for the booming ride-hailing industry and remove uncertainty for firms such as Didi and Uber.
(Reporting by Heather Somerville in SAN FRANCISCO, Denny Thomas in HONG KONG, Rama Venkat Raman in BENGALURU, Jake Spring and Beijing monitoring team in Beijing, and Jeremy Wagstaff in SINGAPORE- Editing by Edwina Gibbs and Ian Geoghegan)
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