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Oh yes you Didi! Chinese ridesharing giant merges with Uber

By Sarah Lacy , written on August 1, 2016

From The Travis Shrugged Desk

By now everyone knows you shouldn’t trust Uber. Apparently you shouldn’t trust the Uber of China either.

For about a year now, I’ve been the biggest skeptic about Uber China in the tech press.

Nearly one year ago, I wrote an in depth story about how bad things where when friendlier blogs were still pretending Uber was “crushing it” there. More recently, as Uber China’s losses mounted, I wrote that something had to give. Either the company had to find a way to cut its losses or suck it up and go public, because even Uber -- a company that can raise billions from icky sources at the drop of a hat -- couldn’t sustain that money losing pace to have low-double-digit market share forever.

And two weeks ago, I wrote that Didi Chuxing seemed to be gearing up to become the regulatory favorite in China. Sure enough, the new rules for ridesharing came out last week, and they entail a lot of registering drivers and other day-to-day work that’s harder for a company like Uber that has struggled for a year to even hire a CEO in China.

And yet, even I’m surprised at the reports last night that Uber China and Didi are merging. Last week when it was leaked that investors wanted it to happen, I was told that was simply investors trying use the press to push an agenda. Indeed, even the Bloomberg article then said actual management had not discussed it.

Well, either people were lying or those meetings happened extremely quickly, because today the two companies confirmed that they are merging in a deal that gives Uber China investors-- including Baidu, Uber Global and others-- effectively 20% of the combined stake. Didi has invested also $1 billion in Uber Global at a near $70 billion valuation. In fact, it’s slightly more complicated: Uber gets 5.89% of the combined company with “preferred equity interest which is equal to a 17.7% economic interest” in Didi. Baidu and other shareholders get about 2.3%. But the biggest shocker of all: The sworn enemies are swapped board seats. Uber’s Travis Kalanick is joining the board of Didi and Didi’s Cheng Wei is joining Uber’s board.

So what to make of the about face?

One thing that’s totally unsurprising, one thing that is surprising, one big global smack in the face, and one nice piece of karmic retribution.

In order:

What’s totally unsurprising: That Uber had to find a way out of this mess. Our sources have said the $1 billion Uber already admitted to burning in China last year was far higher. They were simply outgunned by a company that had all the advantages in China that Uber had here: First mover, endless cash, friendly political connections. Even Uber can’t keep burning billions of dollars a year to have a minority stake with no profits in sight. Especially given the government could crack down on Uber -- a company with a history of organizing political action with ties to the CIA and Department of Defense-- at any minute. Uber needed an exit, and a face saving deal where it still has a stake in the surging company is far better than waiting to get banned and have nothing to show for the billions spent.

Is the balance of power shifting at Uber? In the face of losses that even Uber can’t sustain and an oncoming US war with Apple, Google and Tesla over self-driving cars, are investors finally starting to get their way? We’ll know the answer is yes if Uber files for an IPO in the next year. Travis Kalanick has said he will put it off as long as possible, against the wishes of many of his investors.

What’s surprising: That Didi needed the deal. I have no reason to suspect that Didi isn’t as dominant in China as it claims. But I wrote before that I find the claims of pretty much everyone in this space somewhat circumspect. This move makes me wonder if Didi has been honest about how well it’s doing in China.

The company said it still has most of its money from its last two rounds in the bank, that it’s profitable in half its markets, and growing at a huge clip. It also claims it has eased off on discounting, because its market effects are big enough that it can.

If all of that’s true, why did Didi need to do this deal? This deal shows how desperate Uber was to get out of China. But we knew that. What’s surprising is it makes Didi look far weaker than it had lead reporters to believe. You don’t give up 20% of your company if your competitor is on the ropes. That’s double the price Facebook effectively paid for WhatsApp - seen at the time as a crazy deal. Uber may have been negotiating from a position of weakness, but it certainly wasn’t desperation.

But no matter, Didi now owns what is already the world’s largest ridesharing market. Another bonus for Didi: Not only does it have Tencent and Alibaba as its backers, but by virtue of this deal it now has ties with Baidu too. The only company, its press release crows, that can boast all three. If they were bluffing the world’s press in how well they were doing, it’s yet another way they won at Uber’s own game.

The giant smack in the face: You gotta wonder how the call to Lyft’s senior management went. Didi built a coalition against Uber, tying together Grab, Lyft and Ola and has now done a deal with Uber. Not only did Didi invest directly in these companies -- which is now an astounding conflict of interest and a lesson in why you don’t take money from other startups-- and has relationships where their customers could use each other’s services when they traveled, but it was reportedly helping them out with technology. Grab had engineers based in Didi’s Chinese offices. They’ve all used the same global PR fixers. These relationships were incredibly close.

Here’s what Jean Liu said in a press conference about Didi’s relationship with Lyft:

After our investment, Lyft’s market share almost doubled. [It grew to] 50% in San Francisco and in the US in general it’s close to 25%,” Liu said. “To have this open partnership definitely benefits every one of us.”

Well, until one of us broke ranks and merged with Uber...

And later, from an interview we did recently with Grab’s Anthony Tan:

So the number one is the shared values [Didi and Grab] have. The second is how strategically and tactically we can help each other. [One thing they helped with was] investor expertise. If not for them, frankly, we may not have even pitched our investors….

...We have agreed to co-locate our engineering center up there. [Didi CEO] Cheng Wei and I have agreed to share an office. I thought if we are going to put our engineering in China, even ten minutes is too far. I suggested we share an office and he said, “Yeah great idea, why don’t we do that?”

Just that openness. Always. They don’t own the majority of [Grab]. They don’t even own close. They are just one of our shareholders. Such openness and trust and collaborative attitude.

Well, so much for the “trust” part.

I reached out to those shared PR reps this morning to ask if they had any comment-- from any of the above-- on how Didi manages to be a partner to Grab, Ola, or Lyft with their biggest rival on their board of directors. I’ll update if I get a response.

Once again, Didi seems to have beat Uber at its own game: Don’t let a promise get in the way of what you need as a business. Didi and these other Uber spoilers share plenty of investors too including Alibaba, Softbank, and Coatue. Do they simply see Didi as so dominant in their portfolios that they don’t care about the fates of the others? If these investors are all OK with Didi and Uber dividing up the world, where does it leave the Grabs, Olas, and Lyfts of the world?

If Lyft wasn’t trying to sell itself, maybe it should now. It can’t count on a big chunk of the anti-Uber coalition of billionaires anymore.

Karmic retribution: The whole Uber China fundraising and initiative was led, for a while at least, by Emil Michael. You remember, the guy who threatened to silence me and other journalists by “going after [our] families” in ways that could never be traced back to him? His “bro” Kalanick refused to fire him after that, and Michael was sent to Uber China ostensibly to get a win on the board after that scandal. Nice work.

One thing is for sure: The power balance between US and Chinese startups has changed forever. Sure, Uber may be valued higher right now, but everyone knows China is the larger market. Uber threw billions at winning it and failed. It’s now-- belatedly, after wasting billions-- taking the Yahoo strategy of acquiring a chunk in a major local player.

But at least it has something to show for it: 20% of one of the largest Internet companies in China, already. It’s an interesting case for people who assume the Chinese government simply shuts down US rivals indiscriminately. Certainly, that remains a risk. But if it were that easy for the local companies, Didi wouldn’t have had to just give up a whopping 20% of its company.

Regardless, the Facebook strategy of grow everywhere else is looking smarter. China is big, but there’s also a big world outside of China. By concentrating on the fights it could win, Facebook achieved something almost as rare as winning in China: It prepared for the next big inflection point (messaging) and has dominated rivals. Uber has a similar leap in front of it with self driving cars. Facebook competed mostly with startups when it had to catch the next big thing. Uber will be competing with the largest companies in the world. And Tesla signaled last week just how serious it is about competing in autonomous ridesharing.

Here’s the big question: What this means for the likelihood of an Uber IPO. There are two possibilities: Uber had to shed China in order to file, or Uber shedded China to dramatically lessen its burn rate and put off an IPO even longer, as Kalanick has vowed he would do.

Let’s say this: We’ll be keeping a close eye on Bill Gurley’s Twitter account and blog in coming months for clues that he’s either getting his way or losing his mind.

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