Uber and Didi – There can be only one

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Uber exits China. Didi will become the one.   

• Hot on the heels of the legalization of ride hailing in China, it looks as if the two big players will now merge to create a single entity that will dominate the local market.
• This is the classic end game scenario for many network based businesses that are fighting tooth and nail for dominance in a market.
• It looks likely that Uber will sell its China operation to Didi Kuaidi in a deal valuing the combined entity at $35bn in which Uber will have a 20% stake.
• This is a clear signal that despite its marketing message, Uber is the weaker player in China and was suffering from being a foreign company competing with a local champion.
• At the same time Didi Kuaidi will invest $1bn in Uber at a valuation of $68bn.
• This deal makes complete sense because the main reason that these companies are haemorraging money is because they are offering discounted rides to millions of customers to try and win them over.
• As they become one company, there will be only one go to place to hail a car via a smartphone for both passengers and drivers.
• Hence, there will no longer be any need for discounts to win share and the result is very likely to be higher fares going forward.
• This is the nirvana of all network based businesses as when one becomes the go to place to buy or sell a product or service, then the company can really start to make profits.
• This is a classic example of how a network based business must have 60% share or be double the size of its next competitor in order to make money (see here).
• If marketing is to believed, both Didi and Uber China are roughly the same size and are currently slashing each other’s throats in order to become the go to ride hailing service in China.
• This is why I have long believed that one of these companies would buy the other and clearly this has been in the works for some time.
• The catalyst is the legalisation of ride hailing as it would have been very difficult to get regulatory approval for a merger of companies whose products are technically illegal.
• RFM research indicates that in territories where Uber is dominant, it is already profitable and once this takeover is complete, the same is likely to be true in China.
• However, it looks very much as if Uber is effectively exiting the China market and ride hailing like every other Digital Life service in China will become a Chinese service for Chinese users delivered by Chinese companies.
• From Uber’s perspective this transaction also makes sense as it is coming under increasing pressure to make money and the prospect of that any time soon in China was looking very unlikely.
• Hence it looks like Uber is backing away from its plan to dominate the globe but will instead settle for a big piece of it but at excellent profitability.
• This is bad news for Baidu which had backed Uber China against its rivals Alibaba and Tencent (who backed Didi) as it will now be a very junior player in Chinese ride hailing.
• That being said, Baidu has the best understanding of the ecosystem which combined with its low valuation keeps it my favourite choice for China and one of my top 3 globally.