Uber to Sell to Rival Didi Chuxing and Create New Business in China

HONG KONG — Uber’s future in China seemed to hold promise.

Despite intense local competition, the market was one of Uber’s largest by total number of rides. A Chinese operation was the personal project of the Uber co-founder Travis Kalanick, who traveled regularly to the country and gave speeches that borrowed the jargon of Chinese Communist Party officials. His interest was backed up by billions of dollars in investment.

But on Monday, Uber, the ride-hailing company known globally for competing ruthlessly against all comers, waved the white flag.

In a stark signal of how difficult it is for American technology companies to thrive in China, Uber China said it was selling itself to Didi Chuxing, its fiercest rival there.

The sale, which would create a new company worth about $35 billion, would end the great ride-hailing battle of China. A person with knowledge of the deal said Uber investors had been pushing for such a transaction.

The companies have been fighting relentlessly for market share in mainland China for two years, spending tens of millions of dollars every month to attract riders and drivers. The merger would end that competition and create significant scale, but it would also be a repudiation of Uber’s ambitions to take on local Chinese competitors in their huge home market.

Uber had pushed its way into a country that has gone almost untouched by major American tech companies in recent years. Its progress was widely watched and discussed by entrepreneurs and investors alike as a model for how to reach China’s 600 million internet users — a forbidding prospect considering the country’s well-funded local competitors and regulations aimed at blocking foreign businesses.

With the deal, the company will join the ranks of American peers like Google and eBay, which were unable to capitalize on early footholds in China. EBay was outmaneuvered by Alibaba, while Google left China after it said it was the target of government-sponsored cyberattacks.

Still, it is by no means a financial catastrophe for Uber, which for about $2 billion of investment in the Chinese market gets a $7 billion share in a company that is likely to grow. It also saves the cash it may have spent competing in China for other projects.
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“Three years ago, I traveled to China with a small group of people to see if we might be able to launch Uber there,” Mr. Kalanick, Uber’s chief executive, said in a blog post, adding, “Most of the people we asked for advice thought we were naïve, crazy — or both.”

“However, as an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart,” he wrote. “Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there.”

Under the terms of the deal, the new company’s estimated worth is a combination of Didi Chuxing’s $28 billion valuation and Uber China’s $7 billion, according to two people with knowledge of the deal, who spoke on the condition of anonymity because the information had not yet been made public. Uber shareholders would receive a 20 percent stake in the new company.

Didi Chuxing would also make a $1 billion investment in the company’s operations in the rest of the world, called Uber Global, which was last valued at $62.5 billion, according to the two people with knowledge of the sale. Bloomberg first reported news of the deal.

Over the past two years, Uber upended expectations in China and its business there grew, despite heavy regulation and internet filters that often limit access to the products of foreign tech companies. The early 2015 rollout of People’s Uber, a service that got ordinary Chinese drivers behind the wheel and taking passengers, helped Uber grab a chunk of market share from Didi.

As it grew in China, Uber avoided many of the mistakes made by of its American tech forebears. For one, the company created local teams based around different cities, allowing it to respond quickly and flexibly to moves by the competition. That set it apart from other companies, which sought to control Chinese operations from the United States, slowing their responses.

At the same time, Mr. Kalanick helped Uber overcome the biggest obstacle in China: the Communist Party. By traveling frequently to China, meeting with officials and speaking in language often used by party cadres, Mr. Kalanick helped the company avoid the regulatory tripwire that has led many companies to stumble in the market. Last week, Chinese officials said ride-hailing apps were legal and laid out a framework to license drivers.

For Full Story: http://www.nytimes.com/2016/08/02/business/dealbook/china-uber-didi-chuxing.html