Uber Technologies has caused a stir in the tech industry by selling its China business to rival Didi Chuxing. The deal by Uber came just two days after Beijing legalized the ride-hailing business. It also raised rival Didi to a near-monopoly position in China.
Business analysts said the deal has thrown up some essential pointers for investors about what works in the Chinese market, and what does not. There may be useful lessons for the tech industry as a whole, experts said, referring to the controversial model of running money-losing businesses in the hope of future returns.
"To some extent, the deal shows the difficulties of foreign companies going up against well-connected Chinese competitors with deep pockets," said Scott Kennedy, deputy director at the Freeman Chair of China Studies in Center for Strategic and International Studies in Washington, said. It also highlighted the "basic challenge of making the ride-hailing business profitable in China."
Unlike several other business deals involving Chinese companies, there is no indication that the government was involved in encouraging Didi or making life difficult for Uber, many analysts said.
A mascot of Didi Chuxing is seen at the company's headquarters in Beijing, China, May 18, 2016
"I think Uber China vs. Didi was a fair fight. There wasn't a lot of regulatory or state action favoring any side," said Jeffrey Towson, professor of investment at Peking University Guanghua School of Management. "China's Internet companies today are very fast and sophisticated. Offered mobile services and apps are generally more advanced than those found in the West".
Uber was at a disadvantage because it was the last entrant in the Chinese market, and was forced to compete with a rival with strong links with the Internet platforms Alibaba and WeChat, he said. He cited the fact that Expedia gave up on the Chinese market after trying to develop a toehold for 10 years because it was the last entrant in the market.
The deal came amid a plunge in the sales of Apple products in China, and the release of new products imitating Apple's design by local rivals like Xiaomi. Xiaomi recently launched an "air" laptop, and a mobile phone with three cameras that go beyond the existing range of iPhones.
The Uber-Didi deal, however, might not be a sure thing. China's Ministry of Commerce is giving signs it is worried about creating an unshakable monopoly in the ride-hailing business, which uses technologies that can be replicated in food distribution and other online businesses. The ministry said on Tuesday that the deal will need government approval. Businesses that have the potential of monopolizing the market have to go through anti-trust investigation, it said.
"The near-monopoly of Didi on the Chinese market is not a good message for customers, as prices might rise," explained Jost Wubbeke, head of the program for economy and technology at the Mercator Institute of China Studies in Berlin.
Women holding their smartphones show the ride-hailing apps Uber Technology Ltd., left, and Didi Chuxing at a residential compound in Beijing on Aug. 1, 2016.
The Internet market is generally moving toward concentrating market power in the hands of few enterprises, Wubbeke said. "However, the market is very dynamic, and new challengers can still easily rise."
Both Uber and Didi have lost money in China. Business experts are asking how long companies can sustain the model of making deliberately making losses in the hope of future gains or drawing new investors. The question involves many companies in the Internet industry who are making losses in their core businesses, but surviving on fund infusions from optimistic investors.
"The fierce battle for market shares was a big loss-making business for both companies. With huge losses in China, but only modest market influence, Uber had to surrender to Didi," Wubbeke said.
"I think the more important issue is the basic question of whether online ride-share apps can be profitable. Uber is struggling to make ends meet everywhere, and it is depending for survival in part on the enormous pool of funds it has amassed from investors," Kennedy of CSIS said.