Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Uber's loss may turn out to be a big victory.

The ride-hailing company surrendered in the fierce fight over taxi hailing and on-demand rides in China. Uber agreed on Monday to effectively turn over its operations in China to local rival Didi Chuxing, but only after the U.S. startup lost roughly $2 billion battling for dominance in the country.

What looks today like Uber's capitulation, albeit an extremely rational one, may tomorrow look like a strategic retreat that helped Uber win a global war. 

We Are the World
Uber's surrender in China gives it money and time to focus on its battles in India, Southeast Asia, the U.S. and other competitive markets
Source: CB Insights

Uber now has the money and attention span to better compete in Southeast Asia, India, Europe, the U.S. and other parts of the globe where it's facing both regulatory headaches and feisty domestic competitors. Uber's China surrender doesn't mean the company will win every other battle in every other country. But if it doesn't have to fight on the China front -- a market where a well-financed Didi and the long history of U.S. tech incompetence made it extra hard to win -- Uber will have better odds of success globally. 

In selling Uber's China operation to Didi, the San Francisco company will get a $1 billion investment from its former Chinese rival. Uber already has collected more money than any tech startup in history, but more cash is fuel for Uber to propel its forces around the world.

Perhaps even more valuable will be the 20 percent stake in Didi that Uber is getting out of the transaction, which will value Didi at roughly $36 billion. In time, that stake could prove to be one of the best financial windfalls in corporate history. In short, Uber lost a couple billion dollars in China but won a $7 billion stake in a company likely to be worth much more in the future, especially now that Didi doesn't have to compete with Uber.

Uber can also lick its wounds with the knowledge that the company made its mark in China, even if it didn't win the battle with Didi. The Chinese company started out essentially as a dispatch service for conventional taxis. Uber's entry helped push Didi into on-demand rides with regular people doing duty as semi-professional drivers, plus carpooling services and buses. Competition with Uber made Didi better, and it helped reshape the Chinese transportation market. 

Another advantage is it clears the decks for an eventual Uber IPO. Uber's black hole of financial losses in China would have been the biggest question mark if CEO Travis Kalanick gets over his distaste for the public markets

It should be noted that the combination of Didi and Uber in China makes complete sense. Both companies were losing gobs of money offering big subsidies for riders and drivers. (This fight was terrific for riders and drivers.) Investors in both companies pushed for a combination, and the collective pressure may have given the companies the urge to merge.  

That said, I'm honestly surprised this deal happened. It's always incredibly complex to merge two private companies. And executives at both Uber and Didi tilt toward the self-aggrandizing, us-against-the-world attitudes that are both the best and the worst quality of the tech industry. That type of hubris makes rational moves difficult. The companies also seemed to seriously dislike each other. There were verbal skirmishes over which company was winning in China and accusations of dirty tricks

Giving up in China is good for Uber's eventual IPO, gives Uber a stake in a hugely valuable asset and lets it concentrate on markets where it can actually succeed without spending the equivalent of a small country's gross domestic product. Never has losing looked so good.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It's curious why Uber chose this moment to sell its Chinese operations. It's hard not to see China's recently passed regulations for the on-demand ride market as a factor. The new rules give a leg up to the bigger, more established company -- Didi, in this case -- by banning fares for less than the cost of the trip. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net