BEIJING _ Did Uber just win or lose in China?
That's the multibillion-dollar question hanging over the San Francisco-based ride-hailing company following news Monday that Chinese rival Didi Chuxing would acquire Uber's brand and operations in the world's most populous country.
In some ways, the deal has the smell of surrender. As the headlines broke, some analysts saw a repeat of the attempts by American tech powerhouses including EBay, Google, Facebook and Twitter to enter China, only to be tripped up by fierce local competition, their weak understanding of the market, or a hostile regulatory environment _ or all of those factors combined.
But others say Uber's strategic throwing-in of the towel may pay off big. Uber and the backers of its China operations will hold a 20 percent economic interest in the merged company. Some likened the deal to Yahoo co-founder Jerry Yang's move in 2005 to buy a 40 percent stake in then-fledgling Chinese e-commerce company Alibaba for $1 billion � an investment that was worth $20 billion a decade later.
And they noted that the if-you-can't-beat-'em-join-'em approach means Uber can stop spending piles of cash fighting an uphill battle for riders and drivers in China, and focus its energies elsewhere.
"By either strategy or luck, Uber played this beautifully," said Jeffrey Towson, a professor of investment at Peking University and author of a book on Chinese consumers. "Eighteen months ago they were written off in China _ too small, too late and a foreign Internet company in a political market. But they surprised everyone by continually doubling down and using their money and technology in a powerful way."
That doubling-down didn't come cheaply � Uber's chief executive, Travis Kalanick, famously said the company was losing $1 billion annually trying to grab market share. It wasn't all for naught: The company says six of its top 10 cities by ride volume are in China, and its China business gave investors hope for future growth.
But in the first quarter of 2016, Didi Chuxing � which was formed in 2015 by the merger of two Chinese rivals _ ranked No. 1 in China with a market share of about 85 percent, while Uber was No. 2 at about 8 percent.
Still, Uber attained what Towson called a "solid No. 2 position," leaving Uber and Didi Chuxing left with two possible outcomes � a continued war of attrition or a merger that would give Uber a minority stake in the China winner.
"I see it as spending 1{ years building up a strong negotiating position, and then doing the deal they probably always wanted," Towson added. "Winning in China was probably plan A. Doing a deal with Didi from a position of strength was probably Plan B. ... This is probably their best possible outcome."
Didi Chuxing was formed by the merger of Didi Dache, backed by Tencent, and Kuaidi Dache, backed by Alibaba. When they joined forces following a fierce price war, some observers put their combined value at $6 billion.
But the market has been growing explosively � with rides nearly quadrupling in China from 2015 to 2016. Some observers have valued the merged Uber-Didi company at $35 billion.
China accounted for about 70 percent of the 6.3 billion "on demand" transportation trips worldwide in the first quarter of 2016, according to Hillhouse Capital; North America accounted for about 10 percent.
Those kinds of numbers have prompted multiple rounds of heavy investments in Didi Chuxing, including $1 billion from Apple this year. Still, Didi Chuxing has yet to turn a profit, and it needs to find a way to start making money. Setting aside its fare war with Uber may now help it focus on that.
Duncan Clark, author of "Alibaba: The House that Jack Ma Built," said the Uber-Didi deal is "a sign of how the China market is its own world now."
While doing business in Europe may have given American companies the impression that they could be dominant globally just by dominating the United States, he said, "clearly that isn't the case now."
The tie-up, said Clark, fundamentally illustrates two points. "First, China is in a league of its own in scale, complexity and stakes," he said.
"Second, to be a global player means figuring out a strategy for China, which increasingly means not going it alone there or even partnering _ the end game is to anchor a China partner in the global venture to have a stake in China itself."
After word of the deal broke, Kalanick posted a message on his Facebook page saying that when Uber entered China in February 2014, "we were a young American business entering a country where most U.S. Internet companies had failed to crack the code." The company grew to 800 employees in 60 cities, completing 40 million rides a week.
"However, as an entrepreneur, I've learned that being successful is about listening to your head as much as following your heart," he said. "Sustainably serving China's cities, and the riders and drivers who live in them, is only possible with profitability. This merger paves the way for our team and Didi's to partner on an enormous mission, and it frees up substantial resources for bold initiatives focused on the future of cities _ from self-driving technology to the future of food and logistics."
Clark said this head-heart dilemma is a "prime example of an old lesson for foreigners in China" and that Kalanick was on the right side of things.
"Better be a merchant than a missionary. Merchants left the legacy of Hong Kong (and) trading companies. Missionaries got their heads chopped off."
What the tie-up would mean for drivers and riders in China was not immediately clear, though Didi Chuxing's statement said that Uber "will maintain independent branding and business operations to ensure stability and continuity of service for passengers and drivers."
Yi Beichen, Internet analyst and author of "The Era of Mobile Internet," said while the detente likely spells the end of highly subsidized rides, it could be good for customers in other ways, he said.
"Didi can spend more time to improve the user experience and other details to improve their services. So it's also a good news for users," he ventured.
But some drivers were not sold on the idea. A 34-year-old photographer named Bo Bo who has been working part-time as a driver for both Uber and Didi, said he feared it would mean smaller paychecks.
"Before the merger, I could always compare the fares between Didi and Uber and chose the more profitable rides to work on. But after the merger, Didi will become the monopoly and will decide the price on its own. I think the merger will only make us earn less and less," he said.
After allowing ride-hailing services like Didi and Uber to operate in a legal gray zone for years, China said last week it would formally permit the businesses but impose licensing and registration requirements. Bo said that, too, was likely to hurt him.
"I read the new regulations and found they required a lot of things like GPS installation. I think the new rules will exclude most of the part-time drivers, like me. .... And after the legalization we'll be taxed, so our incomes will be less."
Bo said in 2014 and 2015, a period when drivers were being paid heavy incentives, he could earn more than $800 a week driving only during the morning and evening rush hours.
"After the legalization and merger, I can only make that if I drive full time," he surmised. "I don't want to do it anymore; I'll focus more on my photography business."
For Uber, though, Clark said the company was making a strategic decision that looked likely to pay off.
"Uber is doing a pragmatic China trade. Sure they talked a big game about plans for long-term in China, but ultimately there was no way they could beat a local player like Didi, especially after the two firms merged, bringing combined Alibaba and Tencent firepower, not to mention Apple backing," he said.
The Didi-Uber deal could help clear the way for Uber to do an initial public offering in the United States, he added.
In the end, said Clark, Uber's "big talk helped drive up valuations in China and their own valuation for an IPO, which this deal now makes much more likely."
(Yingzhi Yang and Nicole Liu in The Times' Beijing bureau contributed to this report.)
