Here's What Uber's Departure Means For China's Economic Future

| About: Uber (UBER)

Summary

China is in the midst of moving from a developing economy to an advanced economy, which means a shift away from exports and towards domestic consumption.

Uber's sale of its China operations to rival Didi Chuxing is indicative of this economic shift, and comes just as China has legalized the ride-sharing industry.

This shift in the structure of the Chinese economy represents one of the biggest long-term opportunities in this century.

By Sara Nunnally

I've written quite a bit this year about China's economic transition. Michael Spence, the Nobel Prize-winning economist, calls it the middle-income transition, when a company moves from a developing economy to an advanced economy.

For China, this means a shift away from exports and export-based growth and toward domestic consumption. We've seen this evidenced in the rise in wages and also in the rise in the amount that services contribute to GDP.

But for those of you still not convinced of this economic shift, let's take a look at the multi-billion-dollar deal that just happened in China.

From Bloomberg:

"Uber Technologies Inc. is selling its China operations to fierce rival Didi Chuxing, ending an expensive price war and freeing it up to focus on other markets and possibly an initial public offering.

The truce brings to an end a bruising battle between the two companies for leadership in China's fast-growing ride-hailing market. Uber has already lost $2 billion in China in two years there, people familiar with the matter have said, prompting investors to pressure the company to cut a deal. As part of the arrangement, Didi will invest $1 billion in Uber's global company, people familiar with the matter said."

But get this... despite the losses, China represented the largest market for Uber, as assessed by total number of rides. And that was with pushing against the tide... Didi is the largest company in the Chinese ride-sharing market, with about 80% market share.

In a cut-throat price war, Uber China could only grab about 10% of the market before throwing in the towel.

Which is interesting timing, because in late July, China announced that it legalized the ride-sharing industry, despite strong opposition from taxis.

Now, this article is less about the deal - which would make Didi a $35 billion company - and more about the ride-sharing economy. Didi operates in 400 cities. It has 15 million drivers, and serves 300 million registered users. Uber China was serving up to 150 million passengers a month.

These numbers are massive. Didi's drivers number more than the combined population of New York City, Chicago, Philadelphia and the entire state of New Mexico!

This is an important detail. Let's get past the shock and awe and see what's really happening.

China's economy is shutting down coal and steel plants because there's a huge oversupply in the face of slower economic growth and slower exports. In another stunning statistic, Didi reported that it absorbed about 60% of the people laid off from these industries this year.

And while it's true that this shift is rocky and fraught with losses in former economic growth drivers (like manufacturing and commodities), this shift is progress.

Andy Rothman, an investment analyst with Matthews Asia, told NPR, "So you can go to China's rust belt and say that manufacturing or construction-related industries are doing quite poorly, which they are. But you also have to pay attention to the consumer and services part of the economy, which are doing quite well - and the fact that income growth in China adjusted for inflation is still rising by 7 percent."

That's what makes this deal, and the government's decision to legalize ride-sharing, so important. When economies in transition hold on to state-owned companies, monopolies or policies that support old economic growth industries, then the shift to an advanced economy stalls and can even halt.

Right now, China's service and consumption economies aren't growing fast enough to replace the old economy, reports NPR, which is why China's GDP is slowing.

The fact that China is still taking a step forward in support of economic freedoms and not veering into protectionism of old growth industries shows that it's looking into the future.

Indeed, there's a phrase for the Chinese government's support of new growth drivers: Internet Plus. This phrase encompasses the country's goal of using the Internet as a catalyst for private enterprise, technical innovation and job creation... three huge factors in supporting a service-based, consumer-driven economy.

This idea has the added benefit of being able to optimize and make more efficient the old economy of manufacturing and exports. It also will help encourage research and development and the manufacturing of higher-quality (read, more expensive and thus more economically valuable) goods.

Taken all together, the Uber China story showcases an economic transition in action. It's happening. Right now.

And while Uber China might seem like a loss from the outside, Uber Technologies' shareholders get a 20% stake in the new company and get to keep its branding and applications in place, so as not to disrupt service.

That doesn't seem like too bad a deal from my perspective. Uber will also get a $1 billion investment in its global operations (Uber Global) from Didi. This could help Uber shift resources and attention to other markets and help push the company toward an eventual IPO, according to Bloomberg.

Risks To Consider: Whether considering an investment in China or in an Uber IPO, the biggest risk is uncertainty. It sounds self-explanatory, but here's the thing. Markets - from small cities to massive regions - are growing at vastly different rate, with different economy and geopolitical factors affecting said growth.

This uncertainty may turn off more conservative investors... and rightfully so.

Action To Take: China's economic transition represents one of the biggest long-term opportunities in this century. That's a big statement to make... but when one company employs more people than the entire population of some of the United States' biggest cities, and that represents only a fraction of that company's host economy, the potential growth is unavoidable.

As noted before, this transition will not be smooth, but if China continues to support new economic policies that engender domestic growth, innovation and consumption, then investors will want to be invested for the long ride. Look to tech-based Chinese companies to lead the way.

This article was originally published on StreetAuthority.com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.