Didi, Uber Seek Truce, China Merger Ahead?

| About: Didi Chuxing (DIDI)
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Bottom line: Didi (DIDI) and Uber (UBER) may reach a truce in their China price wars under pressure from their investors, and could ultimately merge their China operations in discussions that could begin later this year.

The past year has seen some mergers of former bitter rivals due to financial pressures, and the latest reports indicate yet another such marriage could be coming between hired car services giants Didi Chuxing and Uber. The reports are grounded in word from insiders that the pair have begun talks about ending their bitter price wars, which have helped them to gain big market share, but are also costing them millions or even billions of dollars in losses. Those talks have naturally led some to speculate that the pair might even merge, though in my view that possibility seems rather low, at least right now.

That said, nobody would have predicted some of the other strange mergers that have taken place in the past year between former bitter rivals. Didi itself was party to one of those mergers, when it combined with former arch rival Kuaidi last year to form the current Beijing-based company called Didi Chuxing. The other major merger that caught many by surprise saw Meituan and Dianping merge earlier this year to form an undisputed leader in the group buying space.

All of these mergers are being driven by a reality that is relatively unique to China and far less common in developed western markets. China's status as a vast and relatively underdeveloped market has made it a magnet for both global and domestic investors, who are willing to pour billions of dollars into loss-making new ventures with hopes of someday making big returns.

But that high tolerance for losses often results in fierce price wars, resulting in billions of dollars in lost investment and the constant need for more fund raising. Even the big investors can only tolerate such big losses for so long. At some point, they usually stop providing more money, which is what drives former bitter rivals to become bedfellows.

It's not clear yet if that could happen with Didi Chuxing and Uber, which have been locked in a bitter rivalry for much of the last 2 years in the hired car services arena. Both companies have raised billions of dollars in new funding during that period, and have spent much of that money to expand and offer aggressive subsidies to lure consumers to their services.

Pressure From Investors

Now media are reporting that some of Uber's backers are tiring of the big China losses, and are pushing the company to wind down its nonstop war for market share with Didi. (English article; Chinese article) The reports say that most discussions so far have come between investors in the 2 companies, which appear to indicate that actual managers at Didi and Uber haven't actually had any substantive discussions yet.

Both companies have engaged in massive fund raising this year, and Uber has previously said it is spending $1 billion a year to build up its China business. I honestly can't imagine Uber's aggressive founder Travis Kalanick agreeing to any truce, though Didi chief Jean Liu might be more open to such an arrangement. But it takes 2 to tango, meaning the only way we could see a truce is if Kalanick's investors threaten to withdraw their support if the price war continues.

Meantime, the investor discussions are leading some Chinese media to speculate that an actual merger of the pair could be under discussion. In this case, that possibility isn't really substantiated in the reports, and a top Didi executive is actually being quoted as saying that such a merger is purely a rumor. (Chinese article)

If such a merger did come, it would almost certainly just involve Uber's China operations, which were recently spun off as a separate company from the global US-based parent. I wouldn't completely rule out such a merger eventually, especially following the other recent mergers of former rivals. But I would also add that such a deal probably isn't under discussions yet, and wouldn't happen until next year at the earliest.

Disclosure: None.