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5 reasons why Uber sold its China business to Didi Chuxing

Uber has bowed out of the world's second-largest economy after selling its China business to domestic rival Didi Chuxing.

 

Uber has bowed out of the world's second-largest economy after selling its China business to domestic rival Didi Chuxing.

The combined new company is worth $35 billion, according to a source familiar with the situation, and brings an end to the brutal battle in China between the two apps..

While investors and analysts have had a mixed reaction to the news, there are clear reasons why it happened.

Burning cash

Earlier this year, Uber chief executive Travis Kalanick said the start-up was losing $1 billion a year in China and, a source told CNBC, that the company had spent $2 billion in two years trying to battle Didi.

It was an unsustainable way to run the China operation, a fact that Kalanick acknowledged in a blog post circulating around Chinese social media.

"Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term," Kalanick said.

Uber was also losing to Didi which claimed to have a nearly 80 percent market share, so it appeared to be a good time to leave China.

Removes a hurdle for IPO

Analysts believe Kalanick has been very vocal that Uber is not looking to go public anytime soon, but when that eventually happens, removing the cash-sucking China business could make the company more palatable to investors.

Focus on other big battles

With China off of the company's plate, Uber can now focus on the hundreds of other regions it operates in where it is also facing challenges.

In Europe, Uber has run into trouble with regulators while in the U.S., the company is in constant debate over whether its drivers are classed as employees or contractors.

India is another big potential growth market for Uber and it can now perhaps devote more resource there. But like China, Uber is battlinglocal incumbent Ola in India.

"India is the single biggest un-won opportunity, there it is a much more level playing field than in China," Rob Kniaz, partner at London-based venture capital firm Hoxton Ventures, told CNBC by phone.

Now that Didi owns Uber China, it's less likely to invest in competitors to Uber around the world, Kniaz added.

New products?

Uber can also focus its effort on developing some of its other products such as UberEats, the food delivery business.

A report in the Financial Times said that the company is planning to invest $500 million into building its own mapping system.

Didi international expansion

As part of the deal, Didi has taken a small stake in Uber's global business which is worth around $62.5 billion, according to analysts' estimates.

This could give Didi potential exposure to Uber's customer base outside of China. Earlier this year, Didi partnered with U.S. ride-hailing app and Uber rival Lyft so that its Chinese customers visiting America could use Lyft's services.

"Didi Chuxing will also continue to expand its international strategy. We look forward to working with our partners at home and abroad to create more value for drivers, passengers and communities," Jean Liu, president of Didi Chuxing said in a statement on Monday.

While there was no suggestion in the comment that a similar model to Lyft could be done with Uber, the options remain open.

Source: CNBC:

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