The Real Reason Uber Abandoned China

Aug 25, 2016

Uber called it quits in China earlier this month, selling its operations there to local rival Didi Chuxing rather than continue heavy spending to sustain a price war. "Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there," lamanted Uber CEO Travis Kalanick at the time.

Now, a report from Bloomberg sheds light on the financial reality that led to Kalanick's unexpected decision. The San Francisco-based Uber lost more than $750 million in the second quarter of 2016, according to the report, building on losses of about $520 million in the previous quarter. (As a private company, Uber does not publicly release financial information, but it does hold quarterly calls with investors to keep them updated.)

Where was all that money going? Drivers. Nearly anywhere there's Uber, there's at least one Uber rival looking to steal away market share. (Lyft and others in the U.S., Ola in India, and, until recently, Didi in China.) That competition creates a price war, wherein the rideshare companies offer cheaper fares to passengers and pay drivers to make up the difference. A source familiar with the situation tells TIME that a majority of the second quarter's loss was spent on subsidizing drivers in China.

That Uber has left China should mean fewer losses in the months to come. Still, the company has long showed a willingness to spend boatloads of money to preserve market share. Indeed, Bloomberg reports that Uber lost $100 million in the second quarter in the U.S., where it was previously profitable, as it fights smaller rivals like Lyft.

Of course, the spend-and-grow tactic can only last so long as you've got money in the bank. Uber's got plenty — $8 billion plus another $1 billion from the Didi deal on the way, per Bloomberg — but it will eventually have to start making money. (Uber's experiments with autonomous vehicles, which could reduce its reliance on human labor, could help.) The company's gambit is that it can keep spending until its rivals fold, or at least settle for distant second, third and so on. Given that Lyft is reportedly looking to sell itself with little success (and losing more money than Uber, per Bloomberg), the strategy could be paying off.

TIME may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.