6 Things to Know About Uber’s Surrender in China

In a summer of big tech deals, this could be counted as the most unexpected. Uber is selling its China operations to its bitter – and more successful – rival, Didi Chuxing, which controls 80% of China’s ride-sharing market. The repercussions of the deal will be felt far beyond China, affecting everything from Uber’s prospects for an IPO to the fate of its competitors in other markets.

The transaction will involve merging Uber China, mostly owned by Uber but also owned by search giant Baidu and others, with Didi’s operations. It resolves a costly battle for users that led Uber to burn through $2 billion in the past two years. Uber gets an 18% financial stake in Didi plus a $1 billion investment from the company. Both companies will hold a seat on each other’s boards.

Didi Chuxing isn’t a household name among consumers outside China, but the company has quickly emerged as a formidable player in the country’s technology industry. Formed by a merger of China’s two largest ride-sharing apps and boasting investments from Alibaba and integration with WeChat’s messaging app, Didi proved to be a juggernaut that blunted Uber’s ability to gain market share.

The news has left the tech world discussing what it all means. Here are some key outcomes from the Didi-Uber deal, which could be unfolding for the next several months.

Uber waves a white flag

Uber isn’t a company accustomed to defeat, yet this deal marks a clear capitulation in one of its most important markets. “As an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart,” CEO Travis Kalanick wrote in a blog post about the deal. That is, Kalanick didn’t want this, but he realized he had little choice. Perhaps because of board pressure. Bloomberg, which broke the news of the Didi-Uber deal, said last week that investors were pushing for a truce between the two companies.

Uber’s defeat is its investors’ gain

Uber is departing China with a dazzling door prize: a sizable stake in a de-facto monopoly of China’s ride-sharing market. Uber’s China expedition echoes Yahoo’s experience there. After years of struggling for a foothold in China, Yahoo bought a stake in Alibaba for $1.7 billion in cash and assets, an investment which shored up Yahoo’s profits for years. Uber has swapped the losing end of a costly battle for future profits of a promising tech giant.

Uber could finally go public

With nearly $6 billion in capital raised in the past year alone, Uber may not need an IPO, a fate Kalanick has worked to avoid. But if private investors are beginning to assert their will, Uber could be going public soon enough. Uber’s losses in developing markets like China have been a key reason the company wasn’t ready for public scrutiny. Selling Uber China eliminates part of those losses and frees up resources to invest elsewhere. Uber could be the huge offering Wall Street has craved to reignite the tech-IPO market.

Tech’s China syndrome

Uber is only the latest U.S. tech giant to either stumble while pushing into China’s market or to decide early on to forego such an effort. Yahoo’s Alibaba investment marked the end of its active presence there. eBay was elbowed aside by Alibaba-owned TaoBao. Facebook and Google have little presence there because of the government’s censorship policies. Chip companies like Intel and enterprise businesses like that of Microsoft’s have fared slightly better, but the consumer Internet in China remains a domestic industry.

Bad news for Lyft

Last September, Didi invested $100 million in Lyft as part of a so-called anti-Uber alliance, a move that boosted Lyft’s prospects. Didi also forged partnerships with Uber rivals in others areas, such as Ola in India and Grab in Southeast Asia. It’s not clear where those partnerships stand right now, but if Kalanick sits on Didi’s board, there will either be some severing of those older ties or some interesting conflicts among Didi’s various partners.

It gets (even more) complicated

With Didi investing $1 billion in Uber, Apple, which in May invested $1 billion in Didi, becomes an indirect investor in Uber. Google also invested in Uber in 2013, even though Uber is now spurning Google Maps for its own technology. All three companies are racing to develop self-driving cars. Even odder, with its investment in Didi, Uber now owns part of a company with a $100 million investment in Lyft.

What next?

All of this sets the stage for some interesting potential outcomes. Will Uber’s capitulation inspire venture capitalists to take hard stands on other unicorns? Could an Uber IPO break the logjam of unicorn IPOs? Will this deal increase the pace of tech mergers? And how are all these increasingly tangled tech giants going to compete with each other when they invest in each other? The ripples from this deal will be playing out for some time.