The Retreat: Uber Leaves China

On Thursday, the biggest story in the sharing economy is a retreat that looks like a victory. Uber announced on Monday that it would merge its China business into Didi Chuxing, its bitter rival, ending a subsidy war that had cost both companies billions. Uber will take a stake of around seventeen and a half percent in the combined company, and Didi will invest one billion dollars in Uber's global business. The deal is the August 2016 story, and the story is the lesson: sometimes the smartest move in a market you cannot win is to leave it on the best terms available.

The Retreat is the subject of this article: how the war in China was fought, why Uber gave up, what the deal means for both companies, and what it says about the cost of growth at any price. The agreement was announced on Monday, August 1, and it created a company that controls around ninety-five percent of the Chinese ride-hailing market. This is the story of the retreat, and the story is about the moment the subsidized war ended.

1. The War

The war in China was the most expensive fight in the history of the sharing economy, and the fight was fought with subsidies. Uber and Didi Chuxing, the Chinese ride-hailing leader, were each pouring billions of dollars into discounts, driver bonuses, and promotions, and the goal was simple: win the riders and the drivers, and the market would follow. The war was the classic battle of the platform era, and the battle was fought with the investors' money.

The war was fought in a market that both companies believed they could not afford to lose. China was the world's largest market for new cars and the fastest growing market for mobile services, and the ride-hailing prize was enormous. The problem was the price of the prize: every month of the war cost both companies hundreds of millions of dollars, and neither side could win quickly enough to make the spending stop. The war was the setup, and the setup was brutal.

2. The Costs

The costs of the war were the reason it had to end, and the costs were visible in the numbers. Uber's chief executive, Travis Kalanick, admitted that both companies had invested billions of dollars in China and had yet to turn a profit there. Uber was profitable in many of its markets, and China was the great exception, the market where the company was losing money faster than anywhere else. The costs were the arithmetic, and the arithmetic did not work.

The costs were also the opportunity cost. Every dollar spent on the Chinese war was a dollar that could not be spent on the rest of the world, and the rest of the world was where Uber could actually win. The company had spread itself across dozens of countries, and the spread required capital, and the Chinese war was consuming the capital that the expansion needed. The costs were the pressure, and the pressure was building.

3. The Announcement

The announcement came on Monday, and the shape of the deal was the surprise. Uber China, the company's Chinese operation, would merge into Didi Chuxing, and Uber would receive a stake of around seventeen and a half percent in the combined company. Didi would invest one billion dollars in Uber's global business, and Kalanick would join the board of Didi. The deal was a merger in name, and the name could not hide the direction: Uber was the one leaving.

The announcement was written as a victory, and the victory was the framing. Kalanick's post described the deal as a win-win and called it a lesson in smart humility, the willingness to recognize when a market cannot be won and to make the best deal available. The framing was the art of the retreat: the company that could not win the market was taking a stake in the company that would. The announcement was the end, and the end was the beginning.

4. The Monopoly

The deal created a monopoly, and the monopoly was the point of the deal. The combined company, Didi Chuxing with Uber China inside it, controlled around ninety-five percent of the Chinese ride-hailing market, a share that would have been unthinkable in most countries and was simply the reality in China. The market was no longer a war; it was a single company with the market to itself, and the market to itself was the prize.

The monopoly was also the source of the questions. The regulators in other countries had watched the Chinese war with concern, and the merger raised the question of what happens when the subsidized competition ends: the subsidies end, the prices rise, and the drivers and riders lose the leverage that the war had given them. The monopoly was the outcome, and the outcome was the issue.

5. The Humility

The humility was the part of the story that made it a leadership lesson, and the humility was rare in the technology industry. The founders and chief executives of the platform era were taught to fight, to grow, to never back down, and the culture of the era treated retreat as failure. Kalanick's decision was the exception: he looked at the Chinese market, counted the costs, and chose the deal. The humility was the decision, and the decision was the lesson.

The humility was also the strategy. The deal gave Uber a stake in the Chinese winner, a seat on the board, and a partner instead of an enemy, and the partnership was worth more than the continued losses of a war that could not be won. The company that could not beat Didi was now a part owner of Didi, and the part ownership was the smartest version of the defeat. The humility was the wisdom, and the wisdom was the win.

6. The Focus

The deal freed Uber to focus on the rest of the world, and the focus was the real prize of the retreat. The company's global ambitions had been stretched by the Chinese war, and the end of the war returned the capital and the attention to the markets where Uber could win. The company could now concentrate on the United States, on Europe, on Latin America, and on the ride-hailing races that were still open, and the concentration was the strategy.

The focus was also the message to the investors. The investors who had watched the Chinese losses with alarm could now see a company that was serious about the bottom line, and the seriousness was the story. The deal was the proof that Uber could make hard decisions, and the proof was the value. The focus was the future, and the future was the point.

7. The Lesson

The lesson of the retreat is about the difference between winning and winning well, and the difference is the hardest lesson in business. Uber spent billions trying to win China, and the spending was not wasted: the company took a stake in the winner and a seat at the table, and the stake was the best available return on the investment. The lesson is that the market you cannot win can still be a market you profit from, if you leave at the right time and on the right terms.

The lesson is also about the courage to change the story. The culture of the platform era treated retreat as weakness, and Kalanick's announcement showed that the retreat could be framed as strength. The company that admits it cannot win a market is not admitting failure; it is admitting reality, and the reality is the beginning of the better plan. The lesson is the humility, and the humility is the strategy.

8. The Future

The future of the deal is the future of the Chinese ride-hailing market, and the future belongs to the combined company. Didi Chuxing now faces the work of integrating its new territory, managing the monopoly, and answering the regulators, and the work will define the market for years. The subsidies are ending, and the real business of running a ride-hailing company at scale is beginning. The future is the test, and the test is the next chapter.

The future is also the lesson in the making. The retreat was the August 2016 story, and the story will be told again every time a company faces a market it cannot win. The companies that learn the lesson will make the deal, take the stake, and move on, and the companies that refuse the lesson will burn their investors' money on a war they cannot win. The retreat is the moment, and the moment is the lesson: sometimes the smartest move in a market you cannot win is to leave it on the best terms available. Uber left, and the leaving was the winning. The next time a company faces a market it cannot win, the story of the retreat will be the reference: the deal that turned a losing war into a winning stake. The leaders who can read the market honestly, and who can explain the retreat as a strategy rather than a surrender, are the leaders who will be trusted with the next bet.

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