INTERNET: Baidu Steers Marriage Of Uber, Yidao
Bottom line: The Baidu-led union of Uber and Yidao in China looks like a smart move for all 3 parties, but could come under strain due to internal and external factors that could ultimately lead Baidu to buy out the venture.
China’s rapidly evolving paid car services realm is creating some strange marriages, bringing together e-commerce leader Alibaba (NYSE: BABA) and social networking giant Tencent (HKEx: 700) last month with a merger of their taxi app services. Now we’re getting word of another unusual marriage, this time as leading search engine Baidu (Nasdaq: BIDU) steers domestic heavyweight Yidao into a union with global giant Uber.
This latest deal would come just 3 months after Baidu made a large investment in Uber, reportedly worth $600 million, and would give Baidu a solid foothold in the fast-growing market for Internet-based car hiring services. China’s other 2 Internet majors, Tencent and Alibaba, already had major Internet hired car assets through their strategic stakes in industry leaders Didi Dache and Kuaidi Dache, respectively, which surprised the industry when they announced a plan to merge last month. (previous post)
This sudden round of marriages is being driven by a number of factors, led by intense competition in a market that has only emerged in the last 2 years. Complicating the situation is a lack of clear regulation for the fleets of private cars that many of these companies operate, which often compete directly with taxis.
The taxi drivers have complained to local officials about the situation, creating major uncertainty about the industry’s future. Thus having big financial backers like Baidu, Tencent and Alibaba gives these young hired car companies some insurance until the regulatory and competitive landscapes settle down.
There’s not much detail in the reports about the marriage between Uber and Yidao, which also goes by the name EasyGo, except to say that Baidu is leading the effort and that the pair are expected to sign a formal agreement later this week. (Chinese article) It’s likely that Uber will combine its China operations with Yonghe’s, and the pair, together with Baidu, will all become major stakeholders in the new company.
The rapidly changing situation with hired car services looks quite similar to what happened in China 4 years ago in the emerging group buying space. In that instance dozens of new players sprang up in a very short time, and US leader Groupon (Nasdaq: GRPN) also entered China through a joint venture with Tencent called Gaopeng. But the market quickly overheated, and Groupon effectively left the market after Gaopeng merged with several other companies under Tencent’s control.
This new Uber-Yidao marriage looks like a good plan for all 3 parties involved. Yidao was quite worried after the Didi-Kuaidi marriage was announced last month, and even complained to the regulator that the deal would be anti-competitive. (previous post) So now Yidao will get more economies of scale, and also important financial backers in Baidu and Uber, which are both quite cash rich.
The deal also looks good for Uber, as it will get 2 strong local partners in the business. That’s quite important in China, where foreign companies are often discriminated against by Beijing and regional governments, which prefer to see partnerships with local firms. The new company also fits nicely with Baidu’s own mapping service, which was already being integrated with Uber’s China business as part of the former’s investment in the latter.
This latest deal leaves Didi, Kuaidi, Uber and Yidao all in the strange situation of having complex shareholding structures that could lead to conflicting interests down the road. I honestly can’t imagine Tencent and Alibaba wanting to co-own a company like Didi-Kuaidi for too long, and Uber’s partnership with Baidu could also quickly come under pressure due to differing opinions and management styles. I doubt we’ll see any of these marriages come completely unglued, but I do expect we could see one company buy out its partners in one or both tie-ups over the next 2 years.
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