Why Uber's China loss Will Actually Be a Long-Run Victory for the Company

At first glance, the acquisition of Uber’s China operations by Didi Chuxing may seem to deal a significant blow to Uber -- a scaling-back of the company’s bold global ambitions. But a closer look at the agreement suggests that the outcome is actually a victory for Uber’s investors and a lesson for tech entrepreneurs, about balancing aggressive ambition with pragmatic pivoting.

In fact, for Uber, retreating from the China battle puts the company in a better position to win the global ride-sharing war, and frees up managerial attention for the bigger challenges that lie ahead.

Related: How Uber's Big Loss in China Is Really a Big Win

Ostensibly, the deal announcement seems like an about-face for the U.S.-based ride-sharing behemoth that has spent billions in pursuit of market share in China. CEO Travis Kalanick, who spent over 70 days there in 2015, has frequently hailed the country’s importance, going as far as indicating in a September email message to investors that, “China represents one of the largest untapped opportunities for Uber, potentially larger than the U.S.” So, ceding the market to Didi might be mistakenly seen as Uber’s first major capitulation.

However, as one peels back the layers of the deal, the benefits to Uber’s investors become apparent.

First, the truce will quell investor fears about China's being a continued source of massive losses as Uber wages an uphill and losing battle there.

China has always been a tough market for U.S. platforms to compete in: WeChat is its most popular messaging and social platform, Baidu dominates search and Alibaba rules retailing. Didi, with a war chest of over $10 billion, influential investors and a deep understanding of local business dynamics, was a daunting rival, whose market share remained well above 80 percent for the entire duration of the Uber foray.

Related: Uber's Fight to Win China

Closing the China front eliminates the risk that nascent Uber profits from the United States and elsewhere will end up being funneled there. It makes the platform a less risky and more attractive investment, perhaps even paving the path to a public offering.

Furthermore, the deal actually leaves Uber’s investors with a 20 percent stake in Didi, now the undisputed leader of the world’s largest ride-sharing market.

Didi has more than 14 million drivers and 300 million customers today. A proven ability to grow at a blistering pace and a growing portfolio of services (ranging from traditional ride-hailing to drivers-on-demand and a bus service) will ensure that the company’s valuation of $35 billion multiplies in the coming years, as its control of the Chinese market solidifies. Barring unforeseen resistance from China's antitrust regulators, Uber's investors are now guaranteed a fraction of this value creation.

The deal also changes the nature of an important partnership forged last year among Didi, Uber’s U.S. rival Lyft, India’s Ola and Singapore’s Grab.

That partnership aimed to make their apps interoperable, expanding each platform’s reach into the others’ countries, and creating an entity that represented a potential global rival to Uber. This alliance seems more fragile now that Uber CEO Kalanick is on Didi’s corporate board. Ceding China to Didi under the terms of the recent deal may therefore have actually strengthened Uber’s global competitive position.

Finally, freed from the China distraction, Uber now has greater executive bandwidth to focus on consolidating its position in the United States and Western Europe.

It also has deeper resources to expend on gaining market share in key global markets where it has greater traction, like India.

Uber’s bigger battles lie in the future, as it transcends its status as a “digital taxi service” to a player in the auto industry, a double-digit percentage of GDP in many countries. The battle being fought is for control of the digital interface that powers access to on-demand mobility. The multi-billion dollar valuations that Uber, Lyft, Didi, Ola, Grab (and, most recently, Indonesia’s Go-Jek) enjoy are based on an investor bet that, over time, these platforms will capture a fraction of the massive consumer spending on buying and maintaining personal vehicles. (U.S. consumers alone spend $1 trillion buying new and used cars each year.)

However, despite its Silicon Valley roots, Uber's demonstrated sources of competitive advantage -- leveraging massive capital infusions and logistics expertise, rapidly scaling on the ground, transferring learning across cities -- more closely resemble those of the 20th century industrial titans. Any “ network effects” barriers it may be building are weaker than those enjoyed by platforms like Apple, Facebook and Google.

Uber’s real challenges are therefore yet to come. An example? Inducing population-scale change in entrenched automobile-ownership behaviors rapidly enough to justify its valuation, while also maintaining high enough commission margins in an industry where market share may need to be actively defended.

Related: The Uber of China Could IPO in 2018 -- Start Up Your Day Roundup

The company’s executive team, in short, has plenty to keep it busy. Not having to worry about China anymore will surely be seen as a blessing in the long run.