Uber sells its China business to big local rival

Meet the president of Uber's China rival
Meet the president of Uber's China rival

Uber has a new strategy in China: If you can't beat them, join them.

Uber is selling its China operations to rival Didi Chuxing, a landmark deal that ends the ride-hailing company's quest to dominate one of the world's largest markets.

"Didi has been a fierce competitor," Uber CEO Travis Kalanick wrote in a Facebook (FB) post. "Sustainably serving China's cities, and the riders and drivers who live in them, is only possible with profitability."

In exchange for its China business, Uber will receive a stake of almost 18% in Didi and become its largest shareholder. Didi will have a minority stake in Uber.

Cheng Wei, the founder of Didi Chuxing, will join the board of Uber. Kalanick, meanwhile, will join Didi's board. News reports put the value of the combined Chinese firm at $35 billion.

The new relationship is potentially complicated by an existing partnership between Didi and Lyft -- Uber's biggest U.S competitor.

In September 2015, Lyft struck up a strategic partnership with Didi, making it easier for foreign users to hail rides. U.S. customers visiting China can use the Lyft app and pay in U.S. dollars. Chinese travelers can do the same in the U.S. using Didi's app. In December 2015, the partnership was expanded to include GrabTaxi in Southeast Asia, and Ola in India, an effort to combine forces to compete against Uber. As part of the deal, Didi invested $100 million into Lyft.

It's unclear whether the acquisition of Uber's China operations will impact Didi's partnership with Lyft.

Lyft sent a statement to CNNMoney on Monday that suggests it could.

"We always believed Didi had a big advantage in China because of the regulatory environment," reads the statement. "The recent policy changes are exactly why we did not invest in the region. Over the next few weeks, we will evaluate our partnership with Didi."

Didi and Uber did not immediately respond to request for comment on this matter.

Uber launched in China in 2013, and its operations have since expanded to roughly 60 cities. The market was a top priority for Kalanick, who made frequent visits to China and poured billions of dollars into the country.

Related: 530,000 steel and coal workers are now driving for Didi Chuxing

But China was a tough market to crack -- especially in the face of stiff opposition from Didi. In February, Kalanick said that Uber was losing $1 billion a year in China.

Both companies burned through investment funds by subsidizing drivers and prices in an effort to capture more of the market. But new regulations announced last week essentially banned the use of subsidies, adding new pressure on the business model.

Didi Chuxing is the product of a merger between two homegrown ride-hailing companies: Didi Dache and Kuaidi Dache, which joined forces in 2015 in a move to counter Uber.

The combined firm, which has been renamed Didi Chuxing, raised $7 billion in its most recent fundraising round, including $1 billion from Apple. (AAPL) It also has the backing of Chinese tech giants like Alibaba (BABA) and Tencent (TCEHY).

Related: Meet the people behind Didi Chuxing

This is the latest in a string of moves by foreign companies to separate their China business units. Yum! Brands, (YUM) which operates popular fast food chains KFC and Pizza Hut, plans to spin off its China unit as a separate, publicly traded company later this year.

McDonald's (MCD) is also reportedly looking to sell its Chinese operations.

-- Charles Riley and Sara Ashley O'Brien contributed to this article.

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