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Where does Uber’s $35 billion deal with Didi leave Lyft?

The sorrow of being Number Two

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Uber used to have a big problem in China: it was hemorrhaging money — some reports put it at $1 billion a year — in its fierce battle with Didi Chuxing over the fastest growing ride-hail market in the world. This was good news for Lyft, Uber’s biggest competitor in the US, because the more Uber was focused on China, the less it could afford to worry about things here at home. But now Uber has solved its problem in China by allowing its operations there to be merged with Didi. And this could be really bad news for Lyft.

First of all, some analysts speculate that Uber’s deal with Didi actually gives it a small ownership stake in Lyft, since Didi invested $100 million in Lyft as part of a global partnership between the two companies (and two other Asian ride-hail apps, Grab and Ola) that was announced last December. “Uber will own a chunk of a chunk of Lyft,” Matt Levine writes in Bloomberg View, “in a big happy family of interlinked ride-sharing.”

Except things aren’t so happy in the rough-and-tumble world of ride-sharing. Uber and Lyft are locked in a no-holds-barred struggle to lock down as many customers as possible, with the assumption that most people could care less about the differences between the two and just want to use whichever is cheapest. As such, it’s been a race to the bottom, price-wise, and so far Uber is winning.

According to a recent analysis, Lyft only captured 5 percent of all black-car transactions in the second quarter of 2016, compared to Uber’s 72.5 percent. But over the last two years, Lyft has grown at a faster rate than Uber, 176 percent compared to 145 percent.

It’s unclear where the deal between Uber and Didi will leave Lyft. One of the outcomes of the partnership between Didi and Lyft was to enable Didi customers to seamlessly summon a car through Lyft’s app while traveling in the US, and vice-versa. That happened last April. But now that Uber and Didi are hopelessly intertwined — Uber has become one of Didi’s largest investors, and Didi gets a stake in Uber’s operations in the US — it’s difficult to see where this leads things for Lyft. Spokespersons for Uber, Didi, and Lyft did not respond to requests for comment.

“being number two in such a big market is an expensive proposition”

It’s more than just lost business. The Uber-Didi deal could pose a much more existential threat to Lyft, which so far has made the best out of being the Number Two ride-hailing app in the US.

“The China merger could even be a sign of things to come in the US since it's clear that being number two in such a big market is an expensive proposition,” said Harry Campbell, who blogs and records a podcast as The Rideshare Guy. “In the US, Lyft is in a tough spot since they're doing a fraction of the rides of Uber yet aren't making much headway in regards to market share.  Now that Uber doesn't need to worry about China, Uber will be able to put even more focus on their key markets like the US and maybe even force a Lyft merger or sale.”

If it comes to that, who would buy Lyft? The most obvious candidate is General Motors, which last year invested $500 million in the pink-mustachioed company for the purposes of developing a fleet of on-demand, self-driving cars. It was recently reported that those robot taxis will be tested on the road this year, thanks to GM’s recent acquisition of autonomous car startup Cruise Automation last March. Till then, the two companies are also working hand-in-glove on a car rental service targeted at Lyft drivers. If GM just bought Lyft, it could make things for both companies a lot easier.

Brian Solomon from Forbes asked this question last month, while noting that Lyft recently hired Qatalyst Partners to explore new investments — or a potential buyer. But Solomon also raises an excellent point: does GM really need to expose itself to Lyft’s losses? Now that Uber and Didi have called a cease fire, that question and many others are sure to rise to the surface in the months ahead.

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