Barely two months ago, Didi announced the acquisition of Uber China, in a move that many regarded as ending the ride hailing war in China.

A few days into the deal, all signs were pointing to this direction: subsidies started to subside, and prices were on the rise. Some unwary media outlets began to cry foul of the future of high price rides due to Didi’s ‘monopoly’. And many called for the government anti-trust watchdog (under the Ministry of Commerce) to intervene.

$100 billion IPO?

In the meantime, a bullish Didi management was allegedly aiming for $100 billion public listing in 2018-2019.  The current valuation is $35 billion.

That sounds like a (very) far stretch. Unlike Facebook, which went IPO at about $100 billion valuation – Didi operates a business model that is of much lower margin and much heavier operations.

To list successfully at $100 billion target, Didi will need to generate an annual GMV of $80 billion, according to a leaked document from one of the shareholders. Didi’s current GMV is estimated to be around $10 billion.

Still a long way to grow, you might say. But there is a much bigger problem: according to the most optimistic estimate, the total market size for urban personal transportation is $60 billion.

How about IPO at the current valuation of $35 billion? You might ask. That would require annual GMV of $28 billion, almost 3 times the current figure.

And this is nearly impossible to achieve – imagine, with all the heavy subsidies over the years, Didi only managed to achieve $10 billion GMV, how could it triple that amount when it has to (at the same time) raise profitability?

Cheerleaders turned into enemies

Also, after the initial hubris, it has become quite obvious that what Didi had won was a battle, not the war. Not only Didi is far from monopolizing the market, but also it realized it is actually fighting far more battles on different fronts.

Who are the belligerents on the other sides then? Are they able to cause more havoc to Didi than the great almighty Uber could?

Here is the (incomplete) list: direct competitors such as Yidao Yongche & Shenzhou Zhuanche, media, the public (both riders and drivers), taxi companies, local governments, and other interest groups.

These battles were previously masked by the Didi-Uber duel – many domestic parties, possibly including the local governments, favored a domestic player versus a foreign one. Now with Uber out of the fighting ring, former allies started their own turf wars – a scenario all but too common over the entire course of human history:

1. Asset-heavy rivals

Yidao and Shenzhou both adopted an asset heavy model – buying their own cars and hiring drivers as employees (not ‘freelancers’). During the subsidy wars, their growth was far slower than that of Didi: huge CAPEX slowed the fleet growth; and higher price attracted only a fraction of the commuter base.

However, they managed to capture many high-end customers. I have quite a number of friends who use either (or both) regularly because of the quality of cars, the good service as well as the perceived safety. When Didi tries to raise its own prices, the likes of Yidao and Shenzhou benefit in terms of market share.

2. Fickle consumers & (un)sympathetic media

Another significant effect of subsidies is that public transport-only commuters began booking for-hire vehicles. Many of these users are fickle – as soon as the price of for-hire cars becomes not so competitive, they switch back to public transport. I do not know the full extent of this in China; but I know the existence of this phenomenon for sure through running lots of subsidy campaigns while managing Easy Taxi for Southeast Asia.

It is difficult to get consumers to show any gratitude for the low prices they enjoyed in the past; in contrast, many would simply blame you for profiteering when you try to get the price back up to sustainable levels.

The media, in competition for readership, almost always sides the public in such issues.

3. Vested local interests (which some call mafia)

As probably in any country, there are vested local interests and it is hard to totally ignore them. For example, local taxi companies, probably the biggest losers in the Didi-Uber subsidy war, are not giving up yet. Again as mentioned above – when Uber is out, Didi becomes the sole target for these vested local interests. For these local interests, Didi is still alien.

At the end of the day, urban transportation is an extremely local business. Majority of the rides are probably taken by residents of a city in that particular city – no matter how widely your service is available across the country, or world.

Didi is well aware of this. Less than one month after the Uber China acquisition, Didi announced major partnerships with scores of taxi companies across the country. The problem here is, there are so many different parties you need to deal with now – it is simply not going to be straightforward.

Your wheelbase is too narrow

The latest strike is the new government regulations coming from major cities including Beijing, Shanghai and Shenzhen.

These regulations give local implementation details for the national guidelines issued by the central government a few months earlier. The guidelines forbad offering rides below cost – making it impossible for Uber China to catch up with their market share gap.

Most of these regulations require cars to be locally registered and drivers to be local residents.

All major cities in China have measures to control the local car population: Beijing has a quota and lottery system; while Shanghai adopted a bidding system. In anyways, it is very difficult to get a car registered in these cities.

And those familiar with China’s residence registration (“Hukou”) system would know that obtaining official resident status of Beijing and Shanghai is probably more difficult than getting citizenship of many countries in this world.

It is estimated that less than 2% of Didi’s for-hire car drivers in Shanghai have local residence. Most are, as you correctly guessed, migrant workers.

Some of the regulations even go extra length to require minimum wheelbase for the vehicles, effectively ruling out most compact cars that are currently on the road.

Therefore if the local regulations go into force as they are, a majority of the private for-hire cars currently on Didi’s fleet will be forced off the road. That is not the end of Didi, but will give a handsome haircut to Didi’s valuation.

So few were surprised when Didi issued a strong-worded statement protesting against such regulations. (Contrary to what many believe, openly criticising specific government policies is allowed in China, as long as you do not question some fundamental issues like the Party’s leadership role).

Of course, the draft regulations are still subject to change. However, with the public no longer on Didi’s side (which they were in previous policy debates), the local governments probably do not see much reason to back down.

What can be done?

So it is pretty clear that Didi is not winning yet. It is also no doubt that the battle-hardened management is well aware of this. Many of their attempts described above targeted squarely at these challenges.

Didi still has a lot of money in their bank account to burn – but without an obvious target (read: Uber) and the window for IPO closing fast, they need more innovative, and probably drastic, measures to sustain, and even grow, their valuation.

What can be done then? Here are just some of my guesses:

1)  Scrap (and even actively dismantle) the ‘anti-Uber’ alliance. The sooner Uber goes IPO, the better it is for Didi. They are not direct competitors anymore; and a successful Uber IPO will send a strong signal to the market, validating Didi’s potential exit. The two companies probably never had their core interests so aligned, as they are now.

2)  Diversify into other areas such as food delivery and last mile logistics to create value, just as Uber and Go-Jek have been doing. This can’t be done through pure strategic and financial investment – they would need to roll up their sleeves and get dirty. This is an extremely difficult route, not only because of the operational complexity and potential dilution of focus: in each of these areas in China there are established national players, and many of those players have not managed to validate their own value.

3)  Venture out of China and into Southeast Asia (putting themselves against Grab and… Uber again) or Latin America. This is probably not that difficult to do operation-wise, given how much knowledge has been acquired in this market (which Didi can easily buy over). However, this won’t help with their valuation that much.

4)  Develop driverless cars, flying unicorns and/or other gimmicks to make the water murkier. This is possible but hardly plausible (and highly risky) given how much they need to catch up, technology-wise.

As you can see, none of these measures is immediately effective. What Didi will do is probably a combination of these and some other measures. The last thing Didi wants is to be perceived as the biggest taxi company in China. As of now I do not see any obvious path for them to escape from this predicament. It is truly a great test on Founder Cheng Wei, and the Didi Management. One thing is very certain: they will not give up but fight until the end – regardless the outcome of this war.

Final question

There is only one part of the whole saga that has always puzzled me: why did Apple invest in Didi? Anyone?

Share this: