A US$30b company is challenging Didi in China

Meituan crushes into Didi’s backyard

In February last year, Meituan (world’s largest on-demand delivery platform) launched its ride hailing service as a trial in China’s eastern city of Nanjing with a very low profile.

Just 10 months later, the service was extended to another 7 first-tier cities including Shanghai and Beijing. By then, Meituan formally moved to compete against Didi in ride hailing business.

Interestingly, Meituan did a public sign up (like a poll) before launching in these 7 cities. One stone, two birds. Meituan could gauge the demand in these regions, at the same time interact and engage customers earlier.

Why and why now?

Why is Meituan competing with Didi for ride hailing business? We think it’s a logical and natural step to complete Meituan’s O2O value chain. Thinking about the entire customer journey of Meituan’s services – dinning, movie, karaoke, hotel and more – transportation is an essential link that cannot be missed out. Meituan’s strategy is to let customers use just only one app to complete the entire journey. Clear and powerful.

Another key driver is that consumer transportation is more profitable and has higher valuation than existing services provided by Meituan. A simple comparison: Didi is valued at US$56 billion with daily order of 25 million; while Meituan is valued at US$30 billion with daily order of 22 million. On per order basis, Didi’s valuation is 60% higher than that of Meituan.

However, after the merger of Didi, Kuaidi and Uber China, Didi has dominated the ride hailing market. Why Metiuan brought the fight to Didi now? A few reasons.

As the monopoly, Didi no longer provides huge subsidies to divers and customers. Quality of services has deteriorated: customers are more sensitive to the quality due to the increasing cost per trip; drivers have less incentive to provide good services due to the decreasing income. Therefore, many people are not satisfied with Didi’s monopoly and wish for new players to enter. Remember the earlier mentioned public sign up from Meituan? Yes, the response was superb.

The entry barrier is not high. From Meituan’s trial launch in Nanjing, they have achieved 100K orders per day without large scale of subsidies. However, this is before Didi starts its aggressive subsidy scheme. Don’t forget how intensive the competition was among Didi, Kuaidi and Uber China 3 years ago.

Didi’s reaction and strategy

So far, Didi has not directly reacted to Meituan’s move into ride hailing but have planned to target at Meituan’s backyard, food delivery service. In fact, Didi invested in Ele.me (food delivery app) in 2015 and considered making another round of investment after Meituan’s move. Softbank was involved in the potential investment as well. Public interpretation is that Didi wish to stop Meituan’s ride hailing business by giving a warning. That may not be the only intention and such indirect counter-strategy may not be effective. Nevertheless, it seems to be a wise choice under current circumstances of limited options.

Food delivery service is a logical and natural extension of Didi’s business as well. Tested by its previous competitor (Uber), Didi can launch services similar to Uber EATS (food delivery) and Uber Rush (express delivery) to boost revenue. The more important benefit is to diversify its business model and reduce risks. However, if current reaction of Didi continues, there is not much to stop Meituan from entering ride hailing business.

Another option for Didi is to start a price war all over again with Meituan. However, it is not likely to happen unless supported by major investors, as it is a big decision at the expense of huge amount of cash. As the dominant player with much bigger volume, the war of subsidy is more detrimental to Didi than to Meituan.

The anti-Didi alliance

Meituan is not the only player who has eyed on Didi’s backyard. In our previous article, Hellobike to reshape bike sharing landscape in China, Mobike has partnered with Shouqi (online car booking app) and Dida (ride sharing app) to integrate their services in bike sharing and ride hailing. Hellobike also partnered with WM Motors to provide an “4+2” service to integrate the service of bike travel and car rental.

Unlike Didi’s stagnant growth in bookings, Shouqi took over the second place in online car booking market by the first half of 2017.  The performance of Shouqi was impressive, a 1173% increase of users, while the users of the entire market dropped by 20%. In November 2017, Shouqi just completed Series B and B+ funding with a total of CN¥1.3 billion (US$200 million). The new cashflow will fuel the growth of Shouqi and taking over market shares from Didi.

Other players such as Yidao and Shenzhou still maintain significant market shares and competing with Didi at all fronts. This is common for dominant players like Didi to face challenges from a group of smaller players. Whether Didi will break through the alliance depends on operation of core business, strategic moves and probably diversifying business model to mitigate risks.