We predicted Didi’s current woes more than 2 years ago

Didi’s decision, announced on Friday (15 Feb), to cut 15% of its workforce came not really as a surprise.

In fact, some of those potentially affected have been lauding the company for only announcing it after Chinese New Year (such that their mood for New Year was not dampened).

We wrote in October 2016, shortly after Didi acquired Uber China, that it was far from winning the war in China.

And it seems our predictions were apt. More than two years after the acquisition, Didi still faced two major challenges we elaborated on then: the government, as well as justifying of its valuation.

Distracted 

It is also not a secret that the indefinite suspension of Didi’s carpooling service has a significant impact not only to Didi’s ride numbers, but also its ability to balance peaks and lows of demand in order to achieve profitability.

As players in adjacent areas attacked Didi’s core market, Didi is forced to invest in new services to defend itself:

• It ploughed a lot of money into ofo, and subsequently launched its own bike sharing/rental service.
• It had to defend itself against attacks by Meituan by launching its own food delivery service with significant subsidies.
• A number of car manufacturers entered the fray, notably Geely through its Caocao car hailing service, coupled with more stringent local regulations, in many cities forced Didi to invest in buying cars and hiring drivers – thus deviating from its asset light model.

There are also rumours that Didi’s huge loss in 2018, which it attributed to driver subsidies (reported to be CNY 11.3 billion), was actually due to fines it had to pay to different local authorities for violating various rules (e.g. mandatory local drivers + locally registered cars).

In addition, the investment in Brazil and Mexico to directly clash with Uber (do not forget Uber is Didi’s largest shareholder), is also a costly attempt to diversify and grow.

Keep exploring 

As we argued then, Didi could be a very profitable business, albeit not at the current level of valuation. Didi would need to keep exploring new areas

Now it is more and more apparent that driverless cars etc. are not as imminent as people had previous thought.

In the meantime, all these distractions, including Ofo, Meituan, murder of passengers (and subsequent suspension of carpooling services) etc. take a lot of management, strategic and operational attention of Didi. The result is that the company is stuck in a constantly defensive mode.

We are still confident that Didi will sail through the current woes. In fact, the restructuring, if done correctly, will rid it of some baggage and bad habits accumulated over the past couple of years.

However, will a leaner Didi secure a good exit for its current investors as well as the team? That we have to see.