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All You Need to Know about Didi, the "Chinese Uber"

Editor, TRANSFIN.
Jun 30, 2021 12:29 PM 6 min read
Editorial

China's largest ride-hailing company is set to make a splash on Wall Street soon.

Didi - formerly Didi Chuxing - has filed its papers with the SEC for an NYSE listing at a valuation of more than $60bn. It expects to raise about $4bn in what could be the largest international listing of 2021.

The self-described "world's largest mobility technology platform" operates in 16 countries and claims to have 493 million and 15 million annual active users and drivers respectively. Among its many high-profile backers are SoftBank, Tencent, Baidu, Alibaba, Apple and former nemesis Uber.

Didi’s mammoth IPO comes less than a decade since its founding: a meteoric rise for a startup founded by a former assistant at a foot massage company. And a rise ridden with controversies and cut-throat competition.

A Star is Born

Cheng Wei was a student from a “second-tier” Beijing university with a mediocre score in China’s College Entrance Examination (gaokao), something that would have destined him to a bland and unhappening life. After graduating, he worked odd jobs before landing a low-level gig at Alibaba.

Eight years later in 2012, Cheng quit his job to launch Didi Dache ("Beep Beep Call a Taxi"), Didi’s forerunner. He struck gold. The Chinese ride-hailing market was ripe for the taking. It was not a crowded field, and Didi took off spectacularly.

FYI: “Didi” is an onomatopoeia in Mandarin. It is basically the sound of a car honk.

The company was prescient and pragmatic. It expanded operations across China whilst pursuing deals with rivals and peers. Within three years of its founding, Didi had bought competitors like Bumblebee, forged strategic alliances with peers abroad like Ola, Graba and Lyft, and joined forces with KuaiDi DaChe, its main competitor. The latter merger transformed the market landscape. By 2014, Didi Chuxing was the unchallenged king of China's burgeoning ride-hailing market.

 

Your Uber has Arrived

That year, Goliath came knocking.

Uber made preliminary explorations to launch in China in 2015. It spent $1bn in advertising, cemented support from the likes of Baidu and Guangzhou Automobile Group, and finally launched to much fanfare.

Travis Kalanick made Cheng an offer: give Uber 40% of Didi or get ready for a brutal price war. To many observers' surprise, Didi opted to battle the Silicon Valley giant.

The ensuing clash of the titans saw ride-hailing prices in China slashed to ridiculous lows, often being practically free. Didi found itself burning $5.8m per day while Uber spent about $2bn in two years.

Finally, in August 2016, Uber threw in the towel and an armistice was signed. Didi would acquire the former's China business in a $35m deal in exchange for a 5.89% stake (Uber currently owns 12.8% of Didi).

 

More Eggs in the Basket

With a resounding monopoly achieved at home, Didi eyed foreign shores. It commenced operations in Mexico, Australia, Brazil, Japan, Chile, Colombia, Russia, New Zealand and South Africa, among other countries.

It diversified its slate of services to include pooled rides, premier rides, drivers-on-hire, bike-sharing and minibus pooling. It aso diversified its general portfolio by dabbling with food delivery, AI, big data analytics, financial services, logistics and smart transportation solutions (chiefly traffic light optimisation). Besides, it also began investing in electric cars and autonomous vehicles to prepare its fleet for the future.

 

Every Coin has Two Sides

Didi’s climb has not been all rosy.

It has frequently been criticised for not vetting its drivers properly and not ensuring the safety of its passengers. This has led to everything from verbal harassment and robberies to sexual assault and murder. For these reasons, it has gained a reputation on the Chinese internet as “the app female users should never use when alone or at night”.

Then there’s the matter of monopoly. Didi has a ridiculous 99% share of the Chinese market, and regulators naturally are not happy. In December, around the time Beijing began the anti-tech crusade that brought down Jack Ma, officials summoned six digital giants, including Didi, and lectured them on how not to abuse their dominance. At the municipality level, stricter rules are being drafted on who can drive for ride-hailing firms in a move to appease local taxi industries and ensure local hiring.

Recently, a long-anticipated antitrust investigation was launched against Didi to probe whether it employed anti-competitive practices to squeeze out local rivals. In fact, worries about a government crackdown have forced Didi to lower its IPO valuation goal from the earlier $80-100bn to $60bn.

 

Eyes on the Prize

Is weathering such obstacles, appeasing finicky regulators and climbing such uphill mountains worth it? In monetary terms, definitely.

China’s ride-hailing market is the world’s biggest. About 21 million trips are booked on the country’s ride-hailing platforms each day (four-fifths of which are done on Didi). And it is rapidly growing. The gross transaction value of China’s ride-hailers in 2020 was $32bn, up by more than 50% since 2017.

A market of such size and sway was enabled by large and densely populated metropolises, well-connected public transport systems, a well-maintained high-speed rail network which blunted the need to use cars for long-distance travel, and government policies that disincentivised private car ownership as a means to decongest cities.

 

Reading the IPO Room

In terms of financials, Didi reported $21.6bn in revenue last year. It also posted a profit this past quarter on $6.4bn in revenue. A net income of $837m was reported before certain payouts to shareholders, with comprehensive net income at $95m for the quarter. Core Platform GTV (GTV of China Mobility and International segments) reached $37.3bn for FY21.

Meanwhile, adjusted EBITA margin has slipped to -13% in Q12021 from the pre-pandemic level of -2% in 2019. After removing all items, Didi reported an adjusted EBITA of c. -$1.3bn in 2020.



When it comes to regulatory duress, all said and done, Beijing might probably be more inclined to turn a blind eye to rule-bending by ride-hailing companies as opposed to, say, rule-bending by tech giants.

Why? Because of the job losses that a crusade against this sector could entail. One in eight Didi drivers are military veterans, who command popular goodwill and have been known to have a penchant for the occasional small-scale protest. Didi’s monopoly is a problem that private-sector competition may not solve anytime soon, but the Communist Party might be content to delay dealing with the issue and take on China’s other tech giants in the meantime.

That said, competition is brewing. Players like SAIC, FAW, Dongfeng, Chang’an and Geely are emerging and gaining a foothold in the market. Food delivery major Meituan and travel booking site Ctrip may also throw their hats in the ring. Even limited government intervention could force Didi to let go of some of its market share, which would invite fresh blood.

But getting the best of Didi is easier said than done. Uber and its other rivals learnt that the hard way.

FIN.
 

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