Failures and opportunities: A pivotal moment for China’s mobility industry
Last year was a rough one for the rental economy and mobility industries in China. With long lines of disgruntled customers outside Ofo’s Beijing office looking for refunds, sexual and physical assaults inside Didi’s cars, and the veil pulled away from Mobike’s numbers, 2018 saw the rubber hit the proverbial road.
No longer could marketers, PR armies, and executives continue to paint rosy pictures about the future of private transportation in China’s cities. For anyone on the ground, many of the claims had already inspired a mix of awe, confusion, and incredulity. If 2018 marked a breakdown in the industry, then 2019 is the year in which we’ll see if their attempts at repair will actually work.
A short ride down memory lane
Both Ofo and Mobike have been around for some time, but it wasn’t until the ride-hailing war was resolved that the industry was able to pick up speed.
Before 2012—when Didi and Kuaidi were both founded—getting around in a Chinese city was not easy. The intrepid intracity traveler had various options: bus, subway, cab, or unlicensed and illegal private cars (heiche, literally “black cars”). None were convenient.
Back then, the subway was less developed and stations were sparse. Deciphering bus maps required intimate knowledge of the city and its neighborhoods. Hailing a cab required a certain finesse as well as an utter lack of regard for other commuters as everyone jockeyed for position on the road; cab drivers, for their part, cared little for fairness, only concerning themselves with the direction and duration of the ride. Black cabs were even worse: overpriced and potentially dangerous. The demand for transport was exponentially higher than the supply and the suppliers knew it.
One night, as my wife and I were leaving a bar at Chaoyang Park’s west gate—a formerly hip and happening place—we discovered it had snowed quite heavily while we were inside. The subway was too far away by foot and most buses had already stopped service. Cab drivers in Beijing are notorious for abandoning the roads during inclement weather. We were stuck. It wasn’t until a good Samaritan gave us a ride to a busier road that we were able to find a cab home.
With the increasingly ubiquitous mobile internet—Xiaomi had launched their first smartphone in 2011, one of the first affordable ones in the country—the mobility industry was ripe for disruption. Unlike Uber, however, both Didi and Kuaidi started not as disruptors of regulation. In countries like the UK and France, Uber’s biggest challenge lay in regulatory frameworks that protected cab drivers but disadvantaged passengers. The American company became notorious for flouting their disregard for regulators and developed a reputation for being hard to deal with. In China, however, Didi and Kuaidi disrupted the cab market by working with cab drivers directly, then signing agreements with cab companies—some of which were state-owned—and then only later launching their private car-hire services.
Fast-forward to 2015: Didi and Kuaidi together controlled much of the market, but after a protracted subsidy war—offering discounts for riders and extra cash for drivers—the companies combined forces in order to face off against the foreign invader, Uber, who had entered China in 2014. After yet another subsidy war, subsequent fraud by drivers, new laws requiring government access to data, increasing compliance costs, and the rising barrier of regulatory approval, Uber raised the white flag in 2016 and sold their China operations to Didi.
Bike rental’s flight of fancy
Founded in 2014, Ofo launched in 2015 as a bike-sharing company on Beijing’s Peking University campus. China’s universities tend to be quite large and inconvenient to travel through. Ofo created a platform where students could share their idle bikes—for a fee—with classmates who needed to get across campus.
Mobike, on the other hand, launched in Shanghai in 2015 as a one-sided rental platform. Unlike Ofo, which had been co-founded by students, Mobike was established by seasoned professionals, including a former executive at Uber China.
After the ride-hailing war had been decided, investors and tech giants alike were looking for the next mobility play, with media dubbing both Ofo and Mobike as the “Uber of bikes.” The money poured in and, just as with any boom cycle in China, both companies competed fiercely for users, suppliers, and mindshare. Unlike in previous booms, however, these products were all offline and required significant investment to manufacture, deploy, and maintain. This didn’t stop both companies from claiming stellar numbers for both user numbers and rides. They remained coy, however, about the number of bikes on China’s streets, in order to conceal the true cost of their operations and to avoid potential dust-ups with municipal regulators over the externalized management costs.
We now know that these numbers were actually quite far from the truth. In 2018, Meituan Dianping went public in Hong Kong. As they had just purchased Mobike in April of the same year, we got a glimpse of the real story: Mobike’s previous claims were 70-75% higher than what was reported in Meituan Dianping’s IPO prospectus. We don’t have that kind of visibility into Ofo’s operations because they are not a public company and have chosen to remain opaque, but we can assume that they are much worse.
Didi in danger
The year 2018 was also a rude awakening for Didi. Established players from other industries began encroaching on the market. Local governments began making noise about the company’s effective monopoly. Worst of all, the public lost most of its trust in the company. The first murder of a Didi passenger was a tragedy but widely seen as a fluke for a company with few previous problems. The second was a wake-up call.
The mask was pulled off to reveal a company completely unequipped to deal with safety issues, especially for female passengers. Not only did they outsource all customer service—with the safety-reporting mechanism between the call center and Didi operations a complete failure—but the service where both murders occurred had been advertised as a place for male drivers to pick up female passengers, literally and figuratively. The former head of Didi Hitch, the carpooling service which saw the most problems, even went on record as calling it a “sexy application scenario.” On top of that, investigations revealed that assaults by drivers on Didi’s platform were much worse than previously thought.
Chinese companies, in a regulatory environment where many rules go unenforced, do not have a good track record of protecting their customers. In order to eke out margin, stay competitive and grow, companies in both tech and traditional sectors have skimmed and cut as much as possible. For a company like Didi, this degree of negligence has pushed them to the brink. As of now, the company is rumored to face losses of RMB 11 billion (around $1.6 billion) for 2018 and looks to be laying off up to 2,000 people. However, unlike Ofo, they actually have a chance to pull out of their current nosedive.
Didi claims to be implementing strategies that will allow it to do a U-turn and get out of the dead-end in which it finds itself. The company has announced that not only will they hire an additional 2,500 people for core business units, but that they will also increase their efforts in South America and bolster their efforts to improve rider safety. They’ve even gone so far as to call it an “existential” moment for them, one that could make or break the entire industry— referring to themselves, one would assume, since they make up most of the ride-hailing industry in China.
Being on top definitely does have its perks: better access to talent, funding, and regulators. However, it also means bearing the brunt of criticism, scrutiny, and the cost of reform. Didi, like other “sharing economy” startups, did not take safety seriously until it was too late, and even then the problem proved to be much deeper than we thought. Didi’s leadership, a pedigreed bunch of Alibaba, Goldman Sachs, and Uber alumni, have shown they know how to weather serious storms. We’ll just have to wait and see whether they make it through this one while also protecting the public at the same time.