Cracks are emerging in China’s ride-hailing sector as dominant companies seek to monetize their rivals, a move which could divide the industry as smaller firms are forced to choose sides.
Major mobility players Didi and Meituan have opened up their platforms to competitors by offering aggregation services that allow users to access multiple ride-hailing platforms within a single app.
Meituan launched its aggregation service in April, allowing the company to spread its ride-hailing offering from Nanjing and Shanghai to dozens of cities around the country. The company enables users to book trips using its own ride-hailing services, as well as through Shouqi Limousine & Chauffeur, Caocao Chuxing, and Shenzhou, among others.
Didi followed suit just weeks later, announcing that a number of automakers would be able to provide ride-hailing within its app, deepening its ties with carmakers in the country and further expanding its reach.
The ride aggregation model has sprung up as a result of problems in the market. Companies have been left reeling from the aftereffects of a government clampdown on the industry while facing trouble reaching profitability.
Previously, map providers Autonavi and Baidu had launched aggregation services within their apps—as had the travel services platform Ctrip. Meituan and Didi’s adoption of the model marks the first time that companies whose business involves ride-hailing have made such moves.
The move has sparked concerns. “Smaller companies are going to be forced to take sides,” Tu Le, founder at Sino Auto Insights, told TechNode. “As a small ride-hailing firm you don’t want to be exclusive.”
In the new paradigm, ride-hailing companies are required to pay Didi or Meituan a commission for every ride that gets booked through the tech giants’ apps. While these services give smaller players access to a larger pool of potential customers, costs could quickly escalate as these companies also need to pay their drivers.
“Smaller players will need to consider carefully which open platform to join for them to remain relevant in the market,” Tom De Vleesschauwer, director at research firm IHS Markit, told TechNode in an email.
Experts say these types of partnerships could create additional problems for an already embattled industry. Smaller players will need to balance commission costs with increased scale, which could ultimately affect their bottom line. Meanwhile, companies like Didi and Meituan will be able to benefit from other operators’ rides, but in doing so, have been accused of putting their own interests above their drivers’.
Real issues
China is home to the world’s largest ride-hailing market. In 2016, the sector was worth more than $20 billion, according to consulting firm Bain & Co. Nevertheless, the industry has seen a series of existential crises that have diminished its supply of drivers, the lifeblood of the ride-hailing sector.
“In downtown areas such as [Beijing’s] Sanlitun or Wangjing, you always have to wait for a ride at night or during the weekend, with at least 55 passengers in line ahead of you,” 25-year-old resident Li Lan told TechNode.
The aggregation mode could help companies like Didi and Meituan address this issue, analysts say. These firms can significantly increase the number of rides within their apps without notable investment, as they are not responsible for paying the extra drivers, a major cost for any ride-hailing network.
China’s driver shortage stems from a government crackdown on the industry following a series of high-profile tragedies last year. In two separate incidents, female passengers were murdered by their drivers while using Didi’s carpooling service Hitch.
Shortly after the incidents, numerous investigations found that passenger harassment was rampant within the industry. Didi suspended Hitch indefinitely but has hinted that the company is looking to bring the platform back online.
Didi, which accounts for 90% of rides in China’s ride-hailing market, responded aggressively to the incidents by implementing security functions and upgrading those that already existed. Safety has now become a priority for the company.
However, Didi and Meituan are not expected to be accountable for the actions of drivers from the other platforms, Le says, meaning liability still falls on the smaller platforms that actually run the rides. It’s unlikely that the new mode will address ongoing safety concerns.
A Didi spokepson told TechNode on Tuesday that it’s open platform will enable the company to share its experience in driver management and safety architecture with its partners. Meituan declined to comment.
Industry crackdown
In light of the safety concerns, the government was also swift in cracking down on the sector, requiring drivers to hold permits in order to get fares. The cities of Beijing, Shanghai, and Tianjin demand that drivers hold licenses from the city in which they operate; this drastically reduces the supply of drivers, as gig workers often live in cities in which they are not registered.
Other barriers include requiring drivers to register their cars as commercial vehicles and pass an exam to get the necessary paperwork.
Didi has removed more than 300,000 unqualified or fraudulent drivers from its platform since the incidents. The government of Shanghai recently fined the company RMB 5.5 million for allowing unqualified drivers on its platform.
Didi has sought to counter these removals and reduce friction by running training services to help drivers become compliant with the government’s rules. The effects of this program are currently unclear. The company said previously that it is unable to service around one-fifth of the rides on its low-cost Express service due to labor shortages.
“Didi was always going to become a platform for various types of transportation. They just opened it to other ride-hailing companies, so their volume is a lot higher,” Le said.
It is unclear how many drivers Meituan has had to remove, though the number of drivers on its platform is limited when compared to Didi.
Cutting costs
Apart from addressing a lack of drivers, aggregating rides from other platforms could help these companies cut costs, according to an expert at a consulting firm affiliated to an automotive industry body; this source was granted anonymity as they are not authorized to speak to the media.
The model will allow more dominant companies to cut their customer acquisition and retention spending, as well as reduce subsidies, the source said.
Ride-hailing companies globally are struggling to make money. In its first-quarter results, Meituan said that it would be taking a “cost-effective approach” to its ride-hailing business, implementing an aggregation model while scaling back subsidies.
The company’s cost of revenue in 2018 increased year-on-year to more than RMB 15 billion ($2.1 billion) from RMB 1.1 billion. Meituan attributed the increase, in part, to expenditure on drivers. The company spent as much as RMB 370 million a month on drivers last year.
Meanwhile, Didi has yet to turn a profit. The company reportedly marked huge losses of RMB 10.9 billion in 2018. Earlier this year, Didi reported that its operating costs were roughly equivalent to 21% of its total fare revenues in 2018. However, its average commission rate was 19% of its fare revenue in the fourth quarter of last year. The 2-percentage point difference was reported as an operating loss.
The company will focus on reducing costs to run its businesses in a “sustainable way,” said Chen Xi, executive president of Didi’s ride-hailing business group, in a statement in April.
Aggregation services allow major players to offer more rides to their users, while not having to spend extra to provide them. De Vleesschauwer says that leaders in the industry see the model as a way to increase scale, and thereby revenue, as no one is in the sector is making money.
A blessing and a curse
Given the increased accessibility, users on microblogging platform Weibo voiced their support of the model, saying that it would make it easier to book rides and cut down on wait times.
“Passengers are free to choose vehicles and vehicle providers,“ said one supporter of the model. “After gathering more drivers and vehicles, passengers can also get a car more easily,” noted another commenter.
However, other Weibo users who appeared to be drivers voiced their concerns, saying that aggregating rides puts the companies and their customers before drivers.
“Drivers are earning less and less,” said one user, commenting on an article about Didi’s aggregation service. “This does not consider the drivers at all,” wrote another.
But the effects of the aggregation mode extend further than just concerns over drivers, pointing to consolidation within the industry. De Vleesschauwer said that smaller ride-hailing companies having to choose between aligning themselves with Meituan or Didi is a “distinct” possibility. No exclusivity agreements have yet been made public.
For smaller platforms, Meituan and Didi’s huge user bases are an attractive proposition. Didi has more than 550 million users across China, while Meituan has around 410 million in its platform, which also includes food delivery and other lifestyle services.
Didi said that its partnerships, particularly those with carmakers, will help users find suitable rides, while giving its partners access to its large pool of passengers, thereby increasing their efficiency and income.
It is unclear how much Didi or Meituan will charge the smaller platforms, but some sources point to a minimum figure of 10%, which could increase costs dramatically for cash-strapped ride-hailing companies.
“Ultimately, whoever controls the platform will hold the power,” said De Vleesschauwer. Smaller companies could effectively become local power bases for Didi or Meituan, he added.
Additional reporting by Jill Shen
This article has been updated to include a response from Didi