INSIGHTS | As ridesharing market plateaus, Didi tries everything

For the past two years, ride hailing giant Didi Chuxing has laid low, waiting out a storm of public outrage that followed incidents when two female passengers who used the platform were killed by their drivers.

Now, the days of biding its time are over. The company has launched a slew of new brands and continued its push abroad, going up against Uber in more markets (and entering Russia).

Didi also recently restructured, creating a maze of sub-brands that cover diverse consumer groups in higher- and lower- tier cities across China, most notably launching a low-cost ride hailing service and rebranding its taxi-hailing app.

Since spring, the company has even made a foray into logistics and grocery delivery, in a bid to provide a range of mobility services within a mega ecosystem.

So what prompted this sudden flurry of activity?

Bottom line: Didi, the world’s second biggest tech unicorn, has a problem: growth in China’s ride-hailing market has plateaued, while the company faces price competition from dozens of well-funded smaller rivals willing to subsidize rides. With the company looking forward to a much-rumored IPO, it needs new sources of growth to justify its $56 billion valuation.

• Didi has three big ideas about how to stimulate new growth: new services, lower tier markets, and going global.
• Didi targets more than 100 million orders per day and reach 800 million monthly active users (MAUs) worldwide over the next three years, which would be more than five times Uber’s 2019 figures. Didi saw about 10 billion rides a year, or an average of 27 million per day, a spokesperson told TechNode in November.

Slow growth

After years of double-digit growth, China’s ride-hailing market expanded an anemic 3.42% in 2019, according to figures from China Internet Network Information Center, partly due to a government crackdown on unlicensed drivers.

Didi, China’s largest ride-hailing platform, has been affected. Ride volume fluctuated between 20 and 30 million trips per day from 2017 to 2019, an unnamed Didi investor told Caixin (in Chinese), and reportedly fell to a nadir of 5 million during the Covid-19 outbreak.

However, there are positive signs for the company. In June, Didi said that its ride-hailing business had returned to its pre-pandemic level, still far off its three-year target of 100 million daily orders. The company set a new daily record last month—CEO Cheng Wei announced that total volume surpassed 50 million on Aug. 25, China’s Valentine’s Day.

After years of losses, the company’s ride-hailing business also recently turned a profit for the first time, Didi President Jean Liu said in May.

Ride-hailing challenges

Didi is a clear winner in China’s ride-hailing market, controlling more than 80% of the market since its 2016 merger with Uber China, but it faces challenges at home.

The company has little control over the price of rides, since it competes with dozens of small players, mostly backed by tech giants and legacy automakers. Many offer generous subsidies to users, including occasional free rides.

Even network effects don’t give Didi as much of an edge as you might think, since apps including Alibaba map service Autonavi, Baidu Map, and Didi’s old rival Meituan all offer ride-hailing aggregation services, leveling the playing field between the giant and its Lilliputian rivals. Earlier this week, Didi entered a partnership with Chinese tech behemoth Tencent, a long-time backer.

Didi’s troubles have also been compounded by increasingly tight rules over hiring after the high-profile murders, leading to a significant shortage of drivers able to operate on its platform.

Nevertheless, there is still a huge space for growth in China’s ride-hailing market. More than 90% of Chinese passengers hail a cab on the streets rather than through ride-hailing apps, according to Didi (in Chinese). Didi currently facilitates 3 million taxi rides each day, just 6% of the country’s daily taxi trips, Latepost reported.

More cities

In a bid to capture more of China’s rides, Didi launched a new budget ride-hailing app earlier this year, and rebranded its licensed taxi service to meet varying demands from users in higher- and lower-tier cities across China.

Budget rides: Huaxiaozhu (which literally translates to “flower piglet”) targets users from lower-tier cities with cheap rides. The platform offers cheaper rides than Didi’s core service, and includes gamified social features.

• Featuring fixed, rock-bottom prices and coupons for early adopters who promote the app online, Huaxiaozhu became known as the “Pinduoduo of ride-hailing” immediately after launch.
• First launched in Linyi, a third-tier city in the eastern Shandong province, and the southwestern city of Zunyi in late March, the service quickly gained traction thanks to a campaign that charged only RMB 1 ($0.15) for a user’s first trip.
• Even without discounts, a 100 km or above journey on Huaxiaozhu is at least RMB 30 cheaper than that on Didi, Chinese media has reported.
• Didi has since announced an RMB 10 billion subsidy program in bid to enter an additional 130 small- and medium-sized cities.

Licensing questions: The pig has been forced to suspend services a dozen cities over a pretty basic issue: regulators say it hasn’t got a license to offer rides, according to multiple Chinese media reports.

• In a statement earlier this month, Didi argued that since Huaxiaozhu is a product developed by Didi, it shares the parent operating license. But some legal experts have argued that in China a parent company does not always share operating licenses with its subsidiaries.

Kuaidi New Taxi: Aside from ride-hailing, Didi also rebranded taxi-hailing service Kuaidi New Taxi, and reshuffled to spin off its taxi business unit from its ride-sharing group, with the head reporting directly to CEO Cheng Wei. The move appears to be part of preparation to monetize the service. Currently, Didi offers government-backed taxi-fleets commission free traffic.

• As part of the rebranding effort, in September Didi began dishing out RMB 100 million in subsidies to taxi riders.
• The move appears to have been put on hold. Didi CEO Cheng Wei told Chinese media this month that there will be no “profit goals” for Didi’s taxi business “for some time to come” (our translation).

Ride-hailing platforms have low penetration in China’s lower-tier cities, and residents in these areas are more accustomed to hailing a taxi on the street than through an app. Not everyone welcomes disruptive innovation—Didi’s success depends on whether it can navigate regulators’ demands in these areas in order to avoid its services being suspended.

More Didi services

In its hunt for growth, Didi has also dived into China’s grocery delivery industry, and started deploying delivery vans in cities around the country.

The company has taken the same approach it has consistently used for ride hailing–offering heavy subsidies to users and drivers to crack the market open. But in these new industries, Didi, a leviathan in ride-hailing, is a small fish.

The company faces relentless competition from dominant companies including Meituan, China’s mega-lifestyle platform, and Kuaigou Dache, the logistics arm of Chinese online classifieds marketplace 58.com.

Delivery vans: In May, Didi started hiring van drivers in the eastern city of Hangzhou and Chengdu, capital of the southwestern Sichuan province. The service targets urban people who are moving homes and businesses that need commercial deliveries. Didi began offering drivers commission-free use of the platform for thirty days.

• Within a month, Didi launched the service with 8,000 drivers, Chinese media reported, citing a company representative. The company said order volume in Hangzhou and Chengdu surpassed 10,000 collectively in its first day of operation.
• That figure doubled by mid-July, and Didi expanded the service to six major cities including Shanghai and Nanjing, capital city of the eastern Jiangsu province in August.
• The company is up against cutthroat rivals. Kuaigou Dache and Lalamove, a Hong Kong-based startup backed by Sequoia China and Hillhouse Capital, currently lead the market. The two companies account for 80% of the sector, with a collective 1.5 million drivers and 15 million active users as of March.
• By comparison, so far over 130,000 drivers registered on Didi’s logistics service platform. Daily orders are now over 100,000.

Delivering essentials: Didi has vied for a piece of the country’s food delivery market since 2018, when it launched Didi Waimai. That service was eventually suspended after a protracted price war with Meituan. Now, Didi is trying again.

• The company launched a new home delivery service called “Paotui,” meaning “running errands” in Chinese, in 21 domestic cities during the Covid-19 outbreak earlier this year.
• The majority of drivers from Didi’s chauffeur service—which previously employed more than 100,000 drivers—have varied their roles since March, either by delivering groceries or picking up laundry, according to Latepost. At the time, a Didi employee told Chinese media that the company would wait to see market reaction before deciding whether to make an all-out push.
• However, in the company’s latest growth plan the priority of the grocery delivery business has reportedly (in Chinese) been downplayed. Didi has struggled to get traction, with some couriers securing only two orders a day, Chinese media reported. In contrast, the order volume of Meituan’s grocery delivery business surpassed 1 million per day as of May.
• Didi declined to reveal the order volume of its home delivery service, known as “Paotui” in Chinese, but said that its grocery delivery platform “Chengxin Youxuan” completes more than 550,000 orders per day in three cities in China’s southwestern Sichuan province.

Didi has sought to overhaul its app by adding a raft of new services in an ambitious bid to make it an all-in-one app for various mobility demands. But Didi’s approach has been met with skepticism. Industry insiders question whether subsidies can work in a market like intra-city delivery, where users place orders less frequently than hailing a cab.

Didi goes global

Third, Didi has stepped up efforts to expand its international footprint, intensifying competition with US rival Uber. Didi so far operates in nine countries including Brazil, Mexico, Australia, and Japan—all of which Uber is already established in. Uber has already pushed its way into 65 nations around the globe, and more than 40% of the US company’s revenue now comes from international markets.

Having seen mixed results across countries, the company is promising a fivefold increase in overseas order volume over the next three years—requiring massive investments to scale.

• Didi plans to reach 5 billion orders annually by the end of 2022, including bookings on its ride-hailing and food delivery services.
• The company last year hit a major milestone, completing 1 billion trips across rides and deliveries from 50 million overseas users. Daily trips on its ride-hailing platform reached a peak of 5 million globally, but averaged at 3 million in 2019.
• Didi’s overseas business was hit hard by the pandemic this year, with order volume down by 20% from pre-pandemic levels, according to Chinese media LatePost.
• A Didi spokesperson told TechNode on Friday said its international markets have started to recover in the past three months, with Brazil and Mexico now “very close to pre-COVID levels.”

Betting on new markets: In its fight with Uber, Didi has sought out key markets to drive its expansion. Latin America is expected to be a battleground for ride-hailing platforms, as a populous area without anefficient public transit systems. Market research company Statista estimates the ride-sharing revenue of the region will surpass $1 billion by 2023.

• Didi saw initial success in Mexico after entering the country in 2018, grabbing around 30% market share in cities including Mexico City, the nation’s capital, and Monterrey.
• Some analysts are positive about Didi’s international prospects. A Pitchbook analyst told the SCMP that Didi has an edge because it takes more tailored approaches to entering different markets, while Uber’s strategy is more one-size-fits-all.
• Didi also made a foray into Russia last month—where it does not compete with Uber, but faces homegrown Yandex Taxi—and is expanding its reach in Australia, but this progress could come at a high price.
• A Didi spokesperson told Business Insider that its ride-hailing service was up to 10% cheaper than other ones in Australia. Uber has long ruled the country’s roads after eight years of operation.
• Also, Didi recently scaled back efforts in Japan by suspending services in ten prefectures, facing major headwinds from both the pandemic and stringent regulations, reported Nikkei. Ride-sharing using private cars is currently forbidden in Japan, forcing Didi to focus on taxi-hailing services.
• A Didi spokesperson told TechNode that is expanding rapidly, adding that it is now recruiting drivers in New Zealand and is ready to launch in more Latin American countries by the end of this year.

As it heads for an IPO, Didi aims to challenge Uber as the world leader of transportation by expanding in the overseas market. While the company boasts a more tailored approach to individual countries than Uber, it faces regulations as varied as the counties in which it operates. As its home market slows, its global business is expected to drive growth.

The future

Didi has ruled China’s ride-hailing market for years, but has never enjoyed a secure position in its home market, as a result of challenges from numerous smaller players. Now, the company faces its biggest trial yet—justifying a valuation of at least $56 billion ahead of a much-anticipated IPO, while competing with Uber for dominance in the global ride-hailing market.

Didi said it is encouraged by its “strong results so far and remains confident” about achieving its three-year target. “Globally, we see definitely more demand for affordable, safer, and more diversified on-demand services post-COVID,” a spokesperson said.

Didi will likely further expand its dominance in China’s mobility market—but the cost will be huge. As mobility services continue to grapple with the lingering effects of the post-Covid-19 era, Didi could face more bumps on its road toward capital markets.

Correction: An earlier version of this article incorrectly cited figures from Chinese media relating to the number of van drivers Didi hired at the launch of its intra-city logistics service. Additionally, the story misquoted a Didi spokesperson regarding order volume on the company’s home delivery service.