Drive I/O | The five trends that will reshape ride-hailing in China

One of the prime industries slammed by the pandemic-induced economic downturn, China’s ride-hailing market is unlikely to recover its freewheeling, easy money ways.

Even before the coronavirus lockdowns, ride-hailing platforms in China struggled with increasing competition, as their usage slowed significantly in the country’s maturing transportation market.

The safety measures may not have been enough. Giant players seek to thrive, not just to survive, in a post-coronavirus world. To ensure growth, they have been introducing low-cost services and entering smaller cities. But the road to recovery of ridership could be slow and bumpy. 

Standing at a crossroads, China’s ride-hailing industry faces economic uncertainty, increased competition, and more regulation as the government steps up to offset the disruption caused by Covid-19. Looking ahead, as Chinese taxi companies and automakers ramp up, ride-hailing giant Didi could pay a heavy price to maintain its dominance.

This month, we review what happened in 2020 and what these trends mean for the future of ride-hailing in China.

Taxis vs ride-hailing

China’s ride-hailing and taxi sectors are converging after years of clashes, as both sides seek a level playing field and additional room for growth amid a deep economic downturn.

• Traditional taxi services have battered heads with Didi, charging the country’s biggest ride-hailing platform with unfair competition, partly because Didi’s ride-hailing drivers could offer cheaper fares with a dynamic pricing model. Taxi drivers have also been angered by Didi’s dispatch algorithms. These are the real-time mechanisms that match drivers with passengers; taxi drivers believe they favor Didi’s own vehicles over taxis, especially for long trips.
• A Didi spokesperson told TechNode that its technology facilitates matching of demand and supply and therefore helps drivers to grow their income, by dispatching, for example, a ride in the same direction as a driver’s route home when he comes off duty.
• Didi has offered taxi-hailing services since its inception, but it now only facilitates 3 million taxi rides per day. That’s only around 6% of the country’s daily taxi trips, suggesting massive growth potential. Until recently, the company didn’t charge state-backed taxi fleets that offered rides on its platform, while Didi drivers pay the company a 20% commission for every ride.
• Things started to change last summer, when Didi for the first time announced plans to charge taxi drivers. The company introduced the charges in lower-tier cities in August and then extended them to some of the country’s biggest cities. In Shanghai, Didi takes a fee of at least RMB 1,000 ($153) from a cab driver each month, around 10% of the driver’s monthly income. This made some drivers unhappy, a driver surnamed He told TechNode in late December.
• Didi explained that revenue from taxis will cover costs and boost demand by offering subsidies to drivers and passengers, and add an IT system for taxi fleets that helps with efficiency. Meanwhile, Alibaba’s mobility service, AutoNavi, has said that taxis and private vehicles will be treated equally on its platform, although drivers like He remain skeptical of the claims.

Untapped markets

Chinese mobility giants are hoping that expansion in the country’s hinterland will compensate for the steady chilling of the once red-hot markets of major cities.

• Didi has launched a budget ride-hailing app called Huaxiaozhu. The platform takes a leaf out of social e-commerce giant Pinduoduo’s book: It offers discounted rides to people who share the app with their friends on social networks. 
• Didi expects Huaxiaozhu to carve out a niche by winning the hearts of young, price-sensitive passengers in the 300 or so lower-tier cities where it operates. Currently, around 20 of China’s biggest cities account for 60% of Didi’s ride volume in its home market, but growth of its core business has been stagnating since 2017. The company’s woes were compounded by a drastic drop in rides early last year due to Covid-19.
• Looking ahead, another round of subsidy wars seems inevitable for Didi: more big tech companies are looking to tap new growth opportunities by offering cheaper services. In December, Alibaba-backed bike rental platform Hellobike launched a ride-hailing service in China’s southern Guangdong province. It claims its fares are 40% cheaper than its competitors. Early last year, Didi launched a RMB 10 billion subsidy program to attract drivers and riders in more than 130 cities across China.

Traditional automakers

Chinese automakers are collectively pushing into the ride-hailing market in order to gain a foothold in a world where vehicle ownership would no longer be a preferred choice for customers. 

• Volkswagen’s Chinese partner SAIC Motor is one of the automakers that could become a contender for Didi. Last month, the company closed a RMB 300 million Series A round from Alibaba and China’s top battery supplier CATL for its mobility service platform Xiangdao Chuxing. The platform offers on-demand ride-hailing and car rental for individual and enterprise customers, among other services.
• State-owned SAIC says its premium ride-hailing service has 20 million users after two years of operation, although its number of active users is only 1% of Didi’s, according to market research firm Analysys.
• Still, Didi has reason to worry. In September, SAIC launched a separate online taxi-hailing service in Shanghai with the support of the city government. Each driver is currently given as much as RMB 200 per day for taking orders on the platform, local taxi driver He told TechNode. Nearly every licensed taxi in the city is accessible through the app, SAIC said.
• More automakers are nibbling away market share from Didi. T3, a ride-hailing service launched by three state-owned automakers, last month said it plans to triple its order volume by entering 48 cities around China this year. The service currently offers 1 million rides a day after going live in mid-2019.

Regulation

Ride-hailing services face increased government intervention and regulatory uncertainty, as Beijing seeks more control to boost an economy hard hit by the pandemic and its aftermath.

• As the central government tightens the reins on big tech firms with anti-monopoly measures, a regulatory storm might be brewing for Didi. The China Taxi Industry Alliance last month called for regulators to review Didi’s 2016 acquisition of Uber’s China unit, according to an open letter published on its WeChat account (in Chinese).
• The industry group, formed by more than 50 licensed taxi companies, also called for Didi to be punished for its alleged monopolistic practices including offering expensive subsidies to promote Huaxiaozhu. A week after the proposal, Minister of Transport Li Xiaopeng pledged to enhance anti-monopoly regulation in China’s transportation sector as one of his ministry’s top priorities in 2021.
• Beijing is also looking to increase its influence in the technology sector as part of its five-year plan to boost its domestic market, last month requiring ride-hailing services to develop “hailing by one-click” features to accelerate adoption among senior citizens.
• Experts believe such moves could help reduce government expenditures for seniors’ medical care and unlock new sources of economic growth. Didi and seven ride-hailing platforms are now required to simplify their apps and launch the specially-designed feature before the upcoming Chinese New Year holidays in February, reported Chinese media.

Capital

Chinese ride-hailing companies are flocking to mainland and Hong Kong stock markets for IPOs, hoping to build their war chests to weather economic uncertainties and strengthen their balance sheets.

• Didi has finally resumed its efforts to go public, two years after putting the plan on hold following the murders of two female passengers using its popular carpooling service, Hitch. Claiming back in May that its “core business” was finally profitable, the company is reportedly (in Chinese) looking to list this year in Hong Kong at a valuation of HK$600 million ($80 billion). Didi has been in early talks with Goldman Sachs among other banks about possibly underwriting the offering.
• Didi has been diversifying businesses outside of its ride-hailing roots in search of new growth markets to justify its valuation, when its core business still struggles due to Covid-19. Its grocery delivery business in late 2020 exceeded 10 million orders per day, putting it at odds with Meituan, Pinduoduo, and more giants rushing into the grocery delivery sector.
• NIO-backed Dida, a distant second to Didi in China’s massive ride-hailing market, in October raced ahead by filing in Hong Kong for what looks to be Asia’s first ride-hailing IPO. Meanwhile, Geely’s ride-share unit Caocao in November hired UBS to raise its Series B and finally list on the public market, without revealing further details.