Didi Chuxing is the largest unicorn company in China valued at 50 billion USD. Over the past three years, not only did the company’s valuation grow in double digits, its investors also witnessed the highest rate of return ever of over ten thousand folds. However, despite the rapid expansion growth Didi is experiencing, the company is also facing many difficulties.
Didi’s business model may be evolving from an asset-light one to an asset-heavy one with countless vehicles. The company has signed agreements with thousands of leasing companies across China, where for every trip the drivers complete, 1% of the income will go to these leasing companies. And the real reason behind the cooperation with these leasing companies is to clear the names of these so-called “black-car drivers”. (In China, illegal taxis, or cab drivers who aren’t licensed to drive cabs are referred to as “black cars”, or hei che) To explain, Didi is sacrificing the great user experience it had built up during the early stages of its startup to optimize its financial statements. For example, even though the app may show that there are several vehicles available nearby, it would still reserve a ride that’s a few kilometers away for users, and incur an additional fee if users cancel the reservation after 3 minutes. Furthermore, if users don’t offer a higher price, it’s extremely difficult to catch a ride during rush hour. Some taxi drivers have complained about the increased burden that Didi has piled up on their shoulders.
With that said, people are starting to have doubts about the company, wondering if their app is really making a difference in their daily commutes or simply making things worse. This may be the greatest challenge faced by the company.
For a startup company that’s been around for just five years, these problems aren’t intolerable; they’re inevitable. However, what’s even more puzzling is that the company hasn’t been spending its money on resolving these issues, but has instead threw them all into other more puzzling things.
A quick example that comes to mind is RenRen Car, a used vehicle trading platform that was recently financed by Didi. It was reported that Didi invested $200 million into RenRen Car and became the only strategic investor of the company. Not only did Didi become the money bag for RenRen Car, but it also brought along big clients for the secondhand car trading platform both online and offline (With 17 million drivers operating under Didi, Didi itself is RenRen Car’s biggest client). However, the biggest question is still, what exactly did this investment bring about for Didi?
Didi is facing the challenges
Receiving complaints from both users and drivers isn’t a once or twice thing for Didi now. Users are becoming more and more frustrated with the unreasonable and unknown raise in prices when using the app, and the drivers who are part of the whole system haven’t received a shred of benefit as well throughout all this.
Li, a frequent Didi user living in the Haidian District of Beijing has been using the app for a long time now to commute home. However after Chinese New Year in 2017, it became almost impossible for her to call a cab using the app. Not only has she been unsuccessful in calling a cab to work with the usual price, but she was still unable to do so even after raising the price by 1.3 times. “Aside from the additional charges incurred from calling for a cab during peak hours, bad weather comes with additional charges too. And so does going to remote regions. There are no other options besides additional charges. I have seriously no idea what’s going on with Didi and their app.”
Didi’s own statistics have shown this raise in prices as well. In June this year, four major cities throughout China— Beijing, Shanghai, Guangzhou, and Shenzhen—will experience a raise in prices throughout rush hours. The prices will grow specifically by 12.4%, 17.7%, 13.2%, and 22.5% respectively. With Didi’s app being disappointing on multiple fronts, many users are returning back to the old way of commuting on overly crowded subway lines. In June this year, a writer in China named Liuliu has also made a post on Weibo, detailing the recent frequent encounter of overpriced Didi rides: a 20KM ride resulted in a heavy amount 163 yuan due to the 1.5 times increase in pricing.
At the same time users are having their benefits stripped away bit by bit, Didi drivers have expressed their inability to rake in any of these benefits as well. A Didi driver in Beijing says that the calculation behind their salary isn’t transparent, meaning the drivers are unsure of how their incomes are calculated. The driver says, “I feel that I haven’t received a cent from the fare raises. Even when the fares were stable, there was a discrepancy to Didi’s 20% commission. The actual commission they (Didi) took should be much higher than 20%.” Several drivers had the same suspicions as well and complained about Didi’s non-transparent method of calculating their commission and each driver’s pay. Drivers could only calculate their own pay based on each customer’s actual fare prices to get a rough estimate of Didi’s commission in between. And the proportion of Didi’s commission is estimated to be much higher than the company’s declared amount of 20%.
Due to the requirements for becoming one of Didi’s drivers becoming stricter, many drivers have left the company with several of their colleagues following suit. This lead to even more doubt from the public. Writer Liuliu questioned Didi’s actions and wondered if Didi is trying to monopolize the market by creating a situation where the only person benefiting from the whole situation is the company.
The increasing weight of Didi’s responsibilities
Since the Chinese government issued additional requirements to be met by drivers such as applying for a transport permit (cab drivers must own a transport permit in China) and owning a local household registration (hukou), the new set of regulations have in fact added more weight to Didi’s responsibilities. Didi has no choice but to comply with the law, purchase a large number of additional vehicles, carefully screen drivers, and pay much more for these drivers. To do all this, the company must also become a driving school and provide training for the drivers. And although Didi has cooperated with ample companies in name, what the company is really doing is clearing the names of “black-car drivers” and recruiting them as a member of their cab drivers under the leasing companies. Didi seems to have turned their exceptional drivers into a sort of company motto and competitive advantage on the market.
While interviewing a Didi driver in Beijing, the driver disclosed that more than 90% of the drivers in contract with Didi drive their own cars and own a standard driver’s license only. Many don’t own a transport permit and must rely on Didi and the affiliate leasing companies to clear their names. And the drivers operating under these leasing companies seem to have additional privileges as well such as receiving priority when accepting new ride requests on the app. However, whether one owns a transport permit or not, without the massive amounts of subsidies from Didi, cab drivers are witnessing a downward trend in their incomes. The only stable figure throughout this whole process is the 28% fee they must pay to Didi for driving one of their cabs.
Didi is finding it harder to become a customer-oriented company and rather becoming more and more of a captive to suppliers.
Didi is now moving further and further away from its mission statement of optimizing commute for all; it is now more burdensome than ever. With the help of large data, the advantage it used to have of allocating vehicles wherever and whenever, had to be sacrificed due to the increasing weight of its asset service. The company not only canceled all of its subsidies, but also raised all of its prices to one that’s much higher than your average taxi fare. The price of hailing a regular cab is already high. But hailing a premium cab or above costs about more than 3 times the regular cab fare.
A war between the platforms for trading used cars
On September 25th, 2017, Didi invested $200 million in the Chinese auto trading platform RenRen Car, a highly questionable investment to many.
In essence, although RenRen Car appears to be an online-oriented trading platform, the company is really looking to sell offline, which is understandable seeing as it’s unreasonable to directly sell hundreds of thousands of vehicles online. Thus, since the actual trading of secondhand cars occurs offline, in low frequency, and at a lower price, it can be concluded that compared to Didi’s high-frequency and high-quality online business, RenRen Car’s business really isn’t as flourished as it may seem. Moreover, the company operation isn’t as optimistic as things may seem. Since its establishment, the company has not yet achieved its annual profit target, and the aggregate costs are still higher than its aggregate revenue altogether.
According to the world’s leading research institution Millward Brown ACSR, during the second and third quarters of 2017, Youxin successfully overtook RenRen Car among the rankings of secondhand car dealerships. In addition, factors such as brand influence, performance scale and others have brought RenRen Car down to third throughout the industry. And it’s definitely not simple to take the first again throughout the industry as the third. The company’s theory of making money solely on commission isn’t logical. It had to operate based on a large customer base. But now, with Didi behind its back, the company is naturally happier than ever.
But what was on Didi’s mind when it invested in RenRen Car? What benefit did this bring about?
After purchasing such a large number of vehicles, Didi is undoubtedly the largest client and trade partner on the market of secondhand cars now. But the company really didn’t need to become one of the shareholders of an average secondhand car trading platform at all. From a capital point of view, if one’s own valuation came out to be 100, but bought something worth about only 20, this would only lower one’s own valuation.
Furthermore, if the purchased asset still doesn’t turn a profit, the result will only make the financial reports after the merge all the more negative. Although Didi has a very high valuation currently, its net profit isn’t exactly positive yet. Thus, the question becomes, did Didi really make the right choice by purchasing a company running a deficit such as RenRen Car?
Has Didi hit the valuation ceiling?
In fact, entering the era of heavy assets, Didi has already hit the ceiling on value assessment. According to a financial report, Didi’s current valuation of 50 billion USD is definitely a remarkable feat unseen of for a startup company that has operated for less than five years.
With the completion of 13 rounds of financing, Didi’s aggregate financing amount of close to 100 billion yuan has far surpassed the combined market value of three of China’s major car dealerships—BYD, GWM and Geely. Didi has a valuation of 50 billion USD currently. With a P/E ratio of 10, Didi would need to reach 5 billion USD, a net profit support of nearly 35 billion yuan according to the current data in order to become listed safely. Thus, turning a profit for Didi is still a goal that has not yet been achieved. Never mind the 35 billion yuan that’s needed, achieving a net profit of 3.5 billion yuan is already a mission for the company.
It seems like Didi’s goal of IPO in 2018 is becoming further down the road.