Home > News > Gobi

How Didi Chuxing Plans to Beat uber in Ride-Hailing Race

The Chinese company saw off its US rival in its home market and is now looking beyond its borders

By Yuan Yang and Sherry Fei Ju in Beijing , Financial Times

Didi recently overtook Uber as the world's most highly valued start-up, and is now looking at global expansion © FT montage / Bloomberg

Su Donghu, a Beijing taxi driver, remembers when the Chinese car-hailing company now called Didi Chuxing launched in 2012. 

The company, then called Didi Dache, was known for its agressive efforts to recruit drivers. Staff would approach them in taxi-queues offering freebies such as hot water flasks to get them to download the app and start taking rides from the platform. 

Mr. Su would frequently see customers fighting over a cab -- leaving the driver with all the power. Now, just six years later, Didi's app has become so dominant that the company dictates his working day. "Hardly anyone hails a cab on the side of the road these days, only elderly people who don't use smartphones," he says. 

Didi has established a dominant position in China. It says it has 450m registered users -- over half of the country's mobile-internet users -- and 21m drivers serving 25m rides per day. By comparison, the government says there are roughly 2.6m licensed taxi drivers in the whole country. 

Now, Didi is in a race against its US rival Uber to conquer the global ride-hailing market -- estimated by Goldman Sachs to grow eightfold to $285bn by 2030 -- sensing opportunity in a moment of weakness for the Silicon Valley company that has been working to repair its image after a series of controversies. 

The company's major backer in doing so is Softbank, the Japanese technology conglomerate that is also the biggest investor in uber and has stakes in a host of other ride-hailing companies worldwide, including Singapore-based Grab and Ola in India. 

Didi has already surpassed Uber as the world's most valuable start-up, with a valuation of $56bn last December compared to $48bn for Uber based on its last fundraising round. 

But despite its reach and financial war chest, Didi says it is making "very low" profits -- and has no plans to change tack in the medium term. 

The company is also making a long-term bet to create the autonomous taxi fleet of the future: it has been testing self-driving cars on public roads for several months, and on Thursday announced that it was helping Beijing carmaker BAIC to design cars. 

"Everyone knows our main competitor [Uber] is very actively internationalising," Bob Zhang, Didi's chief technology officer, told the Financial Times in an interview. "If we don't advance quickly, the window of opportunity could close." 

Didi has already beaten Uber in one battle: it acquired the Silicon Valley company's China unit in 2016, in return for Uber getting a 17.7 percent stake in Didi, ending an expensive fight between the two ride-hailing giants. 

The US company is set to sign a similar deal with Grab, the ride-hailing app focused on Southeast Asia, also backed by Didi and SoftBank. But even as Uber switches focus to retrenching in Europe, the US and Latin America, Didi is intensifying its efforts in those territories, too. 

The Chinese company has a four-pronged strategy to do so: organic growth, acquisitions, partnerships with domestic players -- and continuing to raise lots of cash. 

"If there are suitable domestic partners, we will empower them to succeed, be it by using our capital, technology, products or experience. But if there are no suitable partners, we'll enter ourselves," said Mr. Zhang. 

First, Didi is looking to new markets in Latin America. It is setting up an office in Mexico and has advertised on LinkedIn for an operations manager, in what would be the first non-Chinese market it entered with its own service. 

"Didi has been poaching Uber executives in Mexico and offering them twice their salary and more," said Jeffrey Towson, professor of investment at Peking University who is researching Didi's international expansion plans. "Didi appears to be willing to spend to win the Mexico fight with Uber." 

Didi declined to comment on its Mexico plans. 

Second, Didi is building a financial war chest to acquire local ride-hailing apps, raising $4bn in its funding round last December to fuel that push. The company made its first overseas acquisition in January: Brazil's ride-sharing platform 99, the country's biggest rival to Uber, not long after taking a minority stake in the business. 

"Globalisation is an important theme when we discuss M&A strategy with Didi," said Jeremy Choy, head of M&A at China Renaissance, an investment bank that advises the company. Discussing what he called a typical Chinese strategy of turning a small stake into an acquisition, Mr. Choy added, "It's a possibility Didi will aim to do the same with other stakes." 

Third, the company has built up a global network of minority investments and partnerships with ride-hailing businesses across five continents in a bid to create a global anti-Uber alliance. Didi has invested in Lyft in North America, Ola in India, Grab in Southeast Asia, Careem in the Middle East and North Africa, as well as Taxify in Eastern Europe. 

Didi users have been able to hail Lyft rides through the Didi app and vice versa, though that service has been temporarily paused. Didi says it is "exploring deeper partnerships" with Lyft, but did not specify its plans. 

The company also believes partnering with local taxi companies is a useful way of winning support from regulators, particularly when regulatory tension is high in many crucial markets such as Brazil. 

Didi also offers taxi-hailing in Hong Kong, as well as in Taiwan through a local franchise. It has launched a joint venture with SoftBank in Japan last month, trialing a ride-hailing service that would allow local taxi companies to use its technology. 

Fourth, Didi has raised more than $17bn in the past two years, and has roughly $12bn cash on hand to pursue further acquisitions. Uber, by contrast, had about $5.75bn in cash following a SoftBank-led deal in January. 

Still, Didi faces major challenges. For a start, well-funded local rivals are gearing up to launch. The biggest is Meituan-Dianping, a service known for food delivery and restaurant bookings, which is about to launch its own ride-hailing service. The company, which raised $4bn from Chinese tech giant Tencent, which has also backed Didi in October, is valued at $30bn, according to market research firm CB Insights. 

Meituan's strategy is to charge drivers less to use its platform. Drivers in Beijing say Didi takes a 20 percent cut of passenger's fares. Meituan will let the first 50,000 drivers to join to keep their earnings for the first three months. 

Ken Xu of Gobi Partners, a venture capital firm which chose not to invest in Didi's first major fundraising rounds, said the decision to sacrifice profits for building reach makes it vulnerable. "Didi's problems with profitability are still about the threat of competition," he said. "Right now in China, people always want to enter the market. Didi's pricing is still not high enough to profit, and newcomers will lower prices." 

Didi drivers will probably welcome the competition: many complain of the decline in subsidies from the company and the higher rate it has charged drivers since its merger with Uber. 

Taxi drivers in Beijing were once paid as much as an extra two-thirds of the total fare on top of the fare itself. Now those subsidies have almost disappeared. Shared-car drivers were once rewarded RMB600 to complete 30 trips; now they are given RMB100. Lower payouts -- as well as a government crackdown in big cities on Didi's core migrant workforce -- have led some drivers to quit the platform. 

"Through SoftBank's Uber and Didi board representation, they will try to prevent any value destroying competition," said Chris Lane, analyst at research firm Bernstein. 

But for Mr. Su, the taxi driver, the future is clear: he plans to re-train as a bus driver -- an industry Didi has not yet disrupted. 

Additional reporting by Yingzhi Yang