Ride-hailing

How DiDi’s Jean Liu sees the future of ride-hailing

The president of the world’s largest ride-hailing company talks to FinanceAsia about international expansion, the safety record of robo-taxis and why DiDi should not be valued like Uber or Lyft.

A Chinese sophomore hails a cab in Beijing, gets comfortable in the back seat and starts to play games on his smartphone as the car weaves slowly through the city's congested streets. After a while, he starts to chat with his driver about why he is a frequent user of ride-hailing apps.

Between studying and working as a part-time tutor he enjoys a brief respite while in the taxi. He borrows from Chinese online payment giant Ant Financial to fund his lifestyle in China’s capital city. He simply can’t afford to own a car.

On this occasion, his driver just happens to be Jean Liu, president of Didi Chuxing Technology, head of one of the most valuable startups still in private hands. She regularly gets behind the wheel to learn more about her customers so that she can plan a sustainable route for the firm.

“China’s new generation, they're constantly on mobiles, chatting and playing games,” Liu told FinanceAsia in an interview. “We want to provide a more affordable, convenient, safer ride to everyone.”

Safety and user experience are top of Liu’s mind after a scandal rocked DiDi in 2018. The rape and murder of two passengers by drivers working for DiDi’s carpooling service Hitch, followed by a regulatory clampdown and popular backlash against the firm, rattled management. It is now shaping the company’s strategy.

“It shocked the company,” Liu said, struggling with emotion as she recalls the scandal. “Given what we have learned, we have been very cautious.”

DiDi’s annus horribilis left deep scars. The growth of China’s ride-hailing market stalled after the strict enforcement of qualifications for taxi licenses exacerbated a shortage of drivers.

DiDi ventured overseas in 2018 and expanded rapidly into countries including Mexico, Chile, Colombia, Japan and most recently Costa Rica. Liu cautions, however, that the pace of DiDi’s international growth going forward “won’t be that fast”, held in check by safety and sustainability concerns.

She is disparaging of companies that copy-and-paste products into new markets, which is the fastest way to expand. Instead, she says that DiDi will be tailor-making services for local markets which takes more time and consideration.

DiDi has sought to win back both the support of regulators and public opinion in China, while reassuring investors about the company’s future.

In a sign of DiDi's rehabilitation, regulators allowed it to relaunch a trial of the profitable Hitch business in November after a year-long safety revamp. But even that concession came with caveats: Xu Yahua, who heads the transportation services department inside China’s transport ministry, said that drivers using the carpooling service should not aim to make a profit, but rather just subsidise commuting costs by taking on passengers. DiDi is not taking a service fee during the trial period.

The acid test of DiDi’s recovery will be its fundraising efforts going forward.

DiDi is seeking to raise capital for its units including autonomous vehicles and driver services Xiaoju Automobile Solutions. It even discussed raising capital specifically for its financial services unit with bankers, but pulled back as the unit is still too small and faces stiff competition from the likes of Ant Financial and Tencent’s WeChat Pay, said people familiar with DiDi’s plans.

Together with DiDi’s founder Cheng Wei, Liu has brought into the firm global investors such as Apple and SoftBank, but says she has nothing new to share on fundraising as yet.

It's a tough time to fundraise for ride-hailing. Investors were spooked by the frosty reception from public markets for DiDi’s US peers, Uber Technologies and Lyft. The opinion that ride-hailing companies might never be able to turn a profit gained credence after investors took a good look at Uber and Lyft’s books.

Uber, one of DiDi’s largest shareholders, valued its stake in the Chinese company at $7.95 billion at the end of last year. This is based on the San Francisco-headquartered firm’s S-1 filing and implies a valuation of $51.64 billion, which is lower than its approximate $56 billion price tag during its funding round in December 2017.

Liu hits back at any comparison with Uber and Lyft pointing to the potential growth of ride-hailing in China.  

DiDi forecasts ride-hailing in China will reach 230 million trips a day by 2030, up from 2 million daily in 2014 and 30 million daily in 2019; far outstripping growth in the US. 

She also expresses excitement over the breadth of DiDi versus Uber and Lyft, spanning urban planning to bulk-buying services for its drivers. “What we're trying to do is solve the whole [mobility] supply-chain problem,” Liu said.

ROBO-TAXIS TO THE RESCUE

Driver error is responsible for 94% of vehicle accidents, according to a 2015 US government report. DiDi wants to eliminate as much of that risk as possible. Robo-taxis would eliminate crime by drivers as well as potentially fatal scenarios such as drivers falling asleep behind the wheel or getting distracted.

“I’m a big personal believer in autonomous driving as it can make driving safer,” said Liu, who studied computer science at Harvard.

Robo-taxis would also ease DiDi’s ongoing struggles to attract enough drivers to meet the demand for its services after the regulatory clampdown.

In November, Tiger Qie, DiDi’s vice president and chief technology officer at its ride-sharing unit, also told CNBC that DiDi is only able to fulfil 65% of user requests for rides. DiDi said it has 31 million registered drivers on its platform. 

In the race to deploy robo-taxis, DiDi is behind companies like Google’s Waymo and Baidu in terms of testing licenses and mastering the technology. However, “people in the industry see mass deployment as key, not who technically gets there first,” Meng Xing, the chief operating officer of Didi’s autonomous driving unit, told FinanceAsia.

To hurry development along, DiDi spun out its autonomous driving team into a separate unit in August and is partnering with others in the industry. The unit – as of November – was still 100% owned by Didi but is raising capital from outsiders.

“It's crucial to have this type of partnership in order to build autonomous vehicles going forward,” Xing said. “Financing will probably be part of that.”

Progress is happening. DiDi is gearing up to launch robo-taxis in the suburbs of Shanghai in the coming months. Realistically though, mass deployment of robo-taxis is still a long way off. Liu thinks DiDi’s development of robo-taxis is “a very long-term commitment”.

DiDi's robo-taxis getting ready to hit the road

Also, DiDi might not be able to hold on to all the cost-cuts from taking drivers out of the equation.

“Most of the cost savings from lower labour costs will have to be passed on to consumers,” Robin Zhu, a senior analyst at research and brokerage firm Bernstein, said in a report.

It's something Liu has already pondered. “At the end of the day, people don't just want it safer, they want it cheaper too.”

In terms of winning over public opinion, the bar is higher for startups and technology solutions, she realises.

Statistically, people are safer in ride-hailing taxis than if they had hailed a cab on the street; they’re also safer in robo-taxis than in manually driven cabs. The number of crimes committed by traditional Chinese taxi drivers in 2017 was 14 times higher than those of their ride-hailing counterparts, according to China’s Supreme Court.

Liu, who describes herself as a very poor driver, firmly believes that handing control to technology is the answer: “One day, autonomous [driving] will kill accidents, just like antibiotics killed tuberculosis.” At the same time, she acknowledges that people are generally cautious of the new and unknown, and robo-taxis appear futuristic for many people.

“People have a lower tolerance for robots getting into accidents than for humans getting into accidents,” Liu said. So DiDi has to make its autonomous vehicles fool-proof, which will take time.

ANNUS HORRIBILIS

As DiDi is unlikely to be able to deploy fleets of robo-taxis any time soon, the dearth of drivers in China is likely to continue to be a drag on growth.

Passengers of licensed taxis through ride-hailing apps in China rose from 2016 to a peak of 346.2 million in June 2018 before tumbling to 329.9 million by December 2018, according to the China Internet Network Information Center, the agency responsible for supervising the internet under the Ministry of Industry and Information Technology.

Consultants at Bain have slashed the projected size of China’s ride-hailing market to $60 billion by 2021 from $72 billion by 2020 following DiDi’s safety scandal.

To compound DiDi’s pain, competitors smell blood in the water. Faced with slowing growth of private car ownership, carmakers are building out their own mobility services in China including BMW’s Reach Now, SAIC Motor’s Xiangdao Chuxing, Beijing Automotive Group’s Huaxia Chuxing, Great Wall Motor Company’s Ole Chuxing, Geely’s Caocao and Guangzhou Automobile Group’s Ruqi Chuxing.

“Traditional auto manufacturers have entered the ride-hailing market with firm determination,” said Enyu Guan, a former purchasing director at Didi, during a forum. He noted that they can offer taxi drivers lower vehicle costs.

Carmakers, fearful of even the remote possibility that autonomous ride-hailing may reduce car ownership in the world’s largest car market, are looking to collect data on user preferences so that they can improve their products and potentially develop privately owned autonomous vehicles, say industry experts.

Carmakers are also using ride-hailing as a way to drive electric vehicle (EV) sales and generate EV credits as they come under pressure from regulators to reduce CO2 emissions. As such, they are not primarily in ride-hailing to make a profit.

To be sure, DiDi opened its platform to top automakers in July as well as over 3,000 car-leasing firms. This helps DiDi meet pent-up demand for ride-hailing, but still the path to profitability looks bumpy.  

Even with a near monopoly, DiDi is on average losing money on each ride. From September to December of 2018, DiDi’s average commission rate per ride was 19% of each fare. Out of this, DiDi spent 7% on driver incentives during peak hours, 10% on operating costs; and 4% on tax and payment processing expenses. So DiDi’s car-hailing business was operating at a loss of 2 percentage points of gross merchandise volume.

“As a company, this state cannot last for a long time, otherwise one day it will not continue to operate normally because the funds are exhausted,” wrote Chen Xi, chief executive of DiDi’s ride-hailing business, in an April blog post that gives a rare insight into the financials of a privately owned company.

DiDi has lost money every year since it was founded and management has had to make some tough decisions. On February 15, DiDi laid off 15% of its staff, or 2,000 workers, and rehired in safety and international expansion, according to media reports.

In 2018, DiDi’s loss widened to Rmb10.9 billion ($1.6 billion) versus Rmb250 million, a person familiar with the matter said, confirming multiple media reports.

“We expect to see large losses and cash burn when the company files for an IPO,” said Bernstein’s Zhu. He expects DiDi to list in the next one to two years.

THE COME BACK

In the fight against competitors, DiDi can leverage its greatest asset – its size.

Despite nascent competition from new entrants in the ride-hailing market, DiDi still enjoys a dominant share of the world’s second-largest mobility service market in terms of total vehicle miles travelled in 2018, according to Bernstein analysts.

Founded in Beijing in 2012, DiDi has accumulated 550 million users as of December (the same number as mid-2018 with growth in international markets cancelling out a slow down in China). It processes 13 billion trips per year as of December, across 15 services from taxi and private car-hailing, bus, bike to e-bike sharing. 

“DiDi is the closest among the largest ride-hailing services to achieving a monopoly position,” Bernstein’s Zhu said.

The numbers of passengers using licensed taxis through ride-hailing apps in China is also picking up again, from 329.9 million in December 2018 to 336.6 million as of June, according to the China Internet Network Information Center's latest data

 

From these rides,  DiDi has been gathering a trove of data on transportation in China that it puts to use in inventive and potentially lucrative ways.

DiDi said that it processes more than 4,875 terabytes of data a day. By analysing this data, DiDi says that it can direct a taxi to a destination 30 minutes before demand for transport peaks in the area, making its fleet more efficient. The firm reckons its ability to predict future traffic conditions has hit 85% accuracy in computations 100 times more complicated than a game of chess.

This nationwide data collection exercise will be crucial for the successful deployment of autonomous driving. High-precision maps are one of the key prerequisites for autonomous driving.

Another way to use the data is for urban planning. DiDi launched a division dedicated to the field in January this year.

"This is a very exciting area for us," said Liu. “Traffic jams are still the biggest obstacles that prohibit a better way to transport [people].”

A Beijing professional who lives within the city’s sixth ring road spends an average of 56 minutes stuck in traffic every day, according to a May survey by the Beijing Transport Institute. 

“Given the huge amount of transportation data we gather every day… maybe we can make the transportation system more efficient,” said Liu, a busy single mother of three young children.

DiDi's technology now empowers more than 2,000 traffic lights throughout China, reducing local congestion by an average of 10% to 20%. It is also exporting its traffic-management know-how overseas, to cities as far-flung as Porto Alegre in Brazil.

DiDi has rolled out other services too, such as its car-servicing operations into its Xiaoju Automobile Solutions division in April 2018.

“People rarely talk about the auto solution part [of the business],” said Liu, but it is “one of the key competitive advantages we have.” She spent 12 years at Goldman Sachs, meeting Chinese entrepreneurs and getting to know their startups, before deciding to join DiDi in 2014 because she felt the firm had an edge over competitors.

DIFFERENT PATHS

As DiDi draws closer to a potential IPO, analysts and investors frequently draw parallels to the rocky experiences of DiDi’s publicly traded US peers. Both Uber and Lyft are trading below their IPO prices.

Liu, the Beijing-born and raised daughter of Lenovo founder Liu Chuanzhi, is best-known for going head-to-head with former Uber’s chief executive Travis Kalanick, and winning. Uber exited China in 2016 and now Liu is now taking the fight to Uber in Latin America. She believes that DiDi will pull ahead of its rival yet again. 

For a start, she thinks that DiDi has a home market advantage over its US peers. Americans are emotionally attached to their cars, with far higher private ownership in the US than in China. Private car sales slowed dramatically in the Middle Kingdom in 2019. 

Certainly, most analysts agree that Chinese cities are more conducive to ride-hailing in the long run because they tend to have more high-rise buildings, which cuts the average distance between drivers and riders. China also restricts car number plate issuance in major cities to reduce pollution.

Layer on top of that the relatively poor urban transit systems, a shortage of parking spaces and greater congestion, then owning a car becomes less attractive than ride-hailing. What’s more, taxis are cheaper in China: US taxis cost around $1.5 per mile versus about Rmb2.5/km ($0.6/mile) in China.

Liu firmly believes that DiDi can offer greater value to its users than its rivals. "For China, we can make sure that ride-share is cheaper than driving. In the States, you cannot," Liu said.

In a few years, Liu’s sophomore passenger will likely land a job and will consider buying a car or continue to use ride-hailing platforms. Liu reckons he will plumb for DiDi. 

Additional reporting by Elizabeth Utley and Xinlan Zeng

This story has been updated to include additional data points from DiDi

¬ Haymarket Media Limited. All rights reserved.

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