Ride-hailing

Toyota’s $600m investment in Didi typifies industry tie-ups

Partnerships are growing between automakers and ride-hailing groups looking to solve the car industry's woes. Strategic investment could tide Didi over during a capital raising rut in private markets.

Japan’s Toyota Motor has agreed to invest $600 million in China’s Didi Chuxing as part of a deal to supply cars and share research.

Toyota and Didi will set up a joint venture to provide vehicle-related services for ride-hailing drivers on Didi’s network, they said in a statement on Thursday. The JV will include GAC Toyota Motor, a joint venture between GAC Group and Toyota Motor in China.

“We look forward to combining Didi’s expertise in AI-based large-scale mobility operations and Toyota’s leading connected vehicle technology to build a next-generation intelligent transportation framework for sustainable cities,” said Stephen Zhu, senior vice president of Didi.

Collaboration is growing across the transportation industry as loss-making ride-hailing companies look to cut costs while carmakers seek out new markets for their fleets of cars. Toyota has also invested in San Francisco-based Uber Technologies and Singapore-headquartered Grab. 

Didi founded a cross-sector alliance in April last year including FAW, Dongfeng, BAIC, SAIC, GAC, Geely, BYD, Toyota, Volkswagen and Renault-Nissan-Mitsubishi to collaborate in areas that have the potential to transform the auto industry such as new energy, AI technology and shared mobility.

Stiffer rules in China on the quality of the cars registered on ride-hailing companies' platforms makes the supply of vehicles from blue-chip car manufacturers such as Toyota all the more important. 

Car makers are also keen for new clients for their cars. Global auto demand fell last year for the first time since 2009. Demand slipped by 0.1% in 2018, compared to average annual increase of 4.1% over 2011 to 2017, according to a report by credit rating agency Fitch in May.

Moreover, several structural headwinds for auto demand look set to persist, including increased environmental concerns about diesel cars and close to saturation levels of cars in the US, it said.

FUNDRAISING

Didi is still unprofitable and burning through cash, so finding ways to cut costs, such as driverless cars, would make its business model sustainable.

In the meantime, it still needs huge dollops of capital to keep operating, which is a problem. The weak start of trading for loss-making ride-hailing rival Uber on May 10 soured investors’ sentiment on the industry.

Public investors are less tolerant of an unprofitable firm still burning through cash while scaling up against stiff competition than the private investors were in Uber’s late-stage fundraising rounds. In the wake of Uber’s IPO, private investors are also revaluating their tolerance for companies still deeply in the red after multiple fundraising rounds.

Didi has already completed 17 rounds of fundraising according to Crunchbase, one of which in 2017 valued the company at $56 billion.

“The question is whether or not Didi can ever turn profitable?” said Nisa Leung, managing partner at Qiming Venture Partners, at the RISE conference for startups in Hong Kong on July 9.

Asked when Didi is likely to IPO and when it could break even, Didi’s chief security officer Zheng Bu at the same conference said that “Didi never published a timeline for IPO” and in the meantime “we’ve been improving our operational efficiency”.

The Wall Street Journal reported on July 17 that Didi is seeking to raise $2 billion at a valuation of $62 billion. Toyota’s $600 million is part of the ongoing fundraising, according to sources. 

Corporations that see long-term value in a tie-up with ride-hailing firms could help provide Didi with that stop-gap until IPO markets look more inviting. Toyota’s $600 million will come in very handy. 

¬ Haymarket Media Limited. All rights reserved.

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