Didi – Blood in the water pt. II

Half of Didi’s opportunity has already been lost.

• Didi appears to have lost 30% of its user base (and 50% of its opportunity) since the crackdown on its business which combined with the state backing one of its rivals opens the possibility that Beijing intends to drive Didi out of business.
• Aurora mobile is a provider of big data solutions for app developers in China (see here) and its data is indicating that Didi’s daily active users have fallen to 11m from 16m around the time of the IPO.
• Furthermore, if one extrapolates how the user count was faring at the time of the crackdown then a further 2m users a month are being lost in terms of opportunity cost.
• At the time of the IPO, the user count was 16m and on the trajectory it was on, it would have been around 21m by now if there had been no intervention.
• Hence with a user count now at 11m rather than 21m, one can see how three months of being in the shackles of the state has already wiped out half of what Didi would have become.
• In a networked business like Didi, these kinds of losses are disastrous because networks are all about scale and tend to be a winner-takes-all situation.
• Didi like all ride-hailing, delivery companies, online classifieds, and so on are marketplaces where buyers and sellers come to transact with the marketplace taking a small commission for enabling the transaction.
• This means that most of the time, these marketplaces are brutally competitive and spend most of the time fighting each other tooth and nail for buyers and sellers.
• One only has to look at Uber vs Lyft for evidence of this.
• RFM’s long-held rule of thumb states that when one marketplace wins 60% market share or becomes twice the size of its nearest competitor it becomes to go-to place to transact and the economics change rapidly.
• The marketplace no longer has to fight for buyers and sellers and can increase its pricing becoming a large cash-generating machine.
• This is why what the Chinese state has done to Didi is so detrimental because by preventing it from signing up new users, it is allowing all of its competitors to catch up.
• This means that the prospect of Didi becoming a cash-generating machine is rapidly receding and the outlook increasingly is cut-throat competition and further large losses.
• The situation is further compounded by the state which in addition to grinding Didi beneath its heel has invested $591m into one of its competitors.
• The state now has an incentive to ensure that Didi never recovers and that it is Cao Cao Mobility that takes over leadership in China’s ride-hailing market.
• This can be achieved by selectively applying regulations such that Didi even without the state halting all of its apps is competing with both arms and both legs tied behind its back.
• Hence, I think that the outlook is deteriorating fast for Didi and I would not want to be around when it next reports to the market.
• As a foreign issuer, it does not have to report quarterly but nothing stops it from doing so should it so desire.
• So far it does not desire to do this and is keeping schtum implying that it has nothing but bad news to impart.
• I would sell it immediately at any price as the actions of the state imply that it intends to drive the value of the company to $0.