Didi – Desperate times pt. II

Listing in Hong Kong will not help much.

• Didi has begun its preparations to relocate its listing to Hong Kong but this is unlikely to be able to make up for the fact that the company is already a very pale reflection of its former self.
• Didi, like much of the Chinese technology industry, has been under regulatory scrutiny for some time which has as much to do with the state ensuring its influence as it does with regulatory reform.
• However, Didi’s case has been particularly extreme because as part of the review, the regulator banned Didi from adding new users and new drivers indefinitely.
• In a networked business like Didi, being unable to add users is 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.
• I presume that leaving the USA and relisting in Hong Kong is a condition to be allowed to add users and drivers once again which is why Didi is in a hurry to get this done.
• The problem is that relisting in Hong Kong will not alleviate Didi’s problems as I think that almost all of the damage to Didi has already been done.
• It is no longer far and away the leader in Chinese ride-hailing as all of its competitors are catching up.
• Furthermore, the government’s investment of $591m in one of Didi’s rivals has incentivised it to ensure that Didi goes out of business.
• Consequently, even when it has listed in Hong Kong, converted all the shares from the USA, and delisted them there, it will still be competing with both arms tied behind its back.
• Hence, I would not buy the shares of this company at any price.