Didi – Nasty economics

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Didi encounters a real growth problem.

• Didi is now the only credible ride hailing platform left in the Chinese market, but its problems are far from over because local Chinese governments are finally enforcing regulations designed to protect the taxi industry.
• In December 2016, the governments of Shanghai and Beijing approved a policy called local cars, local drivers.
• This meant that ride hailing companies could only use drivers who had locally registered vehicles and could prove residence in the city.
• This may not sound like a big deal until one looks at the demographics of the urbanised workforce in China.
• Around 40% of the workforce of both of these cities reside outside of the city and in the younger, paid part of the workforce, that number is much higher.
• For example, prior to the enactment of this regulation, less than 3% of Didi’s Shanghai drivers had the necessary residential registration to qualify as drivers.
• I suspect that that Didi’s Beijing drivers show similar characteristics and that other major Chinese cities also have a large migrant workforce.
• This has not become a problem until very recently because although the policy has been approved, it has not been enforced until very recently.
• The result has been that Didi has now been forced to substantially reduce the number of drivers in Shanghai and as of April 1^st, is only allowing cars with a Beijing licence plate to operate in Beijing.
• The net result is that supply of rides has been drastically reduced meaning that the price of those rides will inevitably increase.
• Furthermore, on top of the service becoming more expensive, the quality of the service is also likely to meaningfully decline.
• With less cars available, wait times will certainly rise and the chance of successfully hailing a ride will decrease.
• Rising prices and lower reliability is likely to drive many users back into the arms of the taxi industry thereby achieving exactly the result for which the rules were created.
• Beijing and Shanghai are the two cities which have the largest non-resident workforce but I suspect that this sort of legislation could easily be used in many of the other large Chinese cities.
• This creates a very serious problem for Didi as, with its supply of drivers substantially limited in the areas where it has the highest demand, there will be a real crimp on its ability to grow.
• Furthermore, there remains the very real risk that other major cities in China follow Beijing and Shanghai’s lead causing Didi further agony.
• If this spreads, it is not inconceivable that Didi’s revenues start going backwards.
• Didi was originally created as a taxi booking service and one possibility is for Didi to return to its roots.
• The other is for Didi to move into the high end (where Uber started) and develop a black car offering but I think that demand for this will be quite limited.
• This leaves Didi’s outlook at the mercy of regulation, which is not what one wants to hear when one has put money into the company at a valuation of $34bn.
• DJI or Ant Financial are the only two private Chinese unicorns that I would be willing to consider.
• In the listed sphere I still prefer Baidu and Tencent.