Didi – Unrealised dreams.

From revenue to cost.

• All is not well at Didi as a restructuring of the company is a sure sign that targets are not being met which is certain to lead to questions being asked about the validity of the most recent valuation of $56bn.
• Didi has announced that it will cut 2,000 jobs (15% of the workforce) as it re-evaluates some of the activities within which it is engaged.
• In plain speak, I think this means that the combination of the consumer backlash from its lax security combined with draconian regulation has meant that rides taken have not lived up to the bold forecasts made when it raised $4bn at $56bn in December 2017.
• After Uber was chased from the market (see here), it was thought that Didi would end up owning the market.
• This is essentially true but two events have occurred that make the market outlook for ride-hailing materially worse than it was.
  • First, regulation: 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 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.
  • This rule was created to protect the local taxi industry but was not enforced until sometime later.
  • However, now that it is being enforced, the number of available vehicles is down meaning higher prices, lower reliability and longer wait times.
  • The net result is fewer rides and lower revenues than expected.
  • Second, user safety. Didi suffered from two high profile murders of female passengers within weeks of each other which prompted a number of users to delete the app and seek other methods of transportation.
  • This prompted Didi to shift its focus from rapid growth onto safety which I suspect has also hurt the numbers.
• Increasing competition from Tencent backed Meituan Dianping has also not helped the situation.
• The net result is that the entire ride-hailing industry in China is not living up to expectations which has prompted Didi to think once again about international expansion.
• It is here and in safety that Didi aims to focus its hiring which to me means that costs will go up faster than revenues.
• This is not a good time to be trying to defend a $56bn valuation and so I would steer clear of this in the secondary market in Didi until the price being asked is much lower.
• An IPO also seems extremely unlikely for now.