Insights | State investors place their bets as rivals close in on crippled Didi

China’s July crackdown on Didi has had knock-on effects for the wider ride-hailing market, as investors scurry to fund competitors cranking up efforts to steal market share from the ride-hailing monopoly.

Remarkably, this time it is not seasoned venture capital funds but state-owned investors including Citic that are pouring billions of RMB into promising up-and-comers. The leading beneficiaries so far are automaker Geely’s Cao Cao and T3, a ride-hailing service backed by three other domestic automakers. The investments follow more than three months of speculation that Chinese regulators could impose heavy fines, break up the company, or even demand a complete takeover by the state. Didi was listed on the New York Stock Exchange in late June but, less than one week later, cybersecurity regulators forced the removal of Didi’s app from online stores.

Bottom line: Venture capitalists are bullish that upstarts can catch up with the longstanding leader in China’s ride-hailing industry because Didi has been losing momentum ever since its app was suspended. However, the challengers still have to tackle the same regulatory problems Didi has faced.

T3 and Cao Cao gained traction: Dominating China’s ride-hailing market with a 90% share, Didi has had no serious competitors for more than five years. But now investors believe that Beijing’s cybersecurity investigation of Didi may put some ride-hailers backed by automakers in a better position to prosper.

Founded by auto majors FAW, Dongfeng, and Changan back in 2019, T3 is being thought of as one of the most promising challengers to Didi.

• The company is near closing a $775 million funding round led by state-owned financial conglomerate Citic Group, along with a credit line of RMB 2 billion ($310 million) from local banks, according to a LatePost report (in Chinese) on Sept. 23.
• Cao Cao Mobility is another Didi rival that managed to attract investor interest, currently on track to complete a new round of fundraising in the first half of 2022, Bloomberg reported late last month, citing chief executive Gong Xin.
• A subsidiary of Chinese automaker Geely, Cao Cao made the announcement less than a month after closing a nearly $600 million funding round led by five state-owned enterprises. The local government of the eastern city of Suzhou and its associated parties, such as Suzhou Xiangcheng Financial Holding Group and Suzhou High-Speed Rail New City Group, have since had a serious claim to the company’s capital structure.

Investors bullish on fast-growing entrants

The multi-million dollar investments are the latest to follow in the Chinese ride-hailing space which is witnessing investor interest running high over the possibility that two or even more companies could thrive after being a winner-takes-all market since Uber left China in late 2016. 

• Investors were “very enthusiastic” about T3’s recent external funding round, having placed investment biddings of “more than 10 billion yuan,” LatePost reported citing people familiar with the matter.
• Even minor league entrants, mostly backed by Chinese automakers, are capturing interest from mainstream investment firms and market watchers. Notable are SAIC’s mobility service Xiangdao and OnTime, a ride-hailing service partly launched by GAC, the report said.
• Some Chinese investors are now eyeing Didi’s misfortune as an opportunity for its competitors, especially those backed by local auto giants, to knock it off the top spot in the country’s ride-hailing market. As the industry is facing more stringent scrutiny, these companies, having generally hired more licensed drivers, will be under much less pressure in compliance with new regulations, an industry executive told LatePost.

Have they solved Didi’s problems? One of the biggest regulatory hurdles Didi has faced is compliance with regulations governing operating permits and licenses for drivers. Didi acknowledged in its initial public offering (IPO) filings that many of its drivers in China had not obtained the license legally necessary to provide ride-hailing services. 

• The cities of Beijing and Shanghai, for example, require ride-hailing drivers to be local residents and their cars must be registered with local number plates. Both these requirements are extremely difficult to fulfill for ride-hailing drivers, who are mostly migrant workers from other parts of the country.
• A “large number” of cars on Didi’s platforms may not have the necessary permits to provide ride-hailing services, Didi said in the prospectus. Violators of these regulations may face fines of up to RMB 12,000, local media reported.
• Despite lagging behind Didi in number of orders, those rivals are performing better in terms of compliance with regulations. Around 68.5% of orders completed on T3’s platform were deemed as “compliant” in August, meaning that they had met all regulations, according to data from China’s transportation ministry. Cao Cao managed to get a compliance rating of 56.8% in August. By comparison, the ratio for Didi was only 41.9% in the same month.

Didi’s pain is rivals’ gain: Another competitive advantage rivals have over Didi is that they can accept new app user registrations, while Didi still can’t.

• The Cyberspace Administration of China (CAC) on July 2 ordered Didi to stop taking new user registrations “to prevent the expansion of risk” during a “cybersecurity review” into the company.
• On July 4, the CAC ordered apps stores in China to take down the Didi app as part of the cybersecurity review.
• According to a 2020 regulation on the review process, a CAC cybersecurity review should be completed within 45 days. However, it can be extended if “the situation is complicated.” It seems that Didi’s situation falls under the definition of “complicated” as the review process is still ongoing and the app was still unavailable on Chinese app stores as of Friday.
• The Chinese version of Didi’s app was downloaded about 900,000 times in June, according to SensorTower, or 30,000 times per day.
• In September, the Financial Times reported that the number of Didi’s daily users had fallen 30% since the end of June.
• “Didi has sent me a fewer amount of orders since the investigation, but the impact is not big. I still mostly rely on its platform for rides especially during off-peak times,” (our translation) a Shanghai taxi driver surnamed Lu told TechNode on Oct. 15. Alibaba’s mobility service, Amap, currently collects a 9% service fee of the fares. That fee is “slightly higher than that of Didi,” according to Lu.

Analysts’ take

The Didi saga is “a window of opportunity” for rivals, Chen Liteng, an analyst with Hangzhou-based consulting firm 100ec.cn, told TechNode. But Didi still maintains a “significant lead” in China’s ride-hailing market and up-and-comers “would be struggling in their attempts to shake Didi’s position over the short term,” Chen said.

• “If Didi goes through the crisis, the company will find itself easier to be compliant with rules, and that would turn up the heat on its challengers. Ride-hailing platforms T3 and Meituan will in turn probably face more regulatory scrutiny in the future,” said Chen.
• “Collectively, all of the smaller players together could pose a threat but they still need to raise much more capital, keep trying to grow share, and ultimately compete with Didi in the tier-one cities where their true strength lies,” Tu Le, managing director of Sino Auto Insights, told TechNode.
• Le agrees that automaker-backed ride-hailers, with a higher rate of compliant drivers and vehicles than Didi, probably are more capable of adapting quickly to the new regulatory environment as Beijing imposes stricter regulations on the industry.
• “The automakers are used to influencing and knowing how to work through new regulations and currents, so I see that as an advantage for them,” he said.

READ MORE: Didi app ban ignites race for ride-hailing market share