Article / 17 June 2015 at 5:06 GMT

Didi Kuaidi pledges to bump Uber off centre lane

China Watcher / Shanghai
  • Backed by its $1.5bn raising Didi Kuaidi will directly compete with Uber
  • Uber has enjoyed strong growth in China over the past six months
  • Last week in China there was a a clash between Uber drivers and locals

By Neil Flynn

Since Uber partnered with Baidu in December, there has been a notable growth in the demand for private cars in China’s major cities, and caused the growing taxi hailing industry to rethink its business strategy. Last year, the boom in taxi hailing apps allowed users to find a government licensed taxi, but as Uber has been offering private cars for a similar price, users are choosing to travel in slightly more luxury and comfort.

Didi Kuaidi has announced that it is in the process of raising $1.5bn from investors, which would value the company at around $13bn. With the new capital raised, the firm will develop its private car services in order to directly compete with Uber. Didi Kuaidi announced that its private car rides reached 1.5 million a day, whilst Uber has just under one million rides a day in China.

The merger between the Alibaba backed Kuaidi Dache and the Tencent backed Didi Dache taxi-hailing apps has been good for both firms, as they were previously haemorrhaging money by paying subsidies to both passengers and drivers in order to gain market share over the other.

The merger has made the company into a viable business with a dominant market share in taxi hailing, and this should continue to allow the firm to successfully raise capital. Through the backing of Tencent, users can book a taxi through WeChat, and this gives the firm a major advantage over Uber and other domestic rivals, as the WeChat user flow-through rate to the app will be high, and continue to grow.

 Wherever it goes, Uber is causing fear and consternation among local taxi firms. Photo: iStock

Uber has enjoyed strong growth in China over the past six months as consumers are actively using the app as an alternative to Didi Kuaidi.

Passengers have found that the price of an Uber private car is often cheaper than a standard taxi, whether hailed on the street or via the Didi Kuaidi app. This success in 2015 has seen the firm intend to boost its China operations.

Uber plans to spend around $1bn on building its China business this year, after revealing last month that it would spend $160m on subsidies to promote its private car business. Its formal fundraising process for its China business will begin next week, and comes at a time when users are finding that discounts that used to be available are starting to dry up.

As has been seen around the world, taxi drivers have been protesting against Uber because they are losing business from these unlicensed drivers. Last week in the wealthy Eastern city of Hangzhou, the police had to get involved in a clash between Uber drivers and those from a local taxi company, and protests against Uber have been seen in other cities.

If Uber was the only firm in the private car business, then it would be likely for the government to crack down on the firm, and protect domestic licensed taxi drivers, but with the growth in domestic private car firms, it is more difficult to know how the government will treat the industry.

As the private car business grows in China, it remains to be seen how Uber will be treated by the government, relative to its domestic rivals. There have been several high profile police raids of Uber’s offices in the southern cities of Chengdu and Guangzhou over unlicensed taxi drivers.

But as Uber’s domestic rivals grow in both number and size, the government will have to crackdown on all firms, if it intends to punish unlicensed taxi drivers. I expect that the government will be open to compromise with the private car industry, but will insist on a new form of licensing for private taxi drivers.

Smaller competitors are building a presence

Aside from these two firms, Chinese has also seen several other private car hailing apps that are spending heavily on building market share. The Tianjin based Ucar (神州专车) has been heavily advertised in Shanghai over the past year, and has used David Beckham in their advertising campaigns.

Ucar was originally a car hire firm, similar to Hertz, but has expanded into private car hire in order to capitalize on the large opportunity in the market.

Beckham'll fix it: Finding a private car on the Ucar app. Source: Ucar

Two other private car apps that are growing increasingly popular are Yongche (易到用车) and Kuadi ONE (一号专车), which have focused more on the airport journeys that are lucrative to taxi drivers. As with most cities, the major airports in Beijing and Shanghai are in the city outskirts, and taxi drivers are always more than willing to take a passenger to and from the airport.

Yongche and Kuaidi ONE
Advertising from Yongche (left) and Kuaidi ONE. Source: Yongche and Kuaidi ONE.

Because these three apps are notably smaller than Didi Kuaidi and Uber, they are all offering subsidies to new users, in order to boost their market share. However, it may be difficult for these firms to compete throughout the rest of the year, as Didi Kuaidi and Uber continue to spend heavily on subsidies in order to gain market share over each other.

Subsidies to passengers is a proven way to build market share in this industry in China, so investors should expect both firms to offer heavy promotions throughout the rest of the year, to not only compete with each other, but also to crowd out the smaller players in the market.

-- Edited by Adam Courtenay

Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform


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