It’s been a rough ride for a fair few of China’s state-owned car companies in recent years. Private sector companies have been overtaking them in electric cars (with a few notable exceptions), while their foreign joint venture partners have been shifting focus to their own wholly-owned units.
But there are signs of a fightback in the mobility (ride-hailing) sector thanks to Didi Chuxing’s recent regulatory woes. Three of China’s biggest state-owned carmakers, Chang’an, Dongfeng and FAW, are the founding shareholders of T3 Chuxing, which has just received the sector’s largest funding since Softbank ploughed $5 billion into Didi back in April 2017.
A group led by Citic, the country’s largest state-owned financial conglomerate, invested Rmb7.7 billion ($1.2 billion) in a Series A funding round. Other new investors include online travel group Tongcheng and Virtue Capital, which was founded by Dong Yang, the former head of the China Association of Automobile Manufacturers (CAAM), plus returning investors Alibaba and Tencent.
The financing follows a similar Rmb3.8 billion fundraising for competitor Cao Cao Chuxing which closed in September. The Geely-owned group has already said that it’s actively raising funds for its next round, which it hopes to complete early in 2022.
In an internal letter that was leaked to the Chinese press, T3’s management told staff that the company has a narrow 40-day window to take advantage of Didi’s difficulties. It exhorted them to adopt a “007 attitude”, which means working without rest (zero hundred hours to zero hundred hours for seven days a week) with a ‘licence to kill’ any rivals.
T3 is accelerating an expansion plan to create a national network from its original base in Nanjing where it started in 2019. At the end of last year, it was operating in 21 cities and averaging about 750,000 rides per day.
By June that number had expanded to 41 cities and by the end of September it was clocking two million rides per day, which put it in the number two spot, just ahead of Cao Cao, originally from Jiangsu province too.
By the end of 2021, T3 hopes to hit three million average daily rides. CEO Cui Dayong says the breakeven figure is five million. In contrast, the previously all-conquering Didi saw rides plummet from an average of 15.6 million per day in June to 10.9 million in August, according to data collated by Aurora Mobile. Its domestic market share has dropped from almost 90% to around 75%.
Didi’s deceleration was triggered rather paradoxically by its $4.44 billion New York IPO at the end of June. Two days after its trading debut, the Cyberspace Administration of China (CAC) announced a probe into whether it improperly collected personal data, plus possible national security breaches.
Didi’s app was removed from online stores, preventing new users from signing up. However, it remained active for existing users and is still available as a mini-app on WeChat and Alipay. Its second service, Huaxiaozhu (Piggy Express), which targets younger customers with cheaper fares, hasn’t been affected.
The ongoing crackdown has had a big and lasting impact on Didi’s share price, which has plummeted 42% from its $14 listing price. In addition to the ongoing probe in China, Didi also faces class action lawsuits in the US.
It’s not as if investors weren’t forewarned. The IPO prospectus had already disclosed a summons from the the antitrust regulator, which Didi received back in April, similar to 33 other internet giants.
Didi’s dominant market position made it an obvious target given the government’s strategy of breaking up monopolies to encourage competition, not to mention prodding the state-owned sector to retake a bigger role in the economy.
The company also finds itself caught between two other structural shifts that were evident ahead of its IPO. In early July, China enacted the Personal Information Protection Law, which safeguards the rights and interests of individuals’ data in similar ways to Europe’s General Data Protection Regulation (GDPR).
Then there’s also the efforts to decouple the financial markets of the US and China. Since the Didi debacle, the government has drafted new regulations forcing all companies to seek CSRC approval before they list overseas.
This is partly to prevent companies from trying to avoid domestic regulatory scrutiny. But there’s an additional carrot for firms that choose Hong Kong instead of New York, as they will reportedly be exempt from CAC review.
Didi’s shares briefly rallied in October, when the Wall Street Journal reported that it was considering a secondary listing in Hong Kong too.
The Chinese press believes that moves to breathe more competition into the mobility sector are good news for consumers – over the short-term at least. Customers are already benefiting from heavily discounted fares as rivals try to build market share.
However, this frenetic competition is also worrying the government. The Ministry of Transport has started releasing monthly compliance stats in 36 cities in a bid to force the respective local governments to ensure that mobility companies adhere to government regulations relating to drivers’ qualifications, for instance. In early November, the Shenzhen government also summoned 28 ride-hailing firms operating in the city to warn them against “cut-throat competition”. The authorities are well aware that the new entrants are attempting to emulate in just a few months what took early entrants Didi and Uber almost a decade to achieve.
The domestic media wonder whether T3, in particular, will be able to handle rapid growth and maintain its reputation for customer service. Reportedly, complaints have skyrocketed to 312 in October alone as compared to 1,084 in the preceding two years.
One thing that sets T3 and Cao Cao apart from Didi is that they are both founded on a business-to-consumer (B2C) model rather than a consumer-to-consumer (C2C) one. T3 owns most of its own fleet of cars – all manufactured by the three state-backed founders.
However, there are signs that it wants to move in a similar direction to Didi as its asset-heavy model may slow down expansion and prevent it from building market share quickly enough.
T3 has run a number of unsuccessful trials in an attempt to make this switch. In Nanjing, it tried to get its existing drivers to give up their salaries in favour of a franchise model. In Chongqing, it experimented with two drivers sharing the same car. Neither option was popular with the drivers themselves.
The way that drivers are treated by the ride-hailing platforms also attracts strong social media commentary. For once, those in the West and China largely concur in their criticisms. Uber has long been rebuked for “predatory business practises” in the US and Europe – flooding new markets and undercutting the existing competition by lavishing cash on driver incentives and passenger discounts before adjusting prices and remuneration once it has built a dominant market share.
Chinese netizens express similar sentiments about domestic ride-sharing companies. “As the ancients said, when you drink the water don’t forget who helped you to dig the well,” one commented. “T3 doesn’t care about its drivers. It’s too busy tearing down the bridges as it crosses the river.”
Indeed, if the ride-hailing companies have their way, there won’t be any drivers at all within the next decade. T3’s Cui believes the tipping point for autonomous cars will arrive around 2027.
In the meantime, the big global players like Uber and Lyft are making their first profits after years of building market share.
For Uber, its first foray into the black was bittersweet. It was only able to turn a profit on an Ebitda basis (rather than a net income basis) during its recent third quarter results after being forced to write down the value of its holdings in Didi.
Didi has yet to report its second quarter financial results as the company and its investors await the outcome of the ongoing regulatory review.
Meanwhile rumours abound of changes in the senior leadership of the nine year-old firm, pending the results of that probe.
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