China’s Taxi Wars: Winner-take-all or lose-lose for Uber and its rivals?
Rival taxi-hailing and ride-sharing apps are sustaining heavy losses in the battle for market share. Can a differentiated competitor win in the end?
While the ride-sharing battle in the US is heating up between Uber and Lyft, in China it is an all-out fire storm. Alibaba and Tencent, two of China’s largest Internet tech companies, have recently merged their rival taxi-hailing platforms into Didi Kuadi (valued at over $8B), raised $3B, and expanded into Uber-style ride-sharing. Meanwhile, Uber China, a relative new comer, has already raised $1.2B from investors including Baidu (China’s 3rd tech giant). Both sides are heavily subsidizing rides and drivers in an effort to gain market share. But amidst such intense battle, will anyone emerge profitable in the end?
Network Effects and Multi-homing
Taxi-hailing apps (which I’ll define as including ride-sharing apps such as Uber) exhibit strong indirect network effects, where value to riders accrues as more drivers are on the app and vice versa. However, riders also demonstrate a high tendency to multi-home, particularly in China. When price sensitivity is high and the only barrier to multi-homing is downloading another app, users tend to flock to wherever they can get the cheapest ride. Thus, in order to capture a large amount of users, the platforms are incentivized to make the rides as cheap as possible and sustain losses in order to gain market share. Documents released as part of the Didi Kuadi merger suggest that subsidies totaled more than $300m during the first five months of this year, with a gross loss of $2.75 per ride. I would imagine these losses were even worse before the two rivals merged.
I felt the effects of increased demand for taxis personally. When Didi Dache and Kuadi Dache (the two companies that merged) first began offering steep subsidies to customers for taxi rides booked on their apps, my average wait time in Shanghai for a taxi soared from less than 5 minutes to often over 20 minutes, as people who used to take the metro or bus switched to the now virtually-free taxi service. (Of course this isn’t scientific data, but what a pain!)
This is where Uber offers a differentiated solution. Rather than competing for the supply of taxi drivers, as Didi and Kuadi were doing, Uber sources its own drivers from regular car-owners. This helps alleviate the pent-up demand for rides by unlocking a new source of supply.
Quality: a potential differentiator?
In a market with strong indirect network effects and stiff price competition, differentiating on quality is critical to building and sustaining both sides of the platform. This is where Uber has done well so far.
On the rider side, Uber first entered China with its black-car service only, establishing its premium brand position. It has employed creative marketing such as delivering free Chinese lion dancers during Chinese New Years and having national celebrities drive cars. Users can even order English-speaking drivers (for a fee). All this increases the perceived quality of the platform and increases users’ willingness to pay.
More interestingly, on the driver side, in contrast to the US, driving for Uber is seen as status symbol in China. Car ownership in China is still reserved for the urban elite. Driving for Uber signals that you own a car, are at the cutting edge of tech adoption, and can network with the young, wealthy, often well-traveled riders. Cultivating the perception of quality for drivers is critical to growing Uber’s platform.
But is this differentiation sustainable? While Uber has done well against its home-grown taxi-hailing competitors in gaining market share, neither it nor Didi Kuaidi are close to profitable now. How long can the war go on before investors get anxious and start demanding returns? I’m not sure that either competitor can build a sustainable advantage to block new entrants and solidify its market position for the long run.
What an interesting post. I think that the question you raise on monetization is such an important one. With prices having dropped so low to compete for the bigger user base, it is essentially a race to see who will lose first. However, the question becomes what will happen even once the competitor is driven out of the market? Are users willing to accept a higher rate to sustain uber or a different winner, given that the price differential cannot be too high or else people may return to taxis.
Your post is extremely informative, as it raises the question of the utility of ride-sharing app in China, a country with very specific characteristics when it comes to transportation, due to its size and its demography. As a former long-term resident of PRC, I totally understand you when you say that Didi Dache taxi subsidies have increased the average waiting time to get a taxi due to the fact that it lowered the taxi market barrier to entry, opening it up to a category of population which would have otherwise taken the bus or the subway. That was the same situation in Beijing, where the taxi fare did not change from 2008 to 2013, in spite of a high inflation rate during those years. Once the fare was adjusted, taxi lines became short again… This drives me to what I think is the fondamental question for ride-sharing apps: given the fact that taxis are much more affordable in China than in the West (even compared to the local average income), isn’t Uber in a position of capturing more value by fixing a higher tariff? I think that their product offer is differentiated compared to that of the taxi that they don’t even operate in the same market, as opposed to European cities where taxis and Ubers are rather in a price war.
Would you expect, though, that over time such an increase in demand for rides would result in a corresponding increase in the supply of cars/drivers? I might argue that steep subsidies and lower prices, especially if temporary, are a particularly shrewd way to permanently grow the size of the rider market in China. At lower prices, people may make a habit of taking cars rather than public transport. If DD can subsidize this behavior for long enough for it in fact to become engrained as habit, riders may be reluctant to go back to public transport even as prices increase to more sustainable levels. By this time, hopefully the driver supply has increased as well, so that you aren’t waiting so long!
It is interesting how the economics of the Uber model are so different in a country where car ownership isn’t at the same level as it is in the US! Do Didi and Kuadi order taxis from the official taxi pool that are metered? I’m curious to see where the revenue generation is for them.