While the ride-sharing battle in the US is heating up between Uber and Lyft, in China it is an all-out fire storm.\u00a0Alibaba 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\u00a0giant). Both sides are heavily subsidizing rides and drivers in an effort to gain market share. But amidst such intense battle,\u00a0will anyone emerge profitable in the end?<\/p>\n
Network Effects and Multi-homing<\/strong><\/p>\n Taxi-hailing apps (which I’ll define as including ride-sharing apps such as Uber) exhibit strong indirect network effects, where value to riders\u00a0accrues as more drivers are on the app and vice versa. However, riders\u00a0also 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\u00a0loss of $2.75 per ride. I would imagine these losses were even worse before the two rivals merged.<\/p>\n 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!)<\/p>\n This is where Uber offers a differentiated\u00a0solution. Rather than competing for the supply of\u00a0taxi drivers, as Didi and Kuadi were doing, Uber sources\u00a0its own drivers from regular car-owners. This helps alleviate the pent-up demand for rides by unlocking a new source of supply.<\/p>\n Quality: a potential differentiator?<\/strong><\/p>\n In a market with strong indirect network effects and stiff price competition,\u00a0differentiating on quality is critical to building and sustaining both sides of the platform. This is where\u00a0Uber has done well so far.<\/p>\n 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\u00a0Chinese New Years and having national celebrities drive cars. Users can even order \u00a0English-speaking drivers (for a fee). All this increases the perceived quality of the platform and increases users’ willingness to pay.<\/p>\n More interestingly, on the driver\u00a0side, 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,\u00a0are 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.<\/p>\n 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\u00a0a sustainable advantage to block new entrants and solidify its market position for the long run.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" 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?<\/p>\n","protected":false},"author":163,"featured_media":1469,"comment_status":"open","ping_status":"closed","template":"","categories":[639,21,638,572,637,384],"class_list":["post-1468","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-china","category-network-effects","category-online-economy","category-ride-sharing","category-taxi","category-uber"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/competing-with-network-effects\/","yoast_head":"\n