Caixin
Nov 13, 2019 09:30 AM
TECH TALK

Is Didi Set to Suffer Same Fate as Uber, Lyft and WeWork?

As much of China nurses a shopping hangover after this year’s record-breaking “Double 11” shopping fest, I thought I’d turn my attention to another sector that made headlines last week. The sharing economy made its own splash when ride-hailing services leader Didi Chuxing Inc. announced plans to relaunch its controversial Hitch carpooling service.

My point in this week’s column is less to look at the specific controversy surrounding Didi’s Hitch service, and more to focus on the struggles that Didi and other money-losing Chinese tech startups are facing lately as investors tire of giving them new funds. That theme doesn’t just apply to Chinese companies, and has been a regular feature in global headlines these last few months detailing the struggles of Didi rivals Uber Technologies Inc. and Lyft Inc., as well as shared workspace specialist WeWork.

But China does seem particularly adept at minting money-losing companies that are still bleeding cash long after lengthy periods that, in the past, would have been unacceptable to Western venture capitalists. Didi seems to be a poster child for such companies in China these days, which is why it seems like a good subject for a column on the broader phenomenon of investor fatigue with these startups.

We’ll start by wrapping some related developments at other companies that may have a bearing on Didi’s case. Then we’ll take a closer look at Didi itself to explore what the future might hold for this Chinese company that once enjoyed being compared to Uber, but may now prefer to eschew such parallels.

First, let’s look at Uber and Lyft, which are Didi’s closest peers though perhaps a few years more advanced. The stories of the two U.S. giants are quite similar, in that both enjoyed heady early days but then fell out of investor favor and were forced to make premature IPOs earlier this year while still losing lots of money.

In Uber’s case the company lost nearly $1 billion in this year’s third quarter alone, on revenue about three times that amount. Lyft’s third-quarter loss was about half that of Uber’s, on revenue of nearly $1 billion. The huge losses have taken a toll on both companies’ stocks since each listed, with both now down about 40% from their IPO prices.

Then there’s WeWork, which suffered an even more spectacular drop in market value when it was forced to accept a rescue from investor SoftBank Group Corp. after a planned IPO collapsed and the company suddenly found itself in a major cash crunch. The SoftBank bailout last month valued WeWork at just $8 billion, representing a plunge of more than 80% from the $47 billion it was worth during a previous funding round in January.

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In Depth: Is the Sharing Economy Bubble Bursting?

While Uber, Lyft and WeWork provide global parallels for Didi, there are also some good recent comparisons at home. Those have come from a recent steady series of seriously downsized IPOs by mostly money-losing Chinese tech companies making desperate-looking IPOs in New York.

The latest pair of those came just last Friday, including one from money-losing online news provider 36Kr Holdings Inc. That debut was particularly hair-raising, with the company’s shares falling more than 25% in its first two trading days, after its fundraising plans shriveled from an initial target of $100 million to a final figure of just $20 million.

With all that background in mind let’s take a closer look at the latest picture from Didi, starting with the headlines last week. Those headlines saw Didi announce a plan to relaunch its controversial Hitch service, a year after it was suspended following two separate cases where female passengers were murdered by their drivers.

No sooner did Didi announce the relaunch, than it came under fire again for setting an 8 p.m. curfew for female users of the service, compared with 11 p.m. for males. Didi quickly adjusted the policy in response, and said the 8 p.m. curfew would apply to everyone.

Hitch is no doubt an important part of Didi’s bigger picture, as it provides a low-end offering for budget-conscious riders. But the initial outrage last year and latest scandal last week also seem to reflect the broader controversy surrounding this company as both users and investors lose their patience, much the way the other companies I’ve cited above have been abandoned.

Didi is a private company, so we have much less information about it than the others. But various sources I consulted provided a few numbers, including a 10.9 billion yuan ($1.56 billion) loss for all of last year. That’s actually not too far from the $1.8 billion that Uber lost last year, which seems like a good comparison since Uber is probably a bit bigger than Didi.

That brings us to valuations. Some calculations based on Uber’s 15% ownership of Didi, revealed in Uber’s own IPO prospectus, put Didi’s value at about $51.6 billion. Interestingly, Uber’s latest quarterly report said it believes the value of that Didi investment held steady between the end of September last year and the same time this year.

I use the word “interestingly” because Uber’s own valuation is just $46 billion right now, meaning Uber believes its own value is lower than Didi’s. Of course, the valuations I’ve cited for Didi are based on a very small world of cash-rich private equity investors, and ordinary stock market traders might see things much differently.

That said, some insiders close to Didi founder Cheng Wei recently told Caixin the company is “not in a rush for an IPO.” It does seem like the company probably has enough cash for now to avoid a WeWork-style life-threatening cash crunch. Still, given the current rapidly deteriorating environment for this kind of money-losing startup, I wouldn’t be surprised if Didi’s valuation drops by quite a bit if and when it does its next fundraising over the next 12 months.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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