Strict Local Regulations may Crush Didi’s Grand Endeavors

Didi Chuxing, the largest ride sharing app in China and valued at more than 35 billion USD, may have just encountered one of the biggest challenges since its inception. On Oct 8th, four major tier-one Chinese cities, including Beijing, Shanghai, Guangzhou and Shenzhen released simultaneously a detailed regulation guideline on ride sharing business in China, where Beijing and Shanghai require the drivers of any online ride-sharing business to be having a local hukou (Chinese household registration) and a local plate, which basically forces out most of the current drivers on Didi’s platform. On top of that, the guideline specifically details the vehicle’s wheelbase to be wider than 2.7 meters, and displacement to be above 2.0 litres. Didi subsequently released an official response, saying that this could drive up the cost of ride sharing dramatically, and may cost of “millions of jobs” of Didi drivers. 

(Didi’s CEO Cheng Wei, who accomplished a miracle in a short span of time)

While it’s easy to lay the blame on local governments, we need to put this whole thing into perspective of the recent Didi-Uber(China) merger. The merger has effectively ended a subsidy war in this industry, and makes Didi the de facto monopoly supplier in the ride-sharing space. Following this merger, Didi has ended multiple subsidy campaigns and the cost of ride sharing has already gone up. However, In September, MOFCOM has declared that the merger hasn’t been approved on the antitrust front, and thy have request two times to discuss relevant matters with Didi. While there are no further updates on the antitrust investigations, the recent local guideline might be a “retaliation” method to force Didi back on the negotiation table, since Didi has totally ignored the regulatory component during this transaction and hasn’t shown signs that they will follow up in the investigation following this transaction. 

From Didi’s perspective, this regulatory move could be costly for their platform’s growth and subsequently their future valuation. In their official response, Didi claimed that out of the 410k drivers working on its platform in Shanghai, less than 3% of them has a Shanghai hukou; 80% of the cars on their platform will fail the “wheelbase test”, which further diminishes the supply. Didi claimed that this will cause ride sharing to be less efficient and more costly; but most importantly it will cause job losses where more than hundred thousands of drivers may have to go home or to second-tier cities, where ride sharing is less frequent and much lower in price. 

Local governments have defended their position: Beijing has responded that it is a way to resolve the massive population inflow and vehicle overmass in the city, which will have further social implications. They have also referred to the local regulations, stating that since local taxi drivers have similar guidelines, exempting ride sharing apps from it will be “unfair” and potentially detrimental to the healthy transportation environment in Beijing. Shanghai has yet released any response to the media, but it is likely to adopt the same rhetoric and methodology to counter Didi’s claims.

(Didi has even taxi stops in cities like Shanghai, but seems like honeymoon with the government is over)

While most commentators have been focusing on Didi’s strong response trying to lay the blame on local governments, we tend to believe that this is related to the earlier antitrust probes, which obviously irritates the MOFCOM and even the central government. Local government has been waiting for this green light to be released for long, as there have been several attempts from local governments unilaterally trying to protect its own interests, including increasing complaints of taxi drivers and transportation bureaus. But this is not the real question so as to speak. Since the Didi-Uber merger, Didi has effectively brought up the price of ride sharing, which has already led to resentment from the ride sharing drivers. Most Didi drivers that we encounter have accused Didi of not giving much notice before the transaction, which cost them on a daily basis. While Didi is trying to protect its position of raising prices, the local government basically gives them an excuse to shift the burden of responsibility. After all, what makes Didi valuable is its drivers, and if the drivers were dissatisfied and want to use other platforms, it is a natural market behaviour. The government may have granted the “weapon of excuse” that Didi wanted for long.

What will happen next? Please note that this guideline is provided for “further discussion”, which means Didi can still pull their strong strings and conduct PR campaigns to refrain it from happening. But the government has also indicated little room for discussion, which means Didi needs to talk about the antitrust issue first, before getting down to the real business. Government’s growing dissastisfaction on new internet elites may be another focal point to observe, especially ones that have show no signs to admit higher legal compliance standards.

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