– by Charlie Paglee, edited by Lei Xing
As Uber and Lyft drivers go on strike across the world and the industry anticipates the much-awaited Uber IPO today (expected to be priced at $45 per share, helping it to raise about $8.1 billion and valuing it at about $82.4 billion), China’s leading ride-hailing platform DiDi Chuxing can perhaps take some time to assess its own future prospects and IPO plans.
Without profits or physical assets, the value of DiDi lies with its brand, users, drivers, infrastructure, convenience and the economy delivered to the consumer. The advent of autonomous vehicles competing against ride-sharing companies like DiDi, Lyft and Uber threatens four of those six pillars: drivers, infrastructure, convenience and economy.
Lyft went public on NASDAQ in March with a $911 million net loss on $2.2 billion revenue in 2018 and in just two short weeks their stock lost 20 percent of its $20.4 Billion valuation. Uber is in a hurry to go public at an $80 billion valuation before autonomous vehicles come online and the market for money-losing ride-sharing companies completely evaporates.
DiDi is also in line looking to IPO with a $90 to $100 billion valuation, but Lyft’s lackluster performance has cast a shadow over the entire industry. DiDi’s ability to ever go public and their future valuation will depend on the success of the Uber IPO later this week.
Forbes has already gone on record saying “Uber’s IPO Valuation Makes No Sense.” Uber lost $3 billion on $11.3 billion in revenue in 2018 and lost nearly $1 billion on $3 billion revenue during Q1 2019. DiDi is in better shape but still lost $1.65 billion during 2018. Now DiDi will live in the shadow of two U.S. partner/competitors and be measured against their valuations.
Last month Tesla outlined their plans to destroy DiDi’s business model with advanced neural network trained autonomous vehicle technology. Tesla is not unique: other Chinese autonomous vehicle players including Baidu, Pony.ai and Xpeng have similar autonomous vehicle ride-hailing strategies, which create substantial risks for DiDi:
1. DiDi’s drivers, the biggest barrier of entry protecting their market share, will be eliminated with the introduction of autonomous vehicles.
Human drivers will no longer be necessary once autonomous vehicles are readily available. Any want-to-be competitor can invest $40 Billion, purchase 1 million autonomous vehicles and launch a competing transportation service in a matter of weeks that could dwarf DiDi, offering even shorter wait times, making transportation even more convenient for consumers.
2. Per trip revenue will plummet with introduction of autonomous vehicles.
Tesla estimates net cost of operating a Tesla autonomous vehicle will be $0.18 per mile including electricity, maintenance and depreciation. It plans to take a 25 percent cut of revenue to manage the ride-hailing network. Operating a Tesla vehicle fleet at $0.40 per mile would give the owner a net profit of $0.12 per mile, a 30 percent net profit. Other transportation providers like airlines typically operate on an 8 percent net margin, so 30 percent is rather high. There is the potential for pricing to go even lower depending on competition, but even without fierce competition autonomous vehicles will dramatically undercut the $1 per mile DiDi charges, making it impossible for DiDi to compete. Autonomous vehicle will slash ride-hailing revenue and systematically drive DiDi out of its most lucrative markets one city at a time.
3. “Ride-Sharing” will begin its rapid spiral to zero within 5 years.
DiDi already terminated their car-pooling service, but their trimmed down product offering dampened revenue growth near term. Long term autonomous vehicles will destroy ride-sharing revenue opportunities. Lower per-trip costs will replace “Ride-Sharing” with personalized transport as customers demand individual, quiet, clean, safe vehicle transportation.
4. Back-end infrastructure is worthless after the introduction of autonomous vehicles.
DiDi recently launched new safety systems including real-time SOS and dynamic safety monitoring to protect passengers as a result of two murders committed by DiDi drivers last year. The value of DiDi’s infrastructure to verify vehicle ownership, insurance and do background checks on drivers will disappear with the introduction of autonomous vehicles because there are no drivers.
5. Autonomous vehicles have already driven considerable distances without human drivers.
Autonomous vehicles from eight different autonomous system developers logged over 95,000 miles in China’s capital of Beijing during 2018. Baidu led the way with over 90 percent of those miles driven. Second place Pony.ai logged over 6,330 miles in fully autonomous mode.
Twenty cities in China have established testing regimen for autonomous vehicles including major automobile manufacturing centers like Shanghai, Tianjin, Chongqing, Guangzhou, Shenzhen, Baoding, Changchun, Changzhou, Changsha, Hangzhou and Suzhou. Baidu has partnered with more than 135 OEMs, suppliers and plans to bring 100 robotic taxis to Changsha before the end of 2019.
6. Autonomous vehicles will decimate the ride-sharing industry sooner than most believe.
China’s state economic planners have designated electric vehicles, artificial intelligence and the sharing economy as high priority industries for investment, so it follows that autonomous driving will receive enormous support from the Chinese central government. Still, legislation and regulations enabling autonomous vehicle manufacturing may progress faster in the USA.
In January General Motors applied to the US Department of Transportation (DOT) for permission to begin manufacturing fully autonomous vehicles without steering wheels, brake pedals or accelerator pedals. On March 15, the National Highway Traffic Safety Administration (NHTSA) announced that GM’s autonomous vehicle petition was advancing to the Federal Register for a 60-day public review and comment period.
With regulatory approval GM could manufacture its first fully autonomous vehicle without a steering wheel in 2019. Tesla is predicting they will obtain government approval to operate fully autonomous robo-taxis in some jurisdiction before the end of 2020. As soon as US regulations for autonomous vehicle manufacturing are in place Chinese government regulations will soon follow. Start-of-production of either GM or Tesla autonomous vehicles will put enormous downward pressure on DiDi’s valuation and could very well scuttle any hopes for an IPO if DiDi doesn’t go public before the end of 2019.
7. Autonomous vehicles are safer: DiDi drivers murdered two passengers.
Passenger safety can be an argument both for and against autonomous vehicles. Vehicle safety advocates will argue that autonomous vehicles are not yet safe enough to transport human passengers, but in China two female passengers were murdered by DiDi drivers in 2018, forcing DiDi to implement a real-time SOS system and dynamic safety monitoring. If DiDi drivers continue to murder passengers it follows that autonomous vehicle services offer a safer transportation solution, even if the technology still has limitations. DiDi’s brand certainly took a hit, dramatically lowering their valuation, and delaying their original plans to go IPO last year.
China government regulators have cited the death of a pedestrian struck by Uber’s autonomous vehicle last year in the U.S. as proof the technology is not ready for the real world. The accident happened because Uber disabled their flagship autonomous vehicle’s LiDAR system because false positives caused it to frequently execute emergency braking maneuvers. Test drivers were supposed to ensure safety but Uber hired a convicted felon who was watching a video on her smart phone instead of watching the road when the pedestrian was hit and killed.
8. Lack of charging infrastructure required to operate autonomous vehicles.
Last month China’s largest electric vehicle charging service providers, including market leader TGood, Star Charge, iCharge, and other players announced that they will no longer support Orange Energy, DiDi ChuXing’s electric vehicle charging network. This is problematic for DiDi because autonomous vehicles will require close cooperation with charging service providers to install robots to connect to DiDi autonomous vehicles when they need to be recharged. DiDi’s recent investment in Xiaoju Automobile Solutions puts DiDi in reasonable shape to maintain and repair autonomous vehicles in the future, but without charging their cars will not compete.
9. Unlike Tesla or WeChat, aside from ride-sharing, DiDi has no underlying business to generate revenue as the ride-hailing market undergoes dramatic changes.
Tesla sells electric cars at margins averaging 20 percent, well above the industry average. Tesla is losing money today because they are investing in R&D to launch new vehicles. Tesla is also investing heavily to develop its autonomous vehicle system. Tesla’s vehicle profits offset their engineering expenditures as Tesla invests to maintain its position as the EV industry’s undisputed leader. The lifeblood of WeChat is advertising. Without the need to build up a team of drivers any userbase can form a transportation company to compete with DiDi. When autonomous vehicles are readily available WeChat could easily line up a financial partner to purchase the vehicles and leverage 1.1 billion WeChat users to destroy DiDi with a simple software update.
Like Uber, DiDi needs to go IPO to raise money so they can continue to lose money. A poor Uber IPO debut could have a disastrous effect on DiDi’s valuation and make it difficult for DiDi to raise money or go public in the future. But autonomous vehicles represent an even bigger danger because they make DiDi’s present business model obsolete. Unless they can offer a safe, reliable autonomous vehicle solution DiDi will be driven out of the ride-hailing business.
About the author:
Charlie Paglee is the CEO of Brannan Auto, an American automobile engineering and manufacturing company with multiple factories in China. Paglee is also the director of the China Autonomous Vehicle Experts group. Paglee has three decades of experience doing business in China and speaks fluent Chinese Mandarin. He can be reached via email at firstname.lastname@example.org.
*Note: the views expressed are those of the author and do not necessarily represent those of China Automotive Review.