DiDi & Uber: Similar Births, Different Destinies

Among the several main business models in the platform internet economy, Dolphin Research has conducted extensive research and exploration on e-commerce and local services (takeout & in-store) in its previous reports. However, due to the lack of a domestic listing target caused by DiDi's "midway collapse" in the US stock market, Dolphin Research has been lacking opportunities to conduct in-depth research on the local transportation sector.

Coincidentally, DiDi has been regularly releasing earnings reports, and rumors of its relisting are rampant. Meanwhile, Uber, the overseas benchmark, has seen its stock price rise by about 30% since the third quarter, surpassing the high point during the "big liquidity" period in 2021. Therefore, Dolphin Research seizes this opportunity to fill in the missing piece of the puzzle in the local transportation sector. It attempts to explore why DiDi and Uber, both leading companies in the transportation business in their respective markets, have shown completely different performances in recent years, and what factors, such as different company decisions, differences between the Chinese and American markets, and the strengths and weaknesses of their business models, have influenced them.

The following is the analysis content:

I. Why are DiDi and Uber different?

Looking back, DiDi and Uber can be called "brothers": ① Both were established around 2010, as the first-generation ride-hailing platforms in China and the United States, respectively; ② Uber and DiDi are the leaders in their respective ride-hailing markets, with a current market share of around 70%-80%; ③ In 2016, Uber merged its Chinese business with DiDi, exchanging nearly 12% of DiDi's shares, creating a situation of "you have me, I have you" between the two companies.

DiDi and Uber have similar development trajectories, but looking back at the stock price trends of the two companies since DiDi's listing in 2021, it can be seen that although both experienced a significant decline in stock prices due to the impact of US interest rate hikes and the pandemic on ride-hailing demand, DiDi's stock price has remained stagnant at a level of less than 30% of its market value at the time of listing, while Uber's stock price has not only recovered but also reached a historical high.

This leads to the question that this article attempts to explore and answer: why have two companies with similar development trajectories and industry positions shown completely different stock price performances after 2021?

Starting from the most clear and intuitive financial data, it can be seen that:

The ratio of DiDi's and Uber's ride-hailing business scale (GTV) was approximately between 0.6-0.7 before the pandemic (18-19);

During the pandemic (20-21), Uber's ride-hailing business was significantly impacted, with GTV scale declining by nearly 50% and 30% compared to before. In contrast, DiDi's business scale was not significantly affected and continued to grow slightly; In the post-pandemic era (2022-2023), Uber's ride-hailing business quickly rebounded and grew by over 20% compared to the same period in 2019. However, DiDi's GTV volume declined in 2022 (due to app removal and the pandemic), and although it finally returned to growth in 2023, the ratio compared to Uber dropped to between 0.5-0.6. Therefore, after three years of turmoil caused by the pandemic, the gap in business volume between DiDi and Uber has further widened.

From a profitability perspective (adj.EBITDA / GTV), the gap between DiDi and Uber is even more significant. We can see that:

① Before 2022 (the DiDi regulatory incident), although Uber's adj.EBITDA profit margin was always higher than DiDi's, the difference remained relatively stable at 2%. In other words, there is indeed an inherent gap in the profit margin of the ride-hailing business in the Chinese and American markets. However, the trend of the profit margin for DiDi and Uber's ride-hailing business is generally consistent and steadily increasing. This not only proves that there is room and a trend for the profit level of the ride-hailing business to increase, but also shows that the profit margin of the ride-hailing business in China and the United States, apart from the inherent 2% difference, has not widened due to other factors.

② However, in 2023 (actually, there were already signs in 2022), the improvement trend of DiDi's domestic ride-hailing business profit margin came to an end and turned downward, while Uber's profit margin accelerated its growth. This directly led to an increase in the profit margin gap between the two to 5%. As for the absolute value gap of adj.EBITDA between the two companies, even if we only look at the ride-hailing business (Uber also has a food delivery business), they are not comparable.

In summary, it can be seen that the stock price trends of DiDi and Uber began to deviate significantly at the end of 2022, not only due to different sentiments and risk preferences in the equity markets of China and the United States. Fundamentally, both companies have clearly deviated in terms of business volume and profit level, which is obviously the root cause of the problem.

Admittedly, DiDi was significantly impacted by regulatory issues and delisting turmoil in 2021, which may be one of the important reasons for its weakened performance since 2022. However, with the re-listing of DiDi's app in early 2023, the regulatory issue has been completely resolved.

So, returning to the business itself, will the current situation of DiDi's obvious lagging behind be reversed? Can Uber's recent strong performance be sustained in the long term? Are these differences due to: ① the consequences of different strategic choices and development directions of the two companies in their development? ② temporary differences caused by the different recovery cycles of the Chinese and American economies and ride-hailing demand after the pandemic? ③ Or is it because the ride-hailing business itself has significant differences in the environments of China and the United States?

II. Where does DiDi fall short compared to Uber?

1. The recovery of the ride-hailing industry in China is not worse than that in the United States

Let's start with the macro situation of the industry, which is the easiest to blame. According to data from the Ministry of Transport, the overall order volume of the ride-hailing industry in China has indeed declined in 2022, with a MoM decrease of about 16% in total order volume. However, since 2023, the order volume has been increasing quarter by quarter, and as of October, the total order volume has increased by 6% compared to the same period in 2021. From this perspective, the demand in the domestic ride-hailing industry in 2023 has shown clear signs of recovery, and the business volume has exceeded the pre-pandemic scale.

In contrast, although there is no authoritative institution in the United States that publishes national ride-hailing order volume data, by cross-referencing the third-party data used by two foreign banks, Dolphin Research unexpectedly found that the demand for ride-hailing in the U.S. market is not as strong as indicated by Uber's data at the company level.

As can be seen from the chart below, the order volume of the top two ride-hailing platforms (Uber+Lyft) in New York City in May 2023 was only at the same level as in January 2020. Another institution predicts that the overall transaction volume of the ride-hailing industry in the United States is still slightly lower than the peak level in 2019 as of 3Q23.

In other words, the recovery of the ride-hailing industry in the United States is not as good as, or even slightly worse than, that in China. However, at the company level, Uber's ride-hailing transaction volume in the first three quarters of 2023 increased by 37% compared to 2019. Combining these factors, it can be inferred that Uber's significant growth in the ride-hailing business has surpassed DiDi, not because the demand for Uber's core U.S. market has recovered better than DiDi's core Chinese market (the actual situation may be the opposite). The remaining two reasonable explanations can only be:

① Uber's market share in the core U.S. market has significantly increased (which is not the case as seen in the following text), ② The real driving force behind Uber's strong growth is the incremental market brought by overseas markets.

2. Both Uber and DiDi are losing market share in their respective domestic markets

So, what is the actual situation of the market share evolution of Uber and DiDi in their respective domestic markets?

Let's start with Uber. Due to the development of the second platform in the United States, Lyft, Uber's market share has been slowly declining from 2016 to the present, fluctuating around 70% after gradually decreasing from its peak of 85%. Based on the above information, the recovery of the US domestic ride-hailing industry after the pandemic is not strong, and Uber's market share in the US is slowly declining (although it has slightly rebounded between 2021 and 2023), which verifies that Uber cannot achieve strong growth with only the domestic market, and it actually relies on the incremental growth in overseas markets.

A similar result (although the reasons may not be the same) is that after the merger of Kuaidi and Uber China, DiDi's market share in China once reached over 90%, which means that DiDi was stronger than Uber in the domestic market. However, due to the impact of the pandemic and regulatory events in 2021, DiDi's market share once dropped to slightly over 70%. Even after the relisting of the DiDi app in early 2023, DiDi's market share only rebounded slightly to around 75%, still far from the previous peak.

Therefore, in the long term, DiDi's market share is also declining. Combining the situations of Uber and DiDi, it can be seen that when a company's market share in the domestic market reaches its peak and there is no room for improvement, it is highly likely that some of the market will be taken away by later entrants.

Combining the analysis of the industry's overall performance and market share, it can be seen that the recovery of the US domestic ride-hailing industry is not stronger than that in China, and companies have all experienced a slight rebound after losing market share. Therefore, it can be confirmed that the difference between DiDi and Uber lies in the overseas market.

Although DiDi's international business GTV has doubled compared to before the pandemic, accounting for 20% of the overall GTV, the problem is that DiDi's overseas business is still in continuous loss. On the other hand, when Uber's US domestic and overseas businesses are combined, the adj.EBITDA profit margin is significantly higher than that of DiDi's profitable domestic business in China, and the lead is still expanding.

In other words, while Uber has not fully recovered in the domestic market, it has achieved business scale and profits far exceeding the pre-pandemic level through the overseas market. On the other hand, DiDi's overseas business is still in the stage of "losing money to gain popularity" and is actually limited to the Chinese market.

Therefore, after a comprehensive analysis, we find that one of the key differences between DiDi and Uber is actually a well-known but perhaps not fully recognized fact: for a company that is already mature in the domestic market, the ability to expand into new markets is crucial, and it may even be the only way to continue seeking high growth. And this may also be the reason why Uber (an American internet company) vs. DiDi (a Chinese internet company) has such a difference. One of the fundamental differences between DiDi (a Chinese internet company) and Uber.

In fact, looking back at the development history of DiDi and Uber, we can already see the difference between the two companies in expanding into new markets. It can be seen that Uber was founded in 2010 and started its business in the United States. Just 1-2 years later, Uber began to expand into Western countries such as Europe and Australia. By 2013-2014, it had entered markets in the Middle East, Latin America, China, and Africa. In other words, Uber had already laid out its ride-hailing business globally within 4-5 years of its establishment. Subsequently, in 2016, it launched its food delivery business, achieving a key step in diversifying its business (the scale of Uber Eats is now comparable to that of its ride-hailing business, effectively creating another Uber). This is also one of the key differences between Uber and DiDi. However, this article focuses on the ride-hailing business and does not discuss the food delivery business. Therefore, in the following 6-7 years, Uber had sufficient time to establish itself in new markets, allowing it to enter the stage of integration and refined operations. This ultimately led to its achievement of profitability and continuous improvement in both domestic and international businesses, catalyzed by the pandemic.

In comparison, DiDi was founded in 2012 but remained "stuck" in the competition and subsidy wars in the domestic market for the next 4 years. It was not until 2016, when it merged with Uber China, that DiDi achieved a leading position in the domestic market. From 2019 onwards, 7-8 years after its establishment, DiDi began to enter and expand into overseas markets such as Japan, Latin America, and Russia. In other words, DiDi's entry into overseas markets was 8 years later than Uber's. Starting from 2020, the severe impact of the pandemic and regulatory events left DiDi with insufficient time and energy to refine its overseas operations. Therefore, it is reasonable that its overseas business continues to incur losses.

In summary, DiDi spent too much time on competition and integration in the domestic market, and the urgency to expand into overseas markets was insufficient (the diversification of flourishing O2O business has also largely failed). This has resulted in the company being slow in its progress.

However, although DiDi's slow expansion into overseas markets in the past can be considered a major mistake, looking at the other side of the coin, it also means that as DiDi stabilizes its foothold in overseas markets and achieves positive adj. EBITDA profits, it can provide a certain increment to the overall valuation of DiDi.

4. Conclusion

As a summary of the first part, Dolphin Research believes that for the ride-hailing industry, which is not new in developed countries and does not have a high growth potential in the future, assuming that there are no significant changes in residents' travel habits (this issue can be discussed separately in another article), it is more worthwhile to track and focus on the expansion of overseas markets for top players like Uber and DiDi, who have almost no market share in the domestic market. If the platforms can continue to enter new markets or increase their market share in new markets, their growth prospects in the medium term should be promising. On the other hand, if they lack the ability to explore and establish a foothold in new markets, the prospects for future growth are likely to be bleak.

III. Is the ride-hailing business model inherently flawed?

In the previous section, we mainly discussed the core difference in growth potential between DiDi and Uber, which lies in the difference in expanding overseas markets. From a profitability perspective, another question that intrigues Dolphin Research is: why is the profit margin of the ride-hailing business so low? Although both Uber and DiDi have achieved profitability in terms of adj. EBITDA, DiDi still incurs quarterly losses of over one billion RMB, and Uber only achieved positive operating profit for the first time in more than ten years in 2Q23. Compared with e-commerce, OTA, and even mature food delivery companies, the profit margin of the ride-hailing business is obviously lower. (However, from another perspective, this significantly low profit margin also constitutes the biggest competitive barrier for this business).

Therefore, in this section, Dolphin Research will compare the profit margin differences of e-commerce, food delivery, and ride-hailing businesses from two perspectives: ① starting from the business model, comparing the inherent differences in profit margin among e-commerce, food delivery, and ride-hailing; ② comparing the UE models of DiDi and Uber from different platform and market perspectives.

1. Deficiencies in the monetization of ride-hailing

To put it bluntly, Dolphin Research believes that among e-commerce, food delivery, and ride-hailing platforms, ride-hailing has the worst business model, for the following reasons:

① E-commerce and food delivery can create value in both "commercial flow" and "logistics," while ride-hailing only has value in "logistics": First of all, Dolphin Research believes that it is necessary to clarify an "obvious" concept: the profit margin of any internet platform-based business is based on the profit margin of the commercial activities it facilitates. The platform's ability to help businesses make more money determines how much money the platform can make itself.

E-commerce and food delivery platforms can extract a portion of the profit from the goods or meals provided by merchants and restaurants, and they can also extract a portion of the profit generated from the fulfillment of goods and meals. (JD.com and Meituan keep this part of the profit within the company through a self-operated model, while Alibaba collects technology service fees through Cainiao). And the profit margin of commercial flow is generally higher than that of logistics (the gross profit margin of goods and meals is generally at least in the mid-double digits). However, the business of ride-hailing services is limited to the "logistics" behavior of transporting users from point A to point B (which should be called "human flow" but is analogized to e-commerce and food delivery fulfillment as "logistics"), so its potential profit space is only a fraction of the driver's own profit.

② Ride-hailing apps are primarily tools with no marketing or promotional functions: In addition to commission-based transactions in the "commercial flow" on e-commerce and food delivery platforms, they also have advertising functions for marketing and promotion. In the case of e-commerce, advertising-based monetization potential is actually higher than commission-based transactions, while food delivery platforms have slightly lower marketing attributes, and ride-hailing platforms basically lack this functionality (Uber is piloting advertising for restaurants and in-store services on its ride-hailing platform, but this is considered out-of-platform advertising).

As for the reasons, first, ride-hailing drivers (analogous to merchants) within the system have little need for advertising, and second, ride-hailing platforms have strong tool attributes and lack other opening scenarios besides taking a ride, resulting in insufficient traffic and lack of attractiveness to external advertisers.

In fact, a common argument for ride-hailing is to attract consumer traffic by using the high-frequency behavior of ride-hailing and then extend it to other formats, that is, "high-frequency to low-frequency." However, according to CICC's calculations, more than 50% of users use ride-hailing platforms less than once a month, and more than 50% of orders are contributed by high-frequency users who account for only 9% of the total (i.e., they have orders but are not active users). Even compared to the food delivery business, which has a similar number of users, the frequency of opening the app is only half. In other words, compared to other activities, taking a ride is actually a relatively low-frequency behavior, and expanding the business through "high-frequency to low-frequency" is more of a story.

As for user usage duration, it can also be seen that DiDi's average daily usage per user is less than half of Meituan and JD.com, so the total monthly usage duration of users is far less than 10% of Meituan and JD.com. With such a huge gap in user traffic, it is not difficult to understand why DiDi has difficulty monetizing its traffic.

2. Deficiencies in the scale effect of ride-hailing services

There is a well-known theory of two-sided scale effects in the internet platform economy, which suggests that as the number of buyers and sellers on a platform increases, the experience or benefits of all parties on the platform will improve. In this regard, Dolphin Research briefly describes the different two-sided scale effects of e-commerce, food delivery, and ride-hailing business models: ① The dual-sided effect of e-commerce covers the entire country, and the scale effect is unlikely to reach its limit: For e-commerce businesses, the growth of consumers is always beneficial due to the surplus supply of goods and excess delivery capacity in China. It is difficult for bottlenecks to occur due to insufficient supply of goods or delivery failure.

② The dual-sided effect of food delivery is limited to a single city (within a certain range), and the scale effect is unlikely to reach its limit: The range that food delivery businesses and users can reach is limited to tens or a few kilometers around them. In addition, for food delivery businesses, there is a clear limit to the marginal benefits of increasing the number of consumers, which is the restaurant's meal capacity (such as thousands or tens of thousands of meals in a single restaurant). Additional consumers beyond this limit do not provide additional benefits. However, this situation is rare.

③ The marginal effect of ride-hailing is also limited to a single city (within a certain range), and the scale effect has a clear limit: The marginal benefits of ride-hailing decrease as the number of consumers increases. Even under the extreme assumption of no competitors and unlimited consumer demand, the best-case scenario for a single ride-hailing driver is to be occupied 24 hours a day without any idle time. There is no further room for improvement beyond this point. (This is one of the core flaws of the ride-hailing business).

So, what is the actual impact of different scale limits on these three business models? In short, since the flaws in the monetization of ride-hailing mean that it can only make money by taking a commission from drivers, the only remaining ways for platforms to increase monetization and profit directly are: ① promoting high-end products and increasing average order value; ② improving the efficiency of the original offline operations through online platforms, increasing the profit margin for drivers, and thereby increasing the profit margin for the platform itself.

The feasibility of approach ① will not be discussed in this article, and the problem of low scale effect in ride-hailing means that there is also limited room for improvement in approach ②.

In reality, as the number of ride-hailing platforms used by drivers increases, the idle rate decreases from a minimum of 41.5% to 25.5%, and it becomes increasingly difficult to further reduce it. Therefore, the platform's ability to help drivers reduce fixed costs, such as rent, and reduce idle time by providing more orders, is quite limited. In other words, ride-hailing platforms have limited room for increasing driver and platform profit margins through an increase in order volume.

Essentially, this is because express delivery has a centralized sorting and transportation process, and multiple deliveries can be consolidated for delivery together, while ride-hailing can only be completed one order at a time, with little ability to consolidate orders (carpooling has little significance). In the future, the imagination space for improving profit margins will mainly rely on the continued decline in the cost of using new energy vehicles and the popularization of autonomous driving technology on the driver side. As a comparison, the domestic express delivery prices have gradually decreased along with the increase in order volume, which reflects the business of e-commerce in "logistics". Through economies of scale and efficiency improvement, it can continuously squeeze out profit margins, which can be used to increase profits for the platform and also benefit consumers, promoting more consumption. (An example of an excellent business model)

1. Validation of DiDi and Uber's User Experience (UE)

So how do DiDi and Uber's latest UE models compare? As shown in the table below, Uber's take rate has indeed been increasing year by year. However, this is mainly due to the increase in average order value (due to rising fuel prices and the impact of transitioning from 3P to 1P), and the absolute value of the driver's commission is also increasing (with little effect from cost reduction due to scale expansion).

In comparison, according to Dolphin Research's calculations, the commission paid to drivers by DiDi is also around 80%, which is similar to Uber. Similarly, even in such a challenging environment, the absolute commission paid to drivers has not significantly decreased.

The main difference lies in the fact that DiDi still needs to provide consumers with discounts of more than 10%, especially since 2023, due to intensified competition and macroeconomic weakness, consumer subsidies have increased to about 18%, resulting in a significant decrease in the platform's monetization rate and severely suppressing DiDi's profit margin.

Previous Dolphin Research studies on "Local Transportation (Ride-hailing)":

• July 1, 2021: "A 70 Billion Dollar DiDi: Is It Worth It?"
• October 14, 2022: "Navigating the Pandemic and Inflation: The Secret Behind Uber's Luck"
• November 21, 2022: "Through the Ups and Downs of the Pandemic, Where Does Uber's Future Lie?"

Risk disclosure and statement for this article: Dolphin Research Disclaimer and General Disclosure