Didi-Uber Merger Opens Growth Opportunities for UCAR, Yidao

China's ride-hailing market is expected to grow by 78% by 2020.

Didi-Uber Merger Opens Growth Opportunities for UCAR, Yidao

By: Abdullah Saeed Qureshi Published:

China’s ride-hailing market is expected to grow by 78% by 2020

Uber Technologies and Didi Chuxing's truce in China has opened opportunities for other ride-hailing companies operating in the mainland to step up and make their mark in the highly lucrative Chinese ride hailing market. The most prominent of them is UCAR Inc.

UCAR Inc, an associate of CAR Inc, is China’s largest car rental company, backed by leading US private equity firm Warburg Pincus LLC and a private equity firm owned by Alibaba Group Holding owner, Jack Ma. It is valued at about $5.6 billion and saw its valuation rise to $6.8 billion after news of the Didi-Uber merger burst upon the marketplace. Last month, UCAR also got listed on the Chinese over-the-counter (OTC) market. Its Chinese competitor, Didi, is still preparing for its initial public offering (IPO) in the US. However, the date is yet to be finalized.

UCAR also offers a fleet of rental cars driven by licensed drivers, unlike Didi, which has inundated the Chinese ride-hailing market with subsidized fares and private cars driven by non-professionals. Although the rides offered by UCAR are more expensive than those by Didi due to the presence of professional drivers, analysts believe that the ride-hailing company will benefit from the recent national guidelines issued by the Chinese government that aim to legalize the country’s ride-hailing market.

Last week, the Chinese government issued new guidelines, a major step in legalizing the ride-hailing business in the country. Some of the key features of the guidelines included that the drivers working in the ride-hailing companies should have a minimum of three years of professional experience and must obtain a license issued by the Chinese taxi authority. Similarly, there are strict guidelines about providing excessive discounts or low prices to entice more customers. Local authorities will set the minimum and maximum fare rates.

This means the massive discounts and cheap rates Didi uses to attract customers would come to an end. Before the Uber-Didi merger, both companies burned billions of dollars to provide low cost rides to its customers. In the ride-hailing industry, it is extremely difficult to gain customer loyalty and thus companies need to give discounts and subsidized rates at regular intervals. The latest regulations might help UCAR gain customers.

Didi, which owns more than 90% of China’s ride-hailing market, is still by far the most dominant player in China’s ride-hailing industry. According to a research firm, Analysys International, Didi Chuxing had about 7 million active users back in June 2016. UCAR on the other hand, had about only 3 million users. Likewise, UberChina had about 13 million active users while Yidao, another Chinese ride-hailing company had over 4 million active users. In addition, UCAR is operational in around 70 Chinese cities while Didi operates in more than 400 Chinese cities.

Yidao is backed by LeEco; a leading Beijing based Tech Company, which bought a 70% stake in the ride-hailing company back in October 2015, for about $700 million. Yidao has a market valuation of about $1 billion.

Though it is evident that UCAR and Yidao will need substantial time to get into a race with Didi, China’s ride-hailing market provides substantial growth opportunities, which would be sufficient enough for both to grow and make a name for themselves. According to Credit Suisse, China’s ride-hailing market will be worth $68 billion by 2020, a 78% growth to be more exact.

According to a leading Chinese research firm, China International Capital Corp (CICC), UCAR has a daily order base of 250,000 while Didi receives about 300,000 daily orders. Also, UCAR came into operations just about 2 years ago, while Didi has more than 4 years of experience and receives full support from Chinese internet giants, Tencent Holdings and Alibaba Group. Recently, it also received a $1 billion investment from tech giant Apple Inc (NASDAQ:AAPL). CICC also expects UCAR to report a profit in 2017 after incurring about $560 million in losses back in 2015.

Didi’s competitors in China are still small, but could turn out to be a potential threat to the company in the long run. Analysts believe that with the Chinese government’s move to set a minimum fare rate, future competition between the companies will be settled on safety and services and not on price. When that happens, the smaller players in the Chinese industry could gain significantly.