The long-awaited 'Hitch' service is back in the game. A cluster of signs like sliding Uber and Lyft stock and the rise of stronger competitors has urged DiDi to build up this popular business again - and, more importantly, to prove its profitability.
DiDi's autonomous driving vehicle. Image Credit: DiDi
Chinese ride-hailing giant DiDi Chuxing has announced that it will relaunch its Hitch carpooling service in seven Chinese cities at the end of November, going a step further to boost orders, while its counterpart Lyft and Uber receive battering in the secondary market.
After 14 months of suspension, DiDi will start a trial relaunch in cities including Beijing and Taiyuan, providing trips in metro areas between 5:00 a.m. and 11:00 p.m. (5:00 a.m. and 8:00 p.m. for female users). Thes limits may detract from the benefit for the company, as it is important for a service like DiDi to deliver its unique value proposition for customers, together with a complete range of choices.
This is not a random incident from the public's point of view. DiDi began a private test of the service in April and have been touting their safety solutions in the media press since July. Adding and emphasizing safety features is a priority for DiDi; yet; the limited times also suggested DiDi still feels ‘unsafe’ with technological tools.
In EqualOcean’s report featuring DiDi, historically, the 'Hitch' business contributed 10% of total daily orders. Hitch was also one of the two departments (the other being 'Designated Driving') that recorded positive net profits in 2017, with a CNY 800 million net gain. Hitch’s take rate was approximately 5% - 8%, far less than Express’s 20%-25%. DiDi needs to retain 7% of the transaction value to subsidize drivers driving for Express, the main ride-hailing service that accounts for 85% of GMV (Gross Merchandise Volume). There is, however, less incentive for DiDi to subsidize Hitch drivers heavily, who are ‘freelancers’ in the industry.
When and where DiDi will return to the time that its Hitch service operated in around 400 Chinese cities, is still unclear. But it is rather obvious that DiDi will take prudent and slow steps in scaling up the service, considering how public voices have criticized the company in the past.
During the past 14 months, DiDa Chuxing, Hello Chuxing and AutoNavi have grown this segment while DiDi was out of the game. Though DiDi has a legacy advantage, with more than 550 million registered users and 31 million drivers on hand, regaining such a market takes time and effort. As a result, in the short term, DiDi will likely still struggle on the path to profitability.
Though DiDi experienced a down round in the latest round of funding, bringing the business back won't trigger a distinct improvement for its valuation. DiDi must spend more on operations and R&D, which will harm the bottom line and delay the profitability plans further.
On the other hand, Lyft and Uber's performance in the public market is expected to weigh on DiDi’s IPO plan, damaging the company’s revenue multiples and valuation. Earlier this August, Lyft’s stock was hurt by the lockup expiration – when pre-IPO investors are allowed to sell their shares. Uber’s IPO lockup agreement is set to expire on Wednesday. The company stock is down 32.6% from its USD 45 initial public offering price.