Gloves Off as Uber's China Foe Vows to Be Last One Standing

  • Funding said to exceed previous $1 billion target on demand
  • Didi said to be valued at more than $20 billion by investors

Didi Kuaidi, China’s largest ride-hailing service, has warned arch-foe Uber Technologies Inc. that its days are numbered.

The startup backed by the country’s largest Internet corporations is stockpiling cash for the battle ahead. It raised the target on its latest round of funding to more than $1.5 billion, which could value the company at more than $20 billion, according to a person familiar with the matter. The person asked not to be named because the matter is private.

“We will be the last one standing,” Vice President of Strategy Stephen Zhu told the Credit Suisse Asian Investment Conference in Hong Kong. “Why is our competitor consistently 20 to 30 percent cheaper but still failing to gain market share? It’s because the customer experience is not as good, their network is much less than ours.”

Didi needs capital to bankroll an aggressive program for recruiting drivers and keep fares competitive as it strives to hold off a hard-charging Uber. The U.S. startup, the world’s most valuable, spent more than $1 billion in the country last year and has said China could eventually become its largest market. Chief Executive Travis Kalanick is personally overseeing the business in the world’s second largest economy.

If Didi and its bankers court investors aggressively, the company could raise about $1.9 billion and take its valuation to as much as $25 billion after the investment, two people familiar with the matter said. Didi had initially sought $1 billion, a person familiar with the matter said in February. That came after a $3 billion round last year that valued the startup at $16.5 billion. Existing investors include Alibaba Group Holding Ltd. and Tencent Holdings Ltd., China’s two biggest Internet companies.

Money to do Battle

China will prove crucial to Uber, which finds itself in the unfamiliar position of being the underdog. Didi claims it alone handles eight times more rides than in all of North America, and the market could double annually till 2020. Yet Uber is so far dwarfed by its rival: it estimates its share of private car rides at about 30 percent, while Didi asserts that it controls 87 percent. Uber said this year it wanted to be in 55 cities by the end of February; Didi says it’s already in over 400.

Uber however is no slouch. The startup valued at more than $60 billion has dispatched rivals in Europe and the U.S. and has its own immense warchest to draw from. It’s continually looking for ways to make end runs around its foe, and its drawn influential Chinese backers including China Life Insurance, the nation’s largest insurer, and Baidu Inc., its main Internet search provider.

The San Francisco company says it’s generating $1 billion in annual profit from its 30 largest cities globally, money that puts it in a position to bankroll its Chinese investment.

“We know how to build a winning business, and as our peers spend heavily to buy up unprofitable market share in immature areas, we have invested smartly to shake up the competitive landscape in the highest-potential markets,” Zhen Liu, Head of Strategy for Uber China, said in an e-mailed statement.

User Subsidies

But Didi may have the home-court advantage in China.

“Investors might have a preference toward Didi based on the fact that it has a bigger user base in China," Marie Sun, a Shenzhen-based analyst at Morningstar Investment Service said. "Also when it comes to policy risks of operating in China, some think Didi has a better understanding of how things work.”

Didi also has friends abroad. The company has formed a coalition with Lyft Inc. in the U.S., India’s Ola and Southeast Asia’s Grab to fight a globally expanding Uber.

Uber and Didi will wage war so long as the cash holds out, and the local fundraising environment has proven favorable. While investment globally may be plateauing, the value of venture deals in China rebounded about 50 percent to $12.2 billion in the first quarter, according to London consultancy Preqin Ltd.

On-demand car services have taken off around the world as mobile usage expands and riders seek simpler or quicker alternatives to taxis and public transportation. Yet Uber and its rivals can lose money on rides because they rely on subsidies to attract customers, especially as they enter new markets. Didi will “soon” be profitable, Zhu said without giving a timeframe.

Didi expects to be able to serve some 30 million riders and 10 million drivers daily by the year’s end. It has 4 million active drivers now. By as early as May, the startup could be operating as many as 13 million rides daily, Zhu said.

Local regulations are one of the more significant potential hurdles that ride-hailing services grapple with. Both have faced vociferous local opposition and a thicket of regulations. They may even face competition from a spate of local governments who’re trying to set up their own ride-hailing services. But those could also be allies, Zhu suggested.

“The local government backed platforms are too small and hence it’s hard for them to take off,” said Sun. "Working with Didi wouldn’t be a bad option.”

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