This week’s podcast is about Didi’s upcoming IPO. They have released their numbers and it shows market dominance but operating losses. This is my explanation for what is happening. And what their strategic plan means.
Here is the key paragraph from Didi’s IPO filing:
How I breakdown:
- Market size and/or growth
- Competitive strength and defensibility
- Unit economics
Questions for network effects:
- Local vs. regional vs. international network effects?
- Fast vs. slow network effects?
- Degree vs. value of connections?
- Minimum viable scale vs. asymptotic scale? What is congestion / saturation / degradation scale?
- Linear vs. exponential growth at different scales?
- Ant Financial and the 3 Types of Network Effects (Asia Tech Strategy – Podcast 86)
- A Day in the Life of a Didi Chuxing Driver (Pt 1 of 3)
From the Concept Library, concepts for this article are:
- Network Effects: Indirect
- Economies of Scale: Purchasing Economies
- 5 Forces: Substitutes
- 5 Forces: Threat of New Entrants
From the Company Library, companies for this article are:
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Welcome welcome everybody. My name is Jeff Towson and this is Tech Strategy and the topic for today Why DD is dominant but still unprofitable? And the numbers for DD are out the F1 has been filed pretty good reading Not as much detail as I would have hoped but there’s a lot in there if not about what they’re doing now They do lay out where they’re going And that is actually pretty interesting because the picture now is, as I said, dominant but not profitable. Is the plan they’ve laid out, which is really 10-year plan, is that going to get them there? And I’ll give you sort of my take on both of those questions, why they’re unprofitable today and whether their plan going forward is going to get them there. So that will be the topic. But it’s pretty great reading. I mean, I’ve been waiting for their numbers for years. So it was a pretty great couple days for me. Now for those of you who are subscribers, I’m gonna be sending you out some stuff on Didi. That’s really what I’m focused on over the last several days. So I’ll give you some more details on that. There’s a lot of good lessons here. One, it’s an interesting investment idea. Because it’s not clearly obvious what’s gonna happen. You know, a lot of times these companies go public and they’re so pretty and attractive. Yeah, that’s great, but everyone can see it. Sometimes it’s the muddy, unclear scenarios that are the good opportunity. And DD could be in that category. Certainly Meituan was when it went public. When Meituan went public, it was operating profit negative. A lot of people were not very optimistic about Meituan, including myself, and yet within a year they got to operating profits and took off. So maybe that’s a scenario like this. Certainly I don’t think we’re going to see a big wave of enthusiasm when this thing goes I mean it could happen, but I mean people are pointing out that these numbers look a lot like Ubers. Not awesome. Anyway, so I’m going to send you some information on that through the emails over the next couple of days. For those of you who aren’t members, you can feel free to go over to jefftowson.com, sign up there, free 30-day trial, see what you think. And last thing, my standard qualifier is nothing in this podcast or in my writing or on my website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions expressed by me may be incorrect, no longer relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. And with that, let’s get into the subject. Now, as always, I like to sort of pair these podcasts, so we’re talking about a company. And we’re also talking about a couple important concepts. So pretty much every one of these podcasts goes into two buckets. Like if you go onto my webpage, you’ll see the concept library and you’ll see the company library. Pretty much every one of these podcasts is in both of those libraries. So this one on the company library would go under DD, but on the concept library, this one’s gonna go under network effects, which is a big part of the DD story. And I think a lot of what people got wrong. when they were thinking about this company. And the other idea is economies of scale in purchasing, which is actually where D.D. is spending a lot of its time and effort. So those are the two concepts for today, network effects and economies of scale related to purchasing. Now, if you go into my notes, those of you who are members, you’ll see that I’ve listed four or five different types of economies of scale, fixed cost, geographic density, things like that. But one of the common ones is purchasing economies. And so I’ll talk a little bit about that. But those are the two concepts for today. They’re listed in the show notes and you can find either of them on my webpage. Okay, the first thing is just some of the basics of Didi, which are laid out in the F1. Pretty much what we thought, or at least what I thought. It’s a massive company. This is effectively a monopoly in China, which is the world’s largest ride sharing market. I mean, it dwarfs. Uber in terms of numbers and that’s pretty much how they describe themselves in the F1 which is quote the world’s largest mobile technology platform. They cite two numbers a lot which are a little bit funny. They say 493 million annual active users and that’s kind of strange whenever a company starts telling you about annual active users. That’s a bit weird. Why wouldn’t they talk monthly active users? Why wouldn’t they talk daily active users? They do break out the monthly a little bit later, and they say 156 million monthly active users. OK, I mean, that’s very, very big. Lots and lots of transactions. Average daily transactions, 41 million. OK, that’s big. If you look at companies like Maytwan, how many food orders are they taking every single day? You’re usually in the 20 to 30 million dollar range. So these are China size numbers by a company that is dominating ride sharing. So you know, okay, interesting. So 156 million monthly active users, riders. And then how many drivers? 15 million annual active drivers. So again, they’re giving you the annual number, which is weird. But, okay, 156 million riders, 15 million drivers, about 10%. That’s pretty much what you kind of expected to see. And then they say we’re in 15 countries. Yeah, okay, look, it’s a China story. There is an international component, which they’re talking a lot about, Brazil and Mexico in particular, but generally we’re talking about, they’re gonna live or die based on their China performance. I mean, let’s not kid ourselves. So, okay, those are some pretty impressive big numbers. And then they talk a lot about their growth story. So this is kind of the main thing they’re pitching is, look, we have a huge amount of usage and we have a great long-term growth story in their perspective. The numbers they bring up is, look, what percentage of mobility in an urban area? I mean, you really have to think about urban centers. This doesn’t play out a lot in the suburbs. You need a certain density of people. So high density urban areas like big cities, Shanghai. Mexico City. Now, they say what percentage of mobility is done by shared mobility, which is what they do, and they say it’s about 2%, but it could go up to 20, 25% in 20 years. So they’re painting this big growth story of, look, more and more people are going to move into the cities. That’s inevitable. There’s going to be more people. We are going to have to do more and more shared mobility. Everyone having a car doesn’t make any sense. And they do a pretty good job of laying out the growth drivers on both sides of the platform. So riders and drivers, you have growth drivers for each of the user groups. On the demand side, they say, look, urbanization, that’s going to keep going. Regional economic growth, people are going to have more money. People are going to do consumption upgrade, which is a big China story. People have more and more money. Generations are gonna shift their behavior. People used to always buy cars. It was kind of this rite of passage in life. You buy a house, you buy a car, you get married. Well, maybe that buy a car thing is not gonna be the next generation. They’re not gonna feel that way. Fine. Generally speaking, China has got this sort of increasing consumption, a lot of on-demand, and the story we see in top tier, tier one China cities. is dramatically more use than we see in third, fourth, or fifth tier cities. So the argument is we should see those fourth and fifth tier cities eventually become more like Shanghai and Beijing. OK, not a bad argument. When you look on the driver side, that user group, the supply side, what are the growth drivers there? Well, we have electric cars coming. They tend to be cheaper, a lot cheaper, actually. We have. autonomous driving which could dramatically increase the supply of very low-cost mobility, shared mobility, fine. Okay, we see drivers on both sides. Overall, it’s a pretty impressive story. And then when you look at their numbers, 2018, 2019, 2018, keep in mind they merged with Uber China in 2016. So they have had an effective quasi-monopoly on China for three to four years. and we’re not seeing that growth. Their revenue is going up, I’ll go through the numbers in a minute, but it ain’t going up 50%, it’s going up 10 to 20%. Okay, if you have this great growth story, why don’t we see it in the numbers? Now, maybe it’s gonna happen, maybe it’s gonna pivot, who knows? But anyways, a big part of their pitch is, we have tremendous usage and we have a great growth story, and I generally tend to think that is in fact true. And then we get to their financials. And they are not pretty. I mean, they’re not. Revenue over the last three years, 2018, 2019, 2020. 2020 is a COVID year. So maybe put a big asterisk on that one. But when we start looking at their growth in revenue, their growth in operating profits, their gross profits, 2020, they had $141 billion renminbi in revenue. That was down from 154 billion in 2019. So we can kind of, let’s say COVID year, 2018 about 135 billion in revenue. So let’s look at 18 and 19, 2018, 2019. Revenue goes from 135 to 154. Okay, we’re seeing growth. And let’s assume 2021 is gonna come in above that, 165, something like that. Okay, so we are seeing 10 plus percent growth, 10 to 20%. I mean, it is growing, but it ain’t 100%. It ain’t 50%. OK, then you look at the underneath the top line, what are we seeing? Cost of revenue, I’ll give you the 2020 numbers. In 2020, in US dollars, revenue was about $21 billion. Cost of revenue, which is mostly the drivers, the cost of the cars, things like that, was about 90%. That’s pretty significant. their gross profit is about 10 to 11 percent on that revenue. And then when you start looking at their other operating costs, and the big ones are you know sales and marketing, research and development. Well sales and marketing is 8 percent, research and development is 6 percent, then they have operating costs because they have to onboard cars and things. So you’re already, you know, if you’re spending 8 percent on marketing and your gross profit is only 10 to 11 percent, You’re already negative, and then R&D is 6%. So operating losses, 2020 operating losses were about 10%, negative 10%. And keep in mind, as I said, they acquired Uber China in 2016 in August. So for three to four years, they’ve had this market in terms of direct competitors. I’ll talk about why it’s more complicated than that. But 2020, negative 10% operating profits. 2019, negative 5%, 2018, negative 8%. Now you could argue 2018 to 2019, they were closing in on operating profits. Possible, but still, it’s not awesome. And that 10% gross profit number is concerning, because usually at the end of the day, operating profits pretty closely correlate with gross profits. They do tend to go hand in hand. So we’re seeing fairly slim margins. for this business. Which basically brings us to my neck of the woods, which is what’s going on with the strategy here. I mean, this is a strategy question from top to bottom, and it’s actually a competition question, in my opinion. So that is right in my strike zone. So what is going on with their business model, their strategy, the competitive dynamics, such that despite being the dominant player, they’re still not profitable. Now, They did put a little bit in about their strategy. I didn’t really buy it, to tell you the truth. What they basically say, and they put in a graphic. I’ll put the graphic in the show notes. They basically said, we’ve got a dual flywheel. We’ve got two flywheels, the liquidity network, and the driver enablement network. I’ll put the picture in. I don’t really buy this, and I don’t know who came up with this graphic, but it doesn’t make a lot of sense to me. But they did sort of lay out where they’re going over the next 10 years. And that actually makes good, clean sense in my opinion. But they describe their strategy as we are looking at a world, this is a quote, where AI and big data power a shared electric, smart, and autonomous mobility network. That’s the words they use. AI, big data, shared electric, smart, and autonomous mobility network. And they talk a lot about their mobility network. And this will result in convenient, affordable, and efficient services in denser and denser urban areas. OK, I mean, that’s not bad. There’s stuff in there I agree with. And they describe their dual flywheel, which is the first flywheel is basically this relationship between drivers and riders, which we would call a network effect. The more drivers you have, the more That means there’s a lower wait time and a lower cost for consumers. So consumers like that, so there’s more consumers, which then is beneficial to drivers. OK, so they’re basically describing a network effect between drivers and riders on a marketplace platform for services. That’s how I describe it. They call it a flywheel with an immobility network. I don’t really use that. The other flywheel they described, I don’t really think it’s a flywheel at all. They basically say, we have more drivers, and if we have more drivers, we’re able to buy things like fuel, maintenance, parts, insurance, and we can get lower costs for the drivers. That helps the drivers, so therefore more drivers join, which I don’t buy at all. I think really what we’re talking about is two things that I’ve covered in this podcast for a long, long time. I think we are looking at an indirect network effect on a marketplace for services, more drivers, more riders, just like Ctrip, just like Expedia, but for services. And the other thing we’re looking at is economies of scale in purchasing. The more drivers we have, the more the company can go out and attack the main operating costs for those drivers, which are fuel, fuel, fuel, fuel, fuel, fuel, fuel, fuel, fuel, fuel, maintenance and insurance, they buy as a group and they get discounts. So that’s just good old-fashioned economies of scale and we put it in the bucket of purchasing economies which is one of my four to five types. If you want to look up economies of scale, go to the concept library, click on economies of scale, you’ll see the articles where I sort of tease these things out one by two by three by four by five. I think that’s what they are. And the graphic they put in, which I’ll put in, I don’t really buy it. I think bankers do this stuff, because I keep coming across these IPO filings with these weirdo flywheel ideas. Anyways, you know my opinion on that, I think. OK, that little jab aside at what I consider bad strategy, at least a bad description of strategy, they did lay out a 10-year. They don’t say 10-year. I’m saying 10-year. 10-year plan for what they’re going to do next. And I think that is actually a nice clean picture of. what’s going to happen and we can take that apart. Now they use a phrase in the filing which I thought was very important, I circled it. They said, we are going to go beyond building and maintaining the network. I think that’s a total honest statement about what they’re doing. They are building their network which they call their mobility network. I would call it a platform business model. They are going to go beyond building and maintaining that network which is most of what they have been doing. in doing, basically are doing today. And I put in a JPEG from their filing in the show notes of where they lay out what they call the future of mobility. You can see the JPEG in there, I think it’s great. I’m gonna read you part of it. You can also see my notes on it, because I scribble on it when I read this stuff. They’re trying to go to the future, which they describe as four bullet points. Bullet point one, shared mobility. And that’s what they’re doing today, the Mobility Network, the two-sided marketplace platform between riders and drivers. Point two, Auto Solutions. Now I’ve actually talked about this before on this podcast and I’ve looked into their driver side services and why I think building switching costs there is a really good idea. So that’s Bullet, no Bullet Point One, Shared Mobility, Bullet Point Two, Auto Solutions. Now I would call that DD1.0. Those two bullet points are what they’re doing today. It’s most of what they’ve done for the last five years or wherever. Shared mobility and auto solutions, that’s DD version 1.0. The third bullet point, electric mobility. Now that’s new, I’ll talk about this. I call that DD 2.0, that’s what’s coming next. And then the last bullet point, autonomous driving, I call that DD 3.0. And so the question, and really the point of this podcast, why is DD dominant but still unprofitable? That’s a description of DD 1.0, which is shared mobility plus auto solutions, driver solutions. DD 2.0, electric mobility, is that gonna change? Could they be dominant and profitable then? And then DD 3.0, which is autonomous driving, Are they gonna be dominant and profitable then? Is this scenario gonna change as they go from 1.0 to 2.0 to 3.0? And I’ll tell you how I break that down and sort of make the call. But it’s a good slide from the F1. This is hundreds and hundreds of pages. But if you’re gonna read one paragraph from that whole thing, read the JPEG I put in the show notes. Okay, so what’s going on with DD 1.0? Now, shared mobility is basically most of the numbers. I gave you 156 million monthly active users, about 10%, that number is drivers, I’ve given you all the numbers. They are basically growing this current network. Now, they call it a mobility network. I call it a marketplace platform. I don’t think thinking about this in terms of a network matters, as for those of you who listen, networks to me are an asset. The marketplace is the business model that uses those assets. Now in this case, the assets is just people with smartphones in their hand, whether they’re drivers or riders. Not that important. This is a people-based network. What I care about is the marketplace platform. What are the dynamics of services versus products? What are the dynamics of services that are commodities, which getting a ride to the airport is, versus services that are differentiated, which is going to a hotel or a hotel. getting food delivered from different types of restaurants. What are the dynamics there? They are basically growing this marketplace platform by user number and by activity on both sides of the platform, drivers and riders. That’s where most of their attention is. Now they’re also growing this internationally. Brazil and Mexico are major, well, not major, they’re major international focus for them versus the others, which are quite small. But generally speaking, it’s pretty small. They do mention that their international business is growing at 60%, 59% they say. OK, so that’s faster than domestic. Fine. But they’re basically doing what they have been doing trying to grow. Fine, that’s bullet point one, shared mobility. Bullet point two, what they call auto solutions. I’ve long called driver side solutions. And that. There isn’t a lot you can do on the demand side, on the consumer side of ride sharing. People just want a ride, it’s a commodity. I don’t want to wait, I want it convenient, and I want a reasonable price. I want it cheap and convenient with an acceptable quality car. That’s it, it’s a commodity. There’s not a lot you can do. Consumers don’t tend to be loyal. You can’t lock them in, you can’t make them care. They don’t log into the app 20 times a day to watch videos. There’s not a lot going on on that side of the platform. But when you look at the driver side, there’s a lot you can do. Well, there’s more you can do. And I’ve written you articles about how it’s different to be a DD driver in China versus a DD driver in Brazil versus a DD driver in Mexico. And I actually spent a day, well, hours. with a DD driver in China talking about his life, his work, how he deals with other drivers, why they do this, and really teasing out that side of the platform, which is a lot more interesting. And that these drivers in China, they have these, they’re apps for the drivers. They have like 30 services they can use. There’s mapping, there’s every toilet you’d ever want to find anywhere in China that you can use. There’s helping them buy insurance. There’s helping them do their government registration. They have chat groups between other drivers because they work in teams. They can have fuel stations they can go to. And there’s a whole ton of services on the driver side. It’s actually really, really interesting. Now, the auto solutions aspect of DD was launched in 2018. And they basically started helping them in areas that decreased their costs. That was their biggest lever. Now, they did a lot of stuff beyond that. Flexibility. teammates, finding a bathroom, and for a lot of the drivers when you go to Mexico versus Brazil versus China, they had very different needs. For drivers in Mexico, one of the biggest issues was family insurance. One of the biggest issues for drivers in Brazil was getting paid quickly because they often didn’t have enough cash to get more gas so they could keep driving. So DD issued all these cards where you could get paid within 15 to 30 minutes of doing a ride. Therefore, you could buy more gas. When you talk to drivers in China, what tends to come up is leasing and buying cars. According to the DD driver I talked to, virtually every driver in China wants to own their own car. And some of them create their own small businesses where they buy six, seven, or eight cars, and then other DD drivers drive them and they lease them to them. So there’s like 2000 plus basically small businesses that have been built by drivers on DD China. Okay, now within all of that, it looks to me like the big three levers they’re pushing on the auto solution side, the driver services side, are leasing, refueling, maintenance and repair, because those are big costs. So for leasing, Didi says they have the largest network of leased vehicles in China, we’re 600,000 plus vehicles. are being leased to their drivers. Now they’re mostly doing an asset light version of this, which means they have 3,000 plus leasing partners who provide most of those cars, and DD is sort of the intermediary, as far as I can tell. The typical lease is six to 12 months, and they say that a lease through their internal driver services is 20% cheaper than a regular lease. So you could see for a DD driver, this is a big advantage of being on DD versus leasing it yourself, or more importantly, versus being on a competing platform that doesn’t let you lease a car 20% less. So you have an ability to differentiate to drivers as the leading marketplace platform in a way you don’t have with consumers. That’s what’s interesting about the driver side. Second one, refueling. They say that they have 8,000 plus refueling stations that the drivers can use and the drivers all get discounts because DD would negotiate on behalf of all of them. So if you’re going into a fuel depot or whatever, you negotiate and you say, by the way, I represent 10 million plus rides per month. I mean, that’s a really good negotiating position. A third bucket, maintenance and repair, oil detailing, accident repairs. Again, they deal with, I think, some of their own shops with Didi, but mostly third-party shops and they’re acting as the intermediary. Again, we would call all of this purchasing economies of scale. Walmart does the exact same thing every single day. They go to every type of supplier that’s in a Walmart store, Coca-Cola, Flower, whatever, and they say, we’re Walmart. We have a massive amount of demand. Give us a discount. Deedee’s basically doing the same thing on behalf of all of its drivers for these three buckets of major costs. Leasing, refueling, maintenance and repairs. That’s a very big lever. And it should have a couple effects. Number one, it should decrease the cost of operations. And this is when I said, look, the gross profits only 10%. and the cost of revenue is 90%. Well, that cost of revenue, yes, it includes drivers because they get paid, but it also includes things like leasing, refueling, and maintenance. So if you can attack that 90% of the cost structure this way, you open up space for maybe Dede to make more profits and for the drivers to make more profits. So they’re all on the same page in terms of, let’s do this together and grind down those major costs which are a big deal. The second aspect is if Didi has a problem with their driver costs and their supply of drivers because they might jump to other platforms, which is not the case in China, but it definitely is the case in Brazil and Mexico, one of the ways you can differentiate yourself is stay with us because we can get you cheaper leasing, refueling, we can help you buy a car. So it’s a potential differentiation between another platform and Didi relative to drivers. Okay, so that brings me to the point. Why are they so dominant and yet still unprofitable? When you start to take, I’ve said this kind of a lot of times. When you look at a company, I always look at the competitive dynamics first. That’s my primary lens. And then I look at how that’s changing with various digital tools. That’s important. I think it’s the one thing that’s under your control. It doesn’t mean you’re profitable. It’s a prerequisite competitive strength for being profitable over the longer term, but it doesn’t guarantee it. You’re really looking at three factors, and I’ll put a graphic in the show notes to show this, but we’re looking at, if this was Hamilton Helmer, I’m going to speak for him, probably badly, seven powers. He would say you look for three things. You look for a large market and a growing market. So large and or growing market. needs to be a big opportunity. You need to look at competitive strength, and then you need to look at unit economics. You need to look at all three. And if you have all three, you’re looking at a company that can grow in wealth, create wealth in a powerful way. Now, I don’t do that. Well, that’s not my primary thing. I always look at competitive strength first, because I am totally happy looking at a company with competitive strength in a stagnant market. it can still be a very profitable business. I can find ways to invest in a company with competitive strength and bad unit economics, if they’re predictable. Competitive strength and defensibility gives you predictability. And if I have that, I can look, there are good reasons to invest in bad companies. There are good reasons to invest in good companies in shrinking markets. And there are good reasons to invest in good companies in growing markets. But across all of those scenarios, I need to see competitive strength and defensibility in able to predict what will happen. So that’s my primary lens. And I’ll put a graphic in the show notes where I basically map out the world by, is this a growing, stagnant or shrinking market? And does it have competitive strength in the short term, long term or not at all? And then within that, where are the economics positive and negative? And then you kind of… You can see within that, the seven powers is a very small sub case of a universe of companies you can look at. Okay, so what does DD have? Do they have competitive strength and defensibility? Now I’ve kinda tipped my hand here. I think in terms of competitive rivalry, when you look at competitive strength and defensibility, you wanna look at the existing competitors, competitive rivalry. Now within there I’ve pointed to two things that I think matter. I think they have a weak network effect and I think they have economies of scale in purchasing on the driver side. I think those are their two levers they have versus rivals. Now is this network effect powerful? Weak? What is it? I did a talk and for those of you who are subscribers I sent you a daily update on the types of network effects. and various questions you would ask to tease out, is it strong or is it weak? And this would be an indirect network effect, right? A two-sided network effect. The more drivers, the more beneficial it is to riders. The more riders, the more beneficial it is to drivers. It’s indirect, two-sided. It’s not direct. The more drivers don’t help other drivers, the more consumers don’t help other consumers. And it’s not a standardization network effect. I talked about those three types. It’s an indirect network effect. OK. Is it strong? Is it weak? And I asked you various questions. I’ll put the link to this in the show notes if you’re curious. I said, is it local, regional or international? The network effect. Certain activities by their nature are local. Certain activities are international. The more international, the bigger, the better. Getting a hotel or a room on Airbnb is a global network effect because tourism is by… definition cross border. So I need to have hotels all over the world to serve consumers anywhere. Uber, Didi, they’re overwhelmingly local. You want local drivers to serve local riders in Bangkok. Having a bunch of drivers in Chiang Mai doesn’t help you that much, let alone in Brazil. It’s a local network effect. Those tend to be weaker. It’s a commodity service as opposed to a differentiated service. One way to think about this is a network effect is about every marginal user or activity should create more value and or utility for everyone else. Okay. If it’s a commodity service, me adding one more driver that offers a ride doesn’t add that much value because it’s a commodity. It’s just one more person doing the same thing. If you have a differentiated service like a hotel, every marginal user and activity actually adds value because I have one more type of hotel. Maybe it’s on a different street. Maybe it has a view. Maybe it’s better for families. Maybe it’s downtown. The marginal value and or utility of an additional user is greater with differentiated services than commodity. So that’s two strikes against DD in terms of the power of their network effect. It’s local. It’s a commodity. The other question I ask is, what is the threshold for viability and what is the threshold for asymptotic behavior? Now the threshold for viability is, how many users do I have to get into this network before it becomes a viable product? Now, if I’m Airbnb or I wanna compete with Airbnb, the threshold is incredibly high. Before I can be a viable alternative to Airbnb, I have to have a global network of hotels or places to stay. Otherwise I’m not a viable option for a consumer. It’s got a very high threshold for viability. If I’m in a local part of Bangkok and I wanna offer rides to people within my area, if I get 30 or 50 drivers in the neighborhood, I’m probably good to go in my neighborhood. It’s a very low threshold for viability to get this going in a local urban environment. When does an asymptote, I always say that wrong, asymptotic, when does the increasing value of the network effect flatline? Well, if I’m offering hotels everywhere because I’m Ctrip or Expedia or Airbnb, the more hotels I add in the world, the value to consumers keeps going up, it’s linear. If I’m offering riders in Bangkok or Shanghai, Once I have five or 10,000 riders, it pretty much flatlines, it doesn’t keep going up. If I go onto my app and there’s a driver available within five minutes or three minutes to get me where I wanna go, that’s all I care about. So one, low threshold for viability and it flatlines at a very low level. All of those things should flag out. This is a weak network effect. So. In terms of competitive rivals, network effect is fairly weak. The purchasing economies of scale on the driver side is actually more compelling to me as a competitive advantage going forward. See, I told you this was in my strike zone. This is like right up my alley of everything I do. OK, that’s the first way to think about it. But then you have to look at, look, your unit economics are not just determined by your competitive rivals. determined by a couple other things. If we were to do a Michael Porter’s Five Forces, we would look at buyer power, supplier power, competitive rivalry, substitutes, and new entrants. Those would be the five forces. Actually, it’s six forces now because he added complements. But of those five, the first thing that jumps out to me is the supply and cost of the input of labor. They need drivers. Drivers cost money. Drivers have options. There’s not that many of them. And you can see most of what Dee Dee talks about is dropping the cost and increasing the supply of drivers. So the unit economics are determined by competitive rivalry, which is what I just laid out. It’s also determined by the input costs, driver cost and supply constraint. And they talk about this in their risk section in the filing. supply constraint on the driver’s side is a huge issue. That’s one. The other one you’d think about is substitutes. No one ever talks about substitutes. Substitutes are super important. Low cost substitutes are a big problem. If you’re in any business and the consumer or customer feels there is an acceptable substitute to what you do and it’s cheap. That is going to put a hard ceiling on what you can charge for most customers. What is the low cost substitute for Didi? Public transportation. At the end of the day, I look at the Didi driver, I look at the service, it costs a certain amount, I can always go take the metro. And in China, they have great public transportation. It’s everywhere. It’s super cheap. That puts a ceiling for DD on what they can charge for most people. And at the same time, the cost of their drivers puts a floor on what they can drop their cost structure to. So they are stuck between what it costs to get drivers and what they can charge versus public transportation. And they’re stuck in that little window. So that’s kind of the second factor. The third factor to think about in terms of unit economics, why is it not positive? is the threat of new entrants. That would also be in the Five Forces framework. They know they have big tech competitors like Alibaba, like Meituan, who are right there. And they have a lot of consumer usage and they can ramp up a driver service very quickly. So what you see Didi doing is constantly trying to defend their market share from the threat of new entrants. What do they do? they offer a lot of consumer discounts, and they offer driver incentives. That’s basically saying, we’re going to do these rides, and we’re going to make a 20% take rate. And of that 20%, we’re going to give 10% away to the consumers and the drivers, and we’ll take 10% ourselves. It looks to me like a very defensive posture to keep what they have against new entrants that are very formidable that are right there. So when I look at this, OK. I look at the competitive advantages. That describes to me the situation with rivals, of which they don’t really have any in China. But they have a competitive advantage on network effects. It’s weak. They have economies of scale and purchasing. That’s actually kind of impressive. They are struggling with the cost and the supply of labor. They are bounded by the presence of low cost substitutes, public transportation. and they have the threat of new entrants right there all the time that puts them into sort of a defensive posture where if they try and raise prices, people are going to go to public transportation, Meituan is going to jump in. If they try to lower what they pay drivers, those people are going to jump to another platform and they don’t have a lot of ability to do that. So they’re kind of stuck. That to me is what’s shaping the unit economics even in a market. And by the way, this is the same thing for Uber. The difference between Uber and Didi is Uber has a rival, Lyft. Didi, even though it has a virtual monopoly in China, it is still struggling with the same problem. It’s better off than Uber by far, but it’s still kind of stuck in the situation. So one of the questions I like to ask is, does this company control its own destiny? And I think the answer here is no. usage by offering consumer discounts and driver incentives and they’re trying to maintain their network liquidity. And they talk about this a lot, we’ve got to maintain the network liquidity. I think that’s where they are basically stuck. And what are they doing to try and get out of this situation? You can’t change the substitutes problem. You can’t. Public transportation exists. You can’t change the fact that Alibaba is right there. Can’t change that. the new entrance problem. What you can change is the supply side cost and basically supply constraint problem. How do you do that? You try and provide driver services. You try to reduce drivers from switching. You try and reduce the cost structure of the supply side. And that’s where, as far as I can tell, they’re putting most of their effort is to reducing that side and differentiating against other platforms that might try and offer driver services. That to me is what they’re doing. And I’ll talk about DD 2.0 and DD 3.0. And I think that’s what those are both focused on, is that supply input situation. Okay, what is DD 2.0? Now in there are four things they laid out, which I call their tenure plan. Number one was shared mobility. Number two was auto services. That’s DD 1.0. DD 2.0 is electric vehicles. What does that mean? It’s the same marketplace platform. They’re not changing their business model. It’s a two-sided platform for drivers ride services, right? But they are going to have drivers stop driving regular cars and increasingly drive electric vehicles. OK, why does that matter? Because it does a couple things. The number one thing it does is it lowers the operating costs on the supply side. Electric vehicles. cost less money to operate and they have lower maintenance costs as well. You don’t have gas, right? If they’re trying to lower that 90% cost of revenue, well if you can get the maintenance cost down and the fuel cost down, you would open that up. So maybe you’re not making 10% gross profit. Maybe you’re making 20%. Again, you can take some of it. You give some of it to the drivers. So they are helping drivers lease cars. They’ve launched their own. electric vehicle that’s specifically created for ride sharing. They call it the D1. It came out in November of 2020. They claim to have the largest network of electric vehicles in China today, over 1 million electric vehicles registered. They’re doing this again in an asset light approach, you know, approach where they’re offering leasing and they’re helping, but they’re not buying these cars. They’re also building the largest what they call the largest Recharging network in China because you have to charge all of these vehicles They say they have 30% of the charging market of China And they’re working with a lot of cars and automakers to do all of this including, you know, the recharging stations They’re not building those they have partners They kind of control the demand now You can see that has a couple potential effects Number one, it’s about lowering their operating costs. Number two, by doing electric vehicles where you have a charging network, it enables you to differentiate yourself to your drivers. So maybe they don’t jump to Alibaba, which doesn’t have a national charging network. It also creates somewhat unique infrastructure. That actually might end up being something that sort of increases the barriers to entry because it’s one thing to just ramp up. a ride sharing mobile app where you connect local drivers with local riders. It’s another when you have to provide a national infrastructure for charging. It’s kind of like how Shopee and Lazada benefit from the fact they have all these warehouses they’ve been building. It does sort of raise the barrier to entry. All of those in theory maybe, here’s my question, would that work? Is that enough to make the unit economics profitable? They’ve got the growing market, they’ve got a dominant position, but they’re stuck in unprofitable unit economics. Is an electric vehicle network in their same platform business model of drivers and riders, is that enough to tip the unit economics positive? I don’t know. I think that’s a big question. I think this is over the next several years we’re going to see this play out. This is near-term strategy that might make a difference. Now the other thing this does is it also gives them a bit of a running start in autonomous because that’s DD 3.0 and they’ve got to get better at this. They’ve got to start doing autonomous vehicles. This allows them to sort of move in that direction and that’s kind of the last one, DD 3.0. I’m going to finish up here in a couple minutes. DD 3.0, this is a bright red line in their strategy. This is everything before versus everything after will be different. Because what happens when you build autonomous driving? Now they argue the big benefit of autonomous driving is it’s dramatically cheaper. Why? Because you don’t have drivers. It’s just vehicles and fleets that cruise the streets and give rides. I mean this wipes out their supply side cost problem. In theory it’s also a lot safer. That’s all good. The cars can go 24-7. You get higher utilization. Nobody needs to sleep. Nobody needs to stop and get food. It is just a dramatically different cost structure. So in theory, that’s great. Here’s the problem with that. What is their biggest advantage today? They have a network effect. They’re a two-sided marketplace. And they’re buying all this stuff together. OK. A ride sharing. A mobility service based on autonomous vehicles isn’t a marketplace. It’s not a platform business model. It’s more like the bike sharing business. You buy a bunch of bikes, you put them on the street, people ride them, there’s one user group. This whole thing of like we have a mobility network, they say. I say marketplace platform. In a mobility service based on autonomous vehicles, there’s no network. It’s just a traditional service business. So that’s a problem. Basically, this technology is going to dramatically change the game. Now, they say we are going to move to a hybrid model where some services will be done with our drivers through our marketplace, and some services will be done with our autonomous fleet. So it’ll be a pipeline plus a platform. And that’s probably true. That is probably what the future will look like. But yeah, that’s a game changer. And the other issue they have is once you Who are your competitors? Well, it’s not just Lyft and Uber anymore. Now you’re competing with Tesla and Volkswagen and Toyota and Google and Amazon and Apple and Alibaba and Baidu and Xiaomi apparently, and even Huawei. You are competing with massive tech companies who are going after electric autonomous vehicles all the way. And by the way, these companies are not cash flow negative. You know, is Didi really going to compete with all the massive tech spending they’re going to have to do over a decade to build this while they are operating profit negative versus all these other companies like Apple and Google who have more money than God. You’re going to compete with them? Okay. They have a lot more resources. Now you could you could capital raise fine. Okay, what do you have? Are you good at building cars? No, never done this. What do you have as DD? Well, you have data, you have demand. Okay, that’s good, but a lot of companies have that. So I think once you move from DD 2.0 to 3.0, we’re talking about a different world. And it’s not obvious to me that they are a major threat in that world. I don’t think Elon Musk is worried about DD. I don’t. But we’ll see. I mean, this is in the future and nobody has won this game yet. There are no autonomous vehicles cruising the street offering rides. So it’s an open playing field so we’ll see but to me it’s a big question mark. I don’t know. Anyways, that’s kind of a lot of theory for today. Let me just sum up my point here. I think they basically have two choices. Well let’s say three choices. Number one, just stick with DD 1.0. Keep doing what you’re doing and get to operating profitability. That’s possible. Maytwan, as I mentioned, when they went public, they were operating profit negative and I was not optimistic and within a year they got there. How did they get there? They focused on lower frequency high margin services like hotels and then they really got some increased efficiencies in their food delivery. And they got there. Okay, so just keep doing what you’re doing and get to operating profit by hook or by crook. It could happen. Option number two, copy Meituan. What Meituan does, which is very effective, is they jump in and out of businesses like it’s nothing. They jump into bike sharing, they jump into ride sharing, they go to hotels, they started out doing a Groupon business model. CEO Wanqing, he will jump into anything. So maybe… The best play here for DeeDee is stop thinking of yourself as a mobility company. We do mobility. We do bikes. We do taxis. We do cars. Forget all that. Just jump to a service that can get you some good profits any way you can. Jump into hotels. That’s what Meituan did. Just jump into hotels, and they make money there. Fine. Just jump into low-frequency, high-profit services. Jump into payment. Jump into cloud. Jump into anything. even if it’s not mobility and try and get some profits. I mean, that’s kind of what Wan Xing would do. So option one, stay the course. Option two, copy Mei Tuan and Wan Xing. Option three, copy Elon Musk. Basically do what Xiaomi has announced it’s doing, which is, you know, Xiaomi is a very well-run company, by the way. Lei Jun and his management team are about as good a tech management team as you’ll find in this world. And they did smartphones, before that they did Kingsoft. And now they say we’re going all in on electric vehicles and autonomous. That’s the game. Just do what they did or do what Elon Musk is doing. Say we are all in on autonomous, that’s the future, and copy them and try and be Tesla. And there’s three paths. But I think they have to do one of those. Or maybe two of them. If it was me and I was advising them, I’d say do number one and do number two. Keep doing what you’re doing, push yourself to operating profit, and then do one to two major pivots into unrelated fields that will get you to profitability based on the fact that you do have tremendous usage and a tremendous customer base. Sell them anything else. Sell them t-shirts. I don’t care. But start making some profits off your massive demand. That’s probably what I would do. Okay. And that is basically the… my answer to why is DD dominant and yet still unprofitable? And the two concepts for today, once again, network effects and economies of scale in purchasing. As for me, this is my last night in Mexico City. I’m flying to Rio tomorrow afternoon. Totally looking forward to that. I love being in Rio and it looks like I’m gonna spend five weeks there before I can finally get back into a… Bangkok and basically get home. I’m sort of I’m 51% excited about being in Rio for a month and I’m like 49% I just kind of want to go home like I want to sit at my desk and just sort of do my thing But that’s okay. I mean two to three months a year on the road is not bad for me It used to be I would spend about nine months on the road. So this three month On the road this year is kind of an interesting exception Anyways, I’m in the, for those of you who know Mexico City, I’m in the Roma Norte neighborhood, which is pretty cool. It’s a little more crazy here. I usually stay up in Polanco or somewhere like that, which is pretty and beautiful. This is a little bit crazier. There’s a lot of stuff going on on the street right now outside. Yeah, it’s pretty great. So I’m gonna hang out here one more night and then I’ll be off to Rio. So next podcast, I’ll… I don’t know, I’ll be somewhere in Rio, probably for those of you in Brazil, I’ll be in Leblon, that’s my neighborhood. Usually Leblon or Lagoa, I tend to like to work from there and then just walk around the lagoon and on the beach. That’s my standard day in Rio. I don’t actually do very much. I don’t really go to block parties when they have those. I don’t go to the clubs. I basically just sort of go to the gym and then take walks on the beach and sit and write, which is. It’s not bad. I mean it’s pretty… I really like it there. It’s pretty fantastic. So anyways, that’s it for me. I hope everyone is doing well. I hope this was helpful. I think I kind of got this question. I mean it’s going to be a big question in the media over the next month. Why is DD unprofitable? And I think I… this is my first pass thinking on it. I’ll go through it again over the next couple weeks, but I think I’m pretty close to the truth. I think that was a good which is going to be a pretty important question. So anyways, that’s my take. Hope everyone’s doing well. Have a great week, and I will talk to you next week from Rio de Janeiro. Bye bye.