4 Reasons Why Didi and Ctrip Should Merge (Tech Strategy – Podcast 95)


This week’s podcast is about Ctrip, Didi and their current situation as subscale services marketplaces in China.

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4 Reasons Didi and Ctrip should merge:

  1. They are both subscale in B2C digital China
  2. Both are exposed. And industry barriers in services are shifting and falling.
  3. They are complementary in terms of users, usage, data and cash flow.
  4. Meituan is coming. It is likely it will enter ride-sharing, just like it did in accommodations.


Related articles:

From the Concept Library, concepts for this article are:

  • Indirect Network Effects
  • Marketplace Platform for Services

From the Company Library, companies for this article are:

  • Ctrip
  • Didi


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

——Transcription Below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, four reasons why Didi should merge with Ctrip. Now Didi’s been in the news kind of a lot the last month. They are the latest sort of company under the political lens of China. That lens shifts around a lot, but right now it’s on Didi. One other. Results of that is they are off about 50% share price from their recent IPO So dropping down to about 40 billion US dollars market cap Which is about half what they hit when they went public Now these are still early days of you know them as a public company So there’s a lot of stuff going on there beyond just you know pure valuation But definitely it’s it’s been a big drop and you can compare that to Ctrip which is, I mean, it’s been trending down, not precipitously this year, although COVID didn’t help, but really for the last four to five years. From about 2018, it’s about half the price it was at 2018. So it’s about 15, $16 billion market cap right now. That’s again, about half of 2018. And it’s probably about where the share price was in 2015, 2016. So, What jumps out at me when looking at these companies is one, they are both relatively small to be a major China tech company going after consumers. They are a lot smaller than everybody else. And they’ve all sort of come down in price significantly, either precipitously or sort of trending down. So anyways, based on that, I think there’s a good argument to be made that they should merge up. I’ll give you four reasons for that today. and this is all basically from a strategy perspective. So that’s what I’m talking about. Okay, other stuff for those of you who are subscribers, I sent you out some information on NetEase, which I think is worth taking a look at right now as sort of a number two, number three player in gaming in China, when the number one player Tencent is under the microscope a bit by the government. Really any dominant company is being looked at right now. I also sent you some stuff on just basic valuation frameworks. This is kind of my approach for quick and fast valuation. I’ve been trying to reverse engineer how Buffett does his valuations for a long time. He never says, but this is my best attempt. Anyways, I sent you that last night. And going forward, we’ll probably start talking about Global E, which we had a good discussion about yesterday. I’ll talk about that later. That’s a pretty interesting company as well. So anyways, that’s what’s going on. For those of you who aren’t subscribers, feel free to subscribe over at jefftausen.com. There’s a free 30-day trial. Sign up, join the community, see what you think. And with that, oh my standard qualifier. Disclaimer, nothing in this podcast or in my writing around the website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions expressed may be incorrect or no longer relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. Oh, one quick promotion. I started doing sort of webinars, interactive things, where we could actually chat online. I did the first one in retail tech last week. That turned out to be really fun. I spoke for about 20 minutes on what I think is sort of the most important stuff happening in retail tech by companies, by technology, for about 20 minutes. And then we ended up talking for, I don’t know, an hour and 10 minutes, just sort of chatting and doing questions. It was great. Anyways, the next one is coming up this week, which is going to be healthcare tech. And they’ll be same format. What do I think is the single, you know, the most important things happening by companies or tech within that space right now. And then we’ll do some Q&A and questions and chat a bit. Anyways, there’s a link in the show notes if you want to sign up for that. That’s later this week. Okay, with that, let’s get into the topic. Now the companies obviously. for today are Ctrip and DD, so you can find information on them in the company library on my website. The two concepts for today, which go under the concept library on my website, are marketplaces for services and indirect network effects. Now, I’ve talked about these quite a lot. If you search anywhere on there, just click on the link in the concept library. You’ll find lots of articles, podcasts, things like that about marketplace platforms. which are a type of business model, but they’re very different when you start to do marketplaces for services, as opposed to products, you know, shipping physical goods around, or digital goods for that matter. There’s an old podcast I did a long time ago, Podcast 22, which was basically Maytwan versus Ctrip versus Alibaba, and the question was who is gonna win in China services? And what’s interesting about services is There’s really two things happening here. One, there’s this idea of everybody’s converging on services. Didi is a services company, mobility. Ctrip is a services company, tourism, hospitality. Metuan is a suite of services. Alibaba is a product commerce platform, but they have expanded into services. They own Ulema and they’ve got other things they’re doing. there’s just kind of this general convergence by all the major consumer-facing tech companies of China and increasingly Asia. They’re all kind of converging on the idea of services. They all seem to want to have a hand in that for certain reasons. If you look at Alibaba’s sort of new retail, you know, you go into their supermarkets, their Sun Art retail, their Fresh Hippo, you know, HeMa. Yes, they sell products at the supermarket, but they’re increasingly bundling that with services. So you go down and buy food and they cook it for you and they deliver it for you. Their department store in time, which you know traditional department store that they’re digitizing, they’re also bundling services and products. You order makeup and then they have someone come and put it on you at your house or cut your hair at the same time. So they’re all starting to bundle this stuff together. There’s just this general convergence on services. Now the other sort of thing that’s happening is this idea of how do you win as a platform business model and services? Because most of these companies are platforms. Now we know how a platform business model sort of wins when it comes to products. We saw Amazon go from books to appliances to consumer electronics, blah blah blah. We saw JD do the same thing. They start with, they were mostly consumer electronics. They moved into appliances and other sectors. Alibaba, all these sort of product-based marketplaces, you know, they become the everything store. Now, there are exceptions to that, which I’ve been talking about, sort of specialty e-commerce, but that is generally the trend. So the question is, is the same thing gonna happen on the services side? Does a standalone specialty service company like Ctrip, which really just does tourism, Does that make sense long term or are we going to see a convergence to something closer to Meituan where they do just all the services? As a platform business model, is it competitive? And it’s not always about what consumers want. Oftentimes it’s about who’s the stronger platform. People liked Toys R Us a lot, but at the end of the day, Walmart, the prices they could offer were just too powerful. Same with Amazon. So sometimes the more powerful business model is what matters more than what consumers might prefer. So that’s kind of the question is how are these marketplace platforms going to evolve going forward? And we can see a couple models sort of competing, which is interesting. Didi has one, C-Trip has one, Matron has one, Alibaba has its, you know, they’re combining with products. You know, that’s kind of the ultimate B2C marketplace. And this actually gets a little more complicated because most everything I just talked about were fairly simple consumer facing services. You know, getting a ride to the airport, ordering food. When you move into more complicated consumer services like, I don’t know, seeing a doctor, hiring a nanny, getting a teacher. And these are more complicated. They require sort of different capabilities within the platform to make that happen. And then when we start to move into sort of B2B services. which also began with simpler things like Fiverr, gig economy, but they’re also getting more and more complicated. So we’re seeing this sort of evolution in terms of marketplace platforms for services. B2B, B2C, simple to complicated, local versus international. It’s an interesting space to watch in terms of what business model is gonna be, end up being the Walmart, the Amazon. What’s gonna be the one, look, nobody compete with them, they’re too strong. So I think that’s kind of an interesting question. So that’s the main idea concept for today, marketplace platforms for services, and then indirect network effects. Okay, now I published a podcast and a couple articles a couple weeks ago when Didi went public, and they were basically titled, When Will Didi Become Profitable? Because it’s not. And you can go listen to those. I go through the basics there. I’ll just summarize a couple of the key points that matter. Look, we kind of knew what Didi was. It’s the Uber lift story mostly. And those companies, we’ve seen their financials for quite some time, and they are chronically unprofitable. Not because they’re not growing, and not because they’re not big, it’s because of the unit economics, and a couple other things. So there was this question, okay, Didi is gonna finally go public, will they be profitable? And the difference between, let’s say, Didi and Uber, there’s a bunch of differences, but one of them is Didi has effectively had no major competitor in China for three to four years. So that should, in theory, have worked out for them. And that’s what I thought was gonna happen. What I thought we were gonna see in the numbers was tremendous usage, dominance of a very big market, and solid profitability. That’s what I thought. No, I was wrong. Turns out we see dominance, we see huge usage numbers, and we see that they are sort of chronically unprofitable. Now it’s not, it’s a little better than that. Here I’ll give you some basic numbers from their F1. 493 million annual active users. Now when people tell you the annual numbers for a daily service, that’s a, it’s not a red flag but it’s it’s a little questionable. 156 monthly active writers in the most recent quarter of 2021 prior. So 156 million. and then 15 million annual active drivers. And that’s pretty common when we look at these things. You know, it’s about 10 times as many riders as drivers. Okay, so that’s a very big platform. 41 million average daily transactions. Okay, that’s the number we wanted to see. And that, you know, the reason people liked ride sharing so much was because of frequency, right? It’s, when you look at consumer services that people use the most frequently, it’s usually mobility and food delivery. Right, that gets you engagement, that gets you users. If you’re in the platform building business, that’s really, really important. So that’s great. Now they will have a bunch of information about here’s how big our market is, it’s all about mobility, our market is shared mobility, blah, blah, blah, I don’t really buy any of that. I think it’s a lot more about taking over the taxi market and some other things. It’s not a common, people don’t take DD or Uber every day to work, they don’t. people don’t use this to commute. It’s too expensive, virtually everyone. So as a mobility service, it has always been sort of the exception, not the rule. So I think the whole total addressable market thing is not quite what people think it is. It’s great for getting home, it’s great for going to lunch with your friends. It’s not something people use every day, which is what people buy cars for. But anyways, China’s a huge market, they dominate China, that’s all good. Their biggest competitors not really car ownership. It’s metros and buses and unfortunately for them China is really really good at making metros and buses Subways, they’re very good at it. The subways are awesome. They’re cheap. They’re on time That’s a problem. It’s easier to sell mobility services in I don’t know Salpaulo or some over it’s not quite as easy to get around Okay So that’s fine, I think that’s what we knew what we were gonna see. We look at the financials. Now the COVID year, things are a little bit different. So I’ll jump to the year before COVID, 2019. Revenue, 159 billion rem and be. So 20 plus billion US dollars, and that was growing at 14% year over year. Fine, good. Cost of revenue, 90%. Okay, that’s a problem. That’s the labor aspect coming out. Gross profit, 10%, but again, that was up 6%, so not terrible. And then you look at the marketing and you look at the sales and marketing, you look at the, and they were basically at about negative 5% operating profit in 2019. Now that was an improvement from 2018 where they were at negative 9%. So you could argue they were moving in the right direction. I would say that’s still not awesome because if you’ve been a monopoly in China for three to four years at this tremendous scale, like how big do you have to be before you start to make a profit? I mean, this whole idea of operating leverage is supposed to kick in at some point. I mean, you’re a huge platform and it’s still not showing up and you haven’t had any direct competitors. So. Now, 2020 they dropped a bit. They went down to sort of negative 10% operating profit. Their revenue fell a little bit. But you could argue, hey, they are grinding their way there. And I think that’s probably the case. Now, when I did an article on this, my explanation for all of this was, there’s two problems happening. Number one, they are not as dominant as everyone thinks. They say, oh, they have most of the market. Not really. The things that define their competitive situation are rivals, substitutes, and new entrants. Now, when you look at their current rivals, yes, they have 90 plus percent of the ride-sharing market of China. But when you look at new entrants, you have Alibaba and Meituan right at the door at all times. It’s very hard for them to raise prices because they’ll draw an attack from Alibaba and Meituan who have tremendous consumer side and all they have to do is add drivers and suddenly you’ve got a major competitor. So I think the yes they dominate but the new entrant thing puts them in a competitive basically in the defensive position. They have to sort of keep their rates low to make sure that they don’t draw these competitors in. So I think that’s kind of what they were doing strategy wise. Let’s not push our position. Let’s stay defensive, keep our prices low and grind our way towards profitability by growing 10 to 15% every year. That was my assessment of what they were doing. That’s not bad. The other thing I think they were doing, I think the other factor that plays out here is just the unit economics to a large degree are outside their control. The subways are great and they’re cheap. that’s a low-cost substitute to your service. And any time you have a low-cost substitute that’s readily available, that’s gonna constrain you. It’s not good. I think about this a lot. I mean, on this podcast, I talk a lot about competitive advantage. But I actually know one of my red flags in any business is if I see a low-cost substitute. Because it really limits what you can charge. So they have the low-cost substitute floating out there, and China keeps building their subways, and they’re great, by the way. And then you also have the labor cost, which you also don’t have a great ability to change. So they’re kind of constrained in their unit economics there. They can’t really drop their cost structure too much, and they can’t really raise their prices too much. So that’s kind of what I view them as just sort of on this glide path, the slow profitability with that picture. Now it could change with electric vehicles, and I wrote about this, because electric vehicles as opposed to gas vehicles may change the unit economics. They are cheaper. And it also requires a network of charging stations, which they’re building, which could give them much better defensibility against these new entrants, Alibaba and Maytwan. So I thought that was actually pretty compelling as an idea. We’ll see if it works. And then you have autonomous vehicles, which is a big boogeyman out on the horizon. Who knows what’s gonna happen with that? I don’t think it’s gonna wipe out most of their business. I think it’s gonna change a portion of it. It’s not clear to me that they’re competitive in that at all. Anyways, that was kind of my take on them. There’s a lot to like here, and there’s a lot of strengths for sure, but they also have some pretty significant weaknesses, and that’s pretty much the picture I see with C-Trip as well. There’s a lot I like, there’s a lot that’s like, oh, that’s not great. Now, basics of C-Trip, give you a couple of factoids on this. This is one of the old school. This is old school. online travel agency, first wave of digital internet companies, Expedia, Booking.com, Priceline, and Ctrip. They all got founded around the same time. This is back in 1999, 2000. In China, founded by James Liang, Neil Shen, Min Fan, Qi Ji. Neil Shen, for those of you who follow China, he’s the guy at Sequoia Capital. He has been at the epicenter of digital China for two decades. really interesting dudes but you know this is the same literally the same months that Tencent, Alibaba and Baidu were founded like late 1998 early 1999 and they all sort of started in different cities like Alibaba started in Hanzhou, Baidu in Beijing, Tencent in Shenzhen like all within like months of each other it’s pretty cool actually but they basically took the standard offline travel agency you know you go to the local store they show you flights they show you trains, they show you hotels, they try to sell you packages. They took that model and took it online. And that was a really good idea. Because it just, I mean this was one of those, this is one of those scenarios where digital was just a superpower. Because suddenly, you know, the spectrum of flights and hotels and trains and bundling and cross-selling you can do just explodes in every dimension. You can offer hotels everywhere in the world. you can bundle them with flights, you can offer, I mean it’s just a great business model, that sort of version 1.0 online travel agency. And we saw all these companies surge upward, Expedia, Booking.com, Agoda, I mean they’re all kind of the same companies now. A great business model. Didn’t have a large physical component, there’s no people on scooters, there’s no cars. I mean it was a digital playbook, which is great, because it had sort of outstanding economics for a long time. That’s the C-Trip story. China had a bit of a pretty brutal war in this space for a long, long time. There’s Chunar and Yilong, which was a major investee of Expedia, C-Trip. They all fight it out forever. There’s a lot of consolidation. There’s a lot of M&A. There’s price wars. That pretty much all comes to an end around 2015. From around 2012 to 2015, Ctrip and Chunar and Yilong get into a price war. Pretty brutal. Expedia ends up leaving eventually because they were just taking losses year after year. So they sold their stake, which Ctrip ended up buying. It all consolidates. 2014, 2015, the dust settles. Ctrip is the last man standing after this bloody war. They own the OTA market for China. Good. very impressive. And their operations are basically a digital platform and then they have a bunch of customer service people. That’s kind of the operating aspects of this. And they start doing what you would expect them to do is they start going international. Because what I like about marketplaces for hotels, not airlines, the flights, but the hotel component is it’s one of the most powerful global network effects. I mean, network effects, indirect network effects, so right, two-sided, consumers and merchants. When it’s consumers and airlines, it’s not really impressive because there aren’t that many airlines, you know, a couple hundred at most. But when you get into hotels, you’re talking millions and millions of hotels around the world that people wanna have access to because that’s when you go travel, it’s an international, or at least a regional experience usually. So you start to get global network effects. When you look at an indirect network effect, my standard, I laid out three types of network effects in previous podcasts, direct, indirect, and standardization and coordination network effects. Indirect network effect, two-sided. More hotels is better for the consumers, more consumers is better for the hotels. But then you gotta sort of ask two questions within that. What is the minimum threshold for viability? If you’re gonna offer regional hotel accommodations, the threshold is actually quite high because before you have a minimum viable product for consumers, you have to sign up hotels everywhere. Asia, China, Japan, Southeast Asia, you can kind of do it at the national level if it’s China because that’s a big market and maybe a couple, but generally you have to be at least regional and for the most part you have to be global. So you have to have a lot of hotels or accommodations on your platform to get to minimum viability as a product. That is not the case in ride sharing. You can get to minimum viability to offer rides to the airport in your neighborhood with 20 cars. Right, it’s a very local network effect as opposed to a global network effect. I love that about accommodations. I like it about Airbnb, I like it about Expedia, I like it about booking.com, and I like it about… Ctrip which has been going international quite aggressively the other thing you think about is okay at what level of Users activity on the merchant side does the value flatline You add a marginal hotel the next hotel you add does it add more value to consumers? And at a certain point it goes up it goes up it goes up and a certain point it starts to flatline you know if there are ten drivers in my neighborhood that can pick me up in five minutes to take me on a ride on uber the eleventh driver doesn’t add any value to me it’s flat-lined but hotels because they’re so differentiated you know different streets different views different price points different services different part of town uh… you know accommodations for families accommodations for single there’s a lot of differentiation every additional hotel generally adds more value That’s a linear increase in network effect that doesn’t flatline for a long, long time, if ever. So I love the high threshold for minimum viability. I love the fact that it doesn’t flatline in terms of a network effect. Anyways, for those of you who’ve been listening, you know I like global accommodations network effects. Okay, those are sort of the two ideas for a marketplace for platform, or for services and network effects. Now in theory that should have been the end of the story for Ctrip. They fought their way to the top, consolidation, last man standing, they own the market, one of the largest markets in the world. China, from there they go international from a position of real domestic strength. Which is kind of what Expedia did and what Airbnb did. But underneath all of this 2012, 2014 while they were fighting it out, Maytwan, run by Wan Xing, who you never want to compete with that dude. He’s jumped into the space and started to do Chinese hotels that are cheap. So he comes in at the bottom of the market, just domestic. We’re going to offer all of our consumers, because they have a lot of consumers on May 21, cheap budget accommodations in China. And he just kind of comes up the distant lane. He’s sort of the black horse that no one’s paying attention to. And he just keeps rocking and rolling. and C-Trip was making, C-Trip was very profitable during all of this. They were growth, if you look at their financials, 2010 all the way to today, you see growth and you see profitability. It’s a really nice business model. It’s just that it may not be competitive anymore. That the version 1.0 of online travel may not be what’s coming. Maytwan may be version 2.0, which is we don’t offer just accommodations and tourism. we offer a full suite of services, and then we cross-sell and subsidize. So they sort of jumped into accommodations, and in 2017-ish, they basically surpassed C-Trip as the largest provider of accommodations in China. And once you had the baseline of budget hotels, they start to move up into three-star, four-star, five-star. Pretty impressive. And that’s been kind of the scenario. So when I look at C-Trip today, what I see is a mix of strengths and weaknesses. I love their global business. I love that they’re going international. I love that they’re building a network effect where anytime Chinese consumers fly to Paris or France or Brazil, they can go on C-Trip and get accommodations. That’s awesome. But it looks to me like a weakening position domestically. That you know, Maytuan and Alibaba, which does Fliggy, they’re also in hotels domestically. It looks like domestically their business model may not be strong enough to compete long term. That’s kind of the scenario. So again, it’s like DeeDee. There’s a lot of stuff I like there, and there’s a lot of stuff that’s like, ah, that’s not great. So if we look at Ctrip’s numbers, pre-COVID, which I think is reasonable, 2019 net revenue, 35 billion rem and B. Gross profit, 79%, right? This is a digital, mostly digital business without a physical component, which as you know, I really like that. because you get those digital economics that play out and you get these ridiculous gross profits, the problem with that picture is always, you’re more exposed in terms of competition because you’re just a software creature. I tend to like physical digital hybrids where we get a network effect, we get a platform that’s digital, but there’s a decent number of physical assets that are hard to replicate. So I’m willing to trade off some of those powerful economics for a little more defensibility. But their pre-tax operating profit, 2019, 14%. And their numbers look pretty much like that. You know, you go back five years, you see steady growth. 2018 to 2019, they went from 31 to 35 billion renminbi in sales. Steady growth, really big gross profits, and then a reasonable, healthy operating profit. That’s always been their picture, so that’s good. It’s just like, you know. you got these big competitors looking right at you and it looks like domestically they are pretty fearsome. So anyways, that’s the picture. Okay, that said, why do I think they should merge? So I’ll give you four reasons. Reason number one, I think both companies are now subscale in B2C services in China. Now both of these companies, yes they have an international component. Ctrip in particular. is trying to go global, have non-Chinese consumers. DD has ride sharing and they got sort of a food delivery business in Mexico, but let’s not kid ourselves. These companies are gonna live and die based on capturing and retaining Chinese consumers. That’s the game. If they lose that, none of the other stuff’s gonna matter. You know, the difference between their just pure financial heft… in China and their major competitors in the B2C space is it’s stark now. The numbers I said, DD, $40 billion market cap, I mean this is just post IPO, so take that with a grain of salt, but Ctrip, $15 billion. Okay, Meituan, who would be arguably their closest competitor, $180 billion market cap now. Their other major competitors, Baba, Alibaba. $500 million. I mean, they are just dramatically smaller. And you know, so much of this game, I talked about this in last week’s podcast, is this idea of getting consumers, getting to scale, and then innovating against constantly emerging consumer problems, coming up with new things, just sort of staying on that. I mean, you… You capture the consumers, you get to some degree of scale that throws off cash flow. You’ve gotta have a cash engine, and then you just plow that into R&D against new consumer solutions, and that frontier of we’re gonna do everything for consumers, mostly stuff they’ve never even thought of. I mean, that’s where you live. It’s harder and harder to do that when your competitors for the same consumers are 10 times bigger than you, 20 times bigger than you in terms of cash flow. or in that case it was market cap. I think at a certain point you gotta realize unless you’re in a unique niche like let’s say search, but if you’re in the products and services for consumers, I mean the distinctions between various industry categories are not the same in the digital world like they were in the physical world. It is far too easy for Alibaba, Tencent, JD, any of these to jump into hotel services. which they’ve been doing. So one, I think they’re too small. I think you gotta get bigger. Now in other markets, I don’t think it’s necessarily that way. I don’t think it’s that way in the US. I think you can be a smaller company in the US and do quite fine, because US digital companies tend to stay in their lane. Not the case in China. I don’t think it’s the case in Asia, Southeast Asia generally. So that’s number one. I think they’re subscale. Now if they were growing dramatically and… hey we’re gonna get big that’d be different but they don’t appear to be doing that. Number two, both of them are increasingly exposed to industry barriers that are shifting and falling. You know, Meituan went from food delivery, Groupon type buying, beauty services and then they just jumped right into hotels. I thought we were in the tourism industry and I thought you were in the food It’s all consumer services. So this is that idea that this version 1.0 of online travel agencies, I’m not convinced that works. I’m definitely not convinced it works domestically in China. It may work globally, but domestically, no, no, no, I don’t think so. Now, I sort of put up some ideas. What could Ctrip do in response? And I basically said they had two strategies in my opinion. One is they could become a truly global platform, which means you’ve gotta get nine Chinese consumers, and then you’re basically Airbnb. That’s good, that would work, I think. Or if you’re gonna continue to fight domestically, you need to add something to increase your engagement. What they have, which I’ve said many times, they have a lot of users and they have good cash flow. That’s great. If you look at my little blue diamond diagrams, at the center of the blue diamond, which is a platform business model, I always put four assets. You need users, you need engagement, you need data, and you need cash flow. They don’t have engagement. People don’t go on to SeaTrip three times a day. They book a hotel a couple times a year. They’ve got users, they’ve got cash flow. That’s a problem. They need to up their engagement somehow. The shortest path between where they are in engagement, as far as I’m concerned, is to add content. People like videos of travel. It’s a good, you know, it’s a nice play. People don’t watch videos of socks, but they watch videos of travel. You could do short video, you could do live streaming, you could do influencer stuff. They have an ability to do that, and they are doing that. That, in theory, could get you engagement. But I thought they needed to do one of those two strategies. So one, I think these idea of industry barriers, I don’t think they’re gonna be what we think they are. I think five to 10 years from now is gonna be different. So I think they’re one, they’re subscale. Two, I think they’re both exposed. to direct competitors that are right next to them that could jump in any day of the week. Number three, I think they have complimentary strengths. They fit quite nicely. Ctrip has cash flow, it has users, it has a global network effect. That’s great. And they have relatively high margin services, 79% gross margins. Usually it’s the hotels where you make your money. That’s great, but they don’t have engagement. You know, it’s very rare. Well, what does Didi have? Well, Didi has very high engagement. That’s what they, you know, mobility is the thing people use arguably the most that in food delivery. They have users, they have engagement. What are they lacking? They’re lacking high margin services that throw off a lot of cash. Well, that seems like a real nice fit. You know, if Didi was standing alone, my argument has been, okay, you can grind your way to profitability. That’s good. but you’re still not in a high margin service. You need to add high margin services at the end of the day, which are not gonna be in mobility for the most part. They’re gonna need to jump into something else. Okay, I mean, it’s a nice fit. They both kind of fit each other well. You put them together, suddenly you’ve got tremendous usage. You’ve got a global network effect. You’ve got good cash flow. You got high daily usage. That’s really pretty good. And who does it look like if you merge them together? It looks like Maytwan, basically. And that’s reason number four. Maytwan is coming. Winter is coming. Maytwan is coming. One thing you can take to the bank is Wan Xing, he doesn’t care about industry barriers. And he moves quick. And he is clearly on the way. Like, if he’s not directly in rideshare, I mean, he jumped into hotels, and he did it successfully. He’s already put a foot into ride sharing. You know, he… And now they’ve got the political issues and he’s definitely going to go after this. And Alibaba might as well. So you’ve got at least, at least Meituan and maybe Alibaba, you know, coming for both hotels and ride sharing. So what are you going to do when he starts, you know, coming after ride sharing in a major way? So anyways, those are kind of my four reasons. They’re subscale, they’re both exposed, and industry barriers are shifting, and maybe falling. They have nice complementary strengths, and Meituan’s coming, so you better do something. They ignored Meituan, or at least Ctrip ignored Meituan when they moved into hotels, and they surpassed them. So anyways, those are kind of my four reasons. We’ll see what they do. For those of you who are watching the stock prices. that raises an interesting question both companies are down what would happen to their stock price if they announced a merger uh… might be good and even if they don’t you know dd alone is down fifty percent in the last couple weeks is that an opportunity in its own right without a merger as an optionality uh… i don’t know i’ll leave that to you but i think it’s kind of an interesting play to think about Anyways, I’m not giving you investment advice, but there’s at least two interesting things happening here like in terms of just stocks. One, they’re both down a lot. Two, there’s an idea that they may do something strategic. Now I’m not hearing them talk about this, but it wouldn’t surprise me if it happened any given day. And you don’t have to fully merge, you can do a joint venture. I mean, there’s lots of ways to sort of partner up without going that far. Anyways, that’s kind of the topic for today. And let’s see. Concepts, marketplace platforms for services, and indirect network effects are the two concepts for today. And I think that’s it. I’ll put these four reasons in the show note so you can kinda, you know, let me know if you think I’m full of it, you think I’m wrong. But I’ve been kinda watching the local services space in China and Asia for a long time as this sort of big strategic question. It’s a lot clearer when you start talking about products what’s gonna happen. Services is really kind of interesting little collision of all the tech giants are all kind of colliding in this area Anyways, that’s my take As for me, I am in the home stretch 41 hours, no 41 hours 15 minutes. I can check out of this hotel. Oh my god. This was It’s bad like It’s it’s really not good Like the last week has been brutal It’s just pacing back and forth in this room. And like they literally should, when you move into this quarantine hotel, they give you like water bottles, they deliver me food three times a day. I got weights I can rent. And dude, they should provide antidepressants. And I’m not joking at all. Like I think it’s really brutal mentally to just be stuck in this 10 foot, by whatever 15 foot space. So yeah, I was doing pretty well. First week was not easy, but then it started to feel good. But the last four to five days, the second week is just, anyways, 41 hours, 15 minutes, I am out of here. Thank God. Now on the flip side, I just, I’m gonna do a speaking gig in Germany in October, which is awesome, because this is for an investor group. One, I love doing speaking gigs, it’s really fun. and this is for an investor group, and I love talking to investment groups, like asset management groups, because they’re really smart, right? It’s like you really gotta say something valuable and tell them something they don’t know. It’s like the bar’s really high. So I really like that a lot. Anyway, so that’s awesome, and plus I get to go to Germany, and I love going there, but it also means I have to get back into Thailand, so. So I’m out of quarantine in 41 hours. I get about four to five weeks here and then I’m back outside of the country. I’ll do the Phuket sandbox on the way back, but you know, oh well, whatever. I was planning to be grounded for a couple months. But anyways, and if anyone’s in that part of the world, I think I’m gonna buzz around Europe for a couple weeks. Maybe see around. So if anyone’s around, let me know. I’ll be in the area, that’ll be October. Anyways, that’s pretty much it for me. For those of you who want to do healthcare tech, sign up for the thing later this week. It’s on Eventbrite. The link is down below. And that’s really about Q&A as much as anything. Probably more. We did some feedback on the first one and that seemed to be what people liked is just the ability to chat and ask questions and as opposed to me just droning on hour after hour. Okay, that’s it for me. I hope everyone is doing well. I hope you’re staying safe, especially those of you in Thailand. Things are a bit dicey right now. But as for me, I’m out of here and I will talk to you next week. Bye bye.


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