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Chinese automakers bet on ride-hailing future amid slowdown in car sales

A handful of Chinese major automakers are eyeing online ride-hailing services to boost their business.

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Since the days of Henry Ford, automakers have been selling vehicles as their main source of revenue. However, this may soon change if Chinese carmakers like FAW, Great Wall Motors, and Geely get their way and successfully enter the ride-hailing industry.

In an interview in November 2019 with tech media site iYiou, Zhang Wenhui, president of Ole Chuxing, a ride-hailing company backed by Great Wall Motors, predicted that more than 50% of original equipment manufacturers (OEMs) will generate revenue from mobility services.

Current figures might support Zhang’s prediction, as they indicate difficult times for automakers who are not willing to diversify their business. Auto sales in China, the world’s largest automobile market, shrank 8.2% in 2019 to 25.8 million units when compared to 2018, dropping for the second year in a row. In 2018, auto sales suffered its first decline since 1990, down 2.8% year-on-year to over 28 million units, the China Association of Automobile Manufacturers announced in a recent report.

New energy vehicle (NEV) sales also fell 4% year-on-year to about 1.2 million units in 2019, representing the first decline in ten years following the Chinese government reduction in subsidies announced in June, according to the same report.

With congested roads, a slowing economy, and a credit squeeze in the aftermath of a peer-to-peer (P2P) lending scandal, more and more Chinese people are seeking rides via ride-hailing apps on their smartphones, rather than buying or driving their own cars on the road.

This trend has allowed online ride-hailing services to emerge as a new business sector with vast market potential. The online ride-hailing market in China grew steadily from 2015 to 2018 with an annual compound growth rate of 50% to hit RMB 311.2 billion (USD 45.22 billion) in 2018, according to Chinese data consultancy firm Analysys.

Automakers entering the fray

A handful of Chinese automakers are aiming to hop onto the ride-hailing wagon. Geely, a private manufacturer, was the first. It launched its ride-hailing platform Caocao Chuxing in 2015, and it now currently boasts a fleet of 32,000 electric vehicles in over 25 cities.

Private automaker Geely was the pioneer to enter the ride-hailing industry by launching Caocao Chuxing in 2015. Source: Tuchong.com

Other major state-owned automakers have rolled out their own ride-hailing brands: FAW Group established Yiqi Chuxing in 2019; Hong Kong-listed Dongfeng Motor launched Dongfeng Chuxing in 2018; Shenzhen-listed Chongqing Changan Automobile unveiled Changan Travel in 2017, while BAIC Group unveiled Baic Mobility in 2017, and SAIC Motor introduced Xiangdao Chuxing in 2018.

These major OEMs have also established partnerships with other minor automakers and internet giants for ride-hailing services. OnTime, a ride-hailing app jointly built by Guangzhou Automobile Group (GAC) and Tencent, went online in June 2019. Backed by the country’s largest ride-hailing player, Didi, the service will run over 10,000 NEVs provided by GAC, and is expected to be operative in five major Chinese cities by the end of 2020.

In July 2019, another ride-hailing brand called T3 Chuxing was unveiled in Nanjing, backed by Chinese tech giants Alibaba, Tencent, Suning, and three local mentioned carmakers: Changan Automobile, Dongfeng Motor Group, and FAW Group.

T3 is already operative in six cities including Nanjing, Changchun, and Hangzhou, with a fleet of 12,000 vehicles as of December 2019, according to the company’s CEO Cui Dayong.

Many OEMs have preferred NEVs for ride-hailing services, as the cost of a NEV fleet management is potentially lower than gas-powered cars. Additionally, the Chinese government has been supporting the use of NEVs in the ride-hailing business, and some cities have announced policies requiring all newly-registered cars for ride-hailing services to be fully electric vehicles (EV).

Authorities have also pledged to offer better infrastructure for electric vehicles and boost innovation and EV batteries development, according to a draft proposal released in December 2019 by the Ministry of Industry and Information Technology (MIIT).

Conservative expansion in a money-burning industry

Entering the ride-hailing sector is an important step for automakers to transform into mobility service providers. According to industry observers, OEMs could integrate ride-hailing businesses with other services including car rental, second-hand car trading, and car insurance.

Still, before launching a new ride-hailing service, OEMs need to invest a large amount of money, time and manpower. Companies have to purchase new vehicles, attract new customers, spend on marketing, among other expenses. That’s one of the reasons why carmakers usually launch new services in their headquarter cities, where they can also receive support from the local government. Only after they usually slowly expand their business to other cities and areas.

Take the ride-hailing platform Ole Sharing as an example. Backed by private automaker Great Wall Motors, the service was first rolled out in August 2018 in the company’s headquarter city Baoding, in Hebei province. The company expanded operations in the city of Shijiazhuang in Hebei province seven months later.

Other OEM-backed ride-hailing companies introduced similar strategies. Xiangdao Chuxing, backed by state-owned OEM SAIC Motor, debuted its service in Shanghai in December 2018 and did not seek expansion until July 2019.

As they have seen rapid growth in their headquarter cities, the emerging OEM-backed ride-hailers have gained attention from Didi, which currently provide its services to nearly 80% of monthly active ride-hailing users in China.

Still, it will be uneasy for these new entrants to unseat Didi.

To win new customers, automakers need to burn extra money with aggressive marketing campaigns to improve brand recognition, while launching heavy discounts to lure passengers, industry insiders have pointed out. Companies might also need to subsidize drivers to motivate them to jump onto a new platform.

Companies such as Ole have burned millions of yuans on discounts, trying to grab more market share, said an Ole employee. “The market will reach a balance point only after one of the players will stop burning cash,” he added.

T3 Chuxing also offered coupons worth RMB 20 (USD 2.9) to users for its first ride, and gave out other discounts up to 50% to new customers when it launched its service in July 2019 in Nanjing. Under such heavy discounts, T3’s daily order volume exceeded 100,000 within 100 days since its launch.

Although promising, the market is not mature enough for so many players, an industry insider told 36Kr. Even Didi has yet to turn profitable in all the cities it operates, he added.

Leaked financial data showed that Didi generated losses of up to RMB 10.9 billion (USD 1.5 billion) in the 2018 financial year. Its founder and CEO Cheng Wei also admitted that the company suffered from an RMB 4.04 billion (USD 574 million) loss in the first half of 2018. Of all its expenses, Didi spent a total of RMB 11.3 billion (USD 1.6 billion) on subsidies and incentives to attract qualified drivers.

“It is not easy to start ride-hailing services in a new city. The business won’t last long if automakers only depend on discounts to boost the service,” the aforementioned industry source said.

The original article was written by Qiu Xiaofen of 36Kr, KrASIA’s parent company.