Investment Insight | Rideshare
– Hopping on for the long-term journey
This week, Didi Global (the world’s largest rideshare business when measured by the number of daily rides) listed on the New York Stock Exchange with a market capitalization of US$67 billion. Most people will have heard of and probably used Uber - the dominant rideshare business in New Zealand and in the United States. Fewer people, however, will be familiar with Didi Global (‘Didi’).
Didi is a nine-year old company and the dominant rideshare operator in China with approximately 80% market share. In addition to China, they also operate in 16 other countries including New Zealand (Auckland operations began in late 2020). As you would expect for a business based in the world’s most populated country, the scope of their business operations is hard to comprehend. Didi has almost half a billion annual active users, 15 million drivers (three times the population of New Zealand), and completed an average of 41 million rides per day over the last 12 months (this translates into 14.5 billion rides per year).
By the standards of almost any other company, the existing Didi business is exceptionally large; however, this maybe just the tip of the iceberg and provide significant opportunity now that the company is listed. Below we examine why this is the case. There are three key reasons; urbanisation, cost advantage, and rising income levels.
Rideshare is best suited to large, dense urban cities. In these cities, it is difficult and time consuming to drive your own car. Many of the world’s largest cities have some combination of licensing and driving restrictions and rapidly escalating parking costs. China is the world’s most populated country but, more importantly, China is urbanising rapidly - from under 50% in 2010 to 64% at the end of 2020. The ongoing expansion of Chinese cities into urban clusters, together with continued regional economic growth, is expected to drive the urbanisation rate to 70% in 2030. This will add an additional 200 million city residents by 2030.
This expansion is expected to bring the number of megacities in China (with urban populations larger than New York’s 8 million) from 10 in 2020, to 30 by 2030. Chinese cities with urban populations greater than San Francisco’s 900,000 are expected to increase from 153 in 2020 to more than 230 by 2030.
As urban populations grow so does the use of on-demand transport services. This is evidenced in the penetration of shared mobility (which includes rideshare, app-based taxi hailing and car-pooling) as a percentage of total mobility (private car, public transport, etc). Among the smaller Chinese ‘Tier 3’ and below cities (which often have more than 1 million residents) shared mobility was approximately 7% in the fourth quarter of 2020. This compares to 24% in ‘Tier 1’ and ‘Tier 2’ cities. This suggests there is massive opportunity for expansion, especially in lower tier Chinese cities.
Income levels in China are also rising quickly. The annual per capita disposable income in urban areas of China is expected to grow from NZ$9,700 in 2020 to approximately NZ$12,900 in 2025, an increase of 33%. The number of people whose annual disposable income reached NZ$9,000 was over 400 million in 2020 and is expected to double to over 800 million in 2030. The improvement in Chinese consumers’ standards of living will lead to higher consumption standards and a shift in consumption preference from essential physical goods to services and experiences.
In New Zealand, private car ownership is still relatively cost-effective versus the alternatives. In the United States, the relative cost of rideshare is 2.2 times more expensive per kilometer than the costs of owning a car. In China, private car ownership is not only difficult but also relatively expensive, so this metric gets flipped on its head - rideshare is just 70% of the cost of private car ownership. It is estimated that the per kilometer cost of a private car in China is NZ$0.91 vs rideshare in New Zealand which is NZ$0.64. This makes rideshare an attractive long-term solution for people’s daily transportation needs.
The combination of cost advantage and a rapidly growing urban population suggests that the rideshare business in China has a significant period of growth ahead of it. Currently, shared mobility is estimated to account for approximately 2% of rides from all types of transportation. This is expected to more than double to 4.8% by 2025 and reach 27% by 2040. To put that in dollar terms, the total spend on shared mobility in China is expected to increase from NZ$52 billion in 2020 to NZ$190 billion by 2025. Given that Didi has the lion’s share of this market, the company is placed right at the forefront of this wave of spending.
The icing on the cake for this story is that a lot of this growth is also going to be good for the planet as well. Didi is rapidly moving their fleet to electric vehicles (‘EV’) as they are a natural fit for their business. The benefits of lower operating and maintenance costs for EVs compared to fossil fuel vehicles are amplified when used in a rideshare setting given the greater usage and higher mileage. This makes EVs 12% cheaper to run and it is a saving that can be easily shared between the driver and Didi.
Currently, Didi has the world’s largest network of electric vehicles with over one million EVs (including ‘new energy’ vehicles and ‘hybrid electric’ vehicles) registered on the platform at the end of 2020. During the same period, EVs providing shared mobility services on their platform accounted for approximately 38% of the total EV mileage in China. EVs comprise 20% of Didi’s fleet, up from 0% three years ago and they are aiming for 80% by 2025.
The world is constantly changing and NZ Funds looks to ensure that clients have exposure to businesses like Didi that can benefit from large secular trends and which can drive portfolio returns for many years to come.
Data drawn from China Insights Industry Consultancy Limited cited in the Didi Prospectus.
Didi is a nine-year old company and the dominant rideshare operator in China with approximately 80% market share. In addition to China, they also operate in 16 other countries including New Zealand (Auckland operations began in late 2020). As you would expect for a business based in the world’s most populated country, the scope of their business operations is hard to comprehend. Didi has almost half a billion annual active users, 15 million drivers (three times the population of New Zealand), and completed an average of 41 million rides per day over the last 12 months (this translates into 14.5 billion rides per year).
By the standards of almost any other company, the existing Didi business is exceptionally large; however, this maybe just the tip of the iceberg and provide significant opportunity now that the company is listed. Below we examine why this is the case. There are three key reasons; urbanisation, cost advantage, and rising income levels.
Rideshare is best suited to large, dense urban cities. In these cities, it is difficult and time consuming to drive your own car. Many of the world’s largest cities have some combination of licensing and driving restrictions and rapidly escalating parking costs. China is the world’s most populated country but, more importantly, China is urbanising rapidly - from under 50% in 2010 to 64% at the end of 2020. The ongoing expansion of Chinese cities into urban clusters, together with continued regional economic growth, is expected to drive the urbanisation rate to 70% in 2030. This will add an additional 200 million city residents by 2030.
This expansion is expected to bring the number of megacities in China (with urban populations larger than New York’s 8 million) from 10 in 2020, to 30 by 2030. Chinese cities with urban populations greater than San Francisco’s 900,000 are expected to increase from 153 in 2020 to more than 230 by 2030.
As urban populations grow so does the use of on-demand transport services. This is evidenced in the penetration of shared mobility (which includes rideshare, app-based taxi hailing and car-pooling) as a percentage of total mobility (private car, public transport, etc). Among the smaller Chinese ‘Tier 3’ and below cities (which often have more than 1 million residents) shared mobility was approximately 7% in the fourth quarter of 2020. This compares to 24% in ‘Tier 1’ and ‘Tier 2’ cities. This suggests there is massive opportunity for expansion, especially in lower tier Chinese cities.
Income levels in China are also rising quickly. The annual per capita disposable income in urban areas of China is expected to grow from NZ$9,700 in 2020 to approximately NZ$12,900 in 2025, an increase of 33%. The number of people whose annual disposable income reached NZ$9,000 was over 400 million in 2020 and is expected to double to over 800 million in 2030. The improvement in Chinese consumers’ standards of living will lead to higher consumption standards and a shift in consumption preference from essential physical goods to services and experiences.
In New Zealand, private car ownership is still relatively cost-effective versus the alternatives. In the United States, the relative cost of rideshare is 2.2 times more expensive per kilometer than the costs of owning a car. In China, private car ownership is not only difficult but also relatively expensive, so this metric gets flipped on its head - rideshare is just 70% of the cost of private car ownership. It is estimated that the per kilometer cost of a private car in China is NZ$0.91 vs rideshare in New Zealand which is NZ$0.64. This makes rideshare an attractive long-term solution for people’s daily transportation needs.
The combination of cost advantage and a rapidly growing urban population suggests that the rideshare business in China has a significant period of growth ahead of it. Currently, shared mobility is estimated to account for approximately 2% of rides from all types of transportation. This is expected to more than double to 4.8% by 2025 and reach 27% by 2040. To put that in dollar terms, the total spend on shared mobility in China is expected to increase from NZ$52 billion in 2020 to NZ$190 billion by 2025. Given that Didi has the lion’s share of this market, the company is placed right at the forefront of this wave of spending.
The icing on the cake for this story is that a lot of this growth is also going to be good for the planet as well. Didi is rapidly moving their fleet to electric vehicles (‘EV’) as they are a natural fit for their business. The benefits of lower operating and maintenance costs for EVs compared to fossil fuel vehicles are amplified when used in a rideshare setting given the greater usage and higher mileage. This makes EVs 12% cheaper to run and it is a saving that can be easily shared between the driver and Didi.
Currently, Didi has the world’s largest network of electric vehicles with over one million EVs (including ‘new energy’ vehicles and ‘hybrid electric’ vehicles) registered on the platform at the end of 2020. During the same period, EVs providing shared mobility services on their platform accounted for approximately 38% of the total EV mileage in China. EVs comprise 20% of Didi’s fleet, up from 0% three years ago and they are aiming for 80% by 2025.
The world is constantly changing and NZ Funds looks to ensure that clients have exposure to businesses like Didi that can benefit from large secular trends and which can drive portfolio returns for many years to come.
Data drawn from China Insights Industry Consultancy Limited cited in the Didi Prospectus.
Source: Didi Prospectus, Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Mark Brooks is a Portfolio Manager for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. Mark's comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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