The world’s share markets are riding high, interest rates are mostly non-existent, consumers (and corporates) love the ride-hail concept. In short, conditions are about as good as they can get for tech companies that continue to make eye watering losses. The world’s biggest investors (who can certainly afford to lose a few hundred million) are happily taking large stakes in them, even though the profit profile for ride-hailing companies is a thing of the future.
Didi Chuxing is China’s largest app-taxi company and was big enough in that market to see off Uber when the US-based company tried to establish there. But even it is losing money at historically exciting levels. It’s costing Didi USD1.02 cents for every USD1 it earns from its customers. That can add up to a lot when it’s multiplied by a very big number.
So the unlisted company is seeking another round of funding to top things up. According to the Wall Street Journal, Didi is seeking to raise another USD2 billion, which would give the unlisted company a market cap of around USD60 billion. It’s already got some of China’s biggest tech companies as investors, like Softbank, Alibaba and Tencent, as well as Apple.
Why would smart companies like these squander cash on losing companies when they can do pretty well with their own businesses? One answer is that they do have too much cash and need somewhere to park it. And these big bets can one day pay off. That’s why it’s called venture capital.
For some early investors, the IPOs of Uber and Lyft have brought a payday. But they didn’t do all that well for new investors, although better than some sceptics; even so they’re still under water from their listing prices.
And each of the app companies is still losing billions of dollars every quarter. For most of us, we’d be very worried about our investments; and as consumers, we’d be forgiven for wondering if there is a future for us – or whether we’re doomed to fall back into the arms of taxi companies.
It’s about burning off the competition…
Not everything is always as it seems, although having a benign financial environment can often lead to a surfeit of exuberance. For big operations with very, very big investors, burning cash can actually deliver a competitive advantage. For one thing, it tends to keep competition at bay. And what the big investors keep hoping as they seemingly keep pouring in good money after bad, is that one day they will reap the benefits of market dominance.
There are some intriguing subplots to this too. When Uber first entered the Chinese market, sparks flew and for two years the mutual cash burn was horrendous, as each fought for market power. Eventually Uber exited, extracting from Didi a 15% shareholding. Now Didi is starting to spread its wings globally too. So, in some ways, Uber is buying insurance policies for the future, by ensuring it has a stake in a market even where it isn’t active.
… and then there’s data
With offshoots like Uber Eats, apart from knowing where we live, work and visit, the app company becomes adept at accumulating information across a wide range of our personal likes. And Didi, for example, entering the Brazilian market, encountered a lot of drivers who didn’t have bank accounts, so Didi entered the financial services market. These are minor examples of how their webs are spreading, suggesting potential for a large speculative element to investments in these consumer-facing companies.
Then too, there is the intense data derived from passenger movements to help both Uber and Didi, among others in developing self-drive vehicles.
So don’t sign off on them just yet. But you’d have to think they’ll be more fragile than most if there is a sizeable fall off in business and consumer confidence. They will no doubt be hoping the holy grail of market dominance can be achieved before that happens.