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China tech

China's ride-hailing king DiDi faces uphill battle in Russia

Protectionism and fierce competition await the onetime Uber-slayer

MOSCOW -- China's ride-hailing giant DiDi Chuxing is preparing to make its debut in Russia, the latest step in the company's ambitious global expansion -- but one that experts say is unlikely to be easy, citing established local competitors and protectionist attitudes.

DiDi has begun recruiting drivers in the southwestern city of Kazan, offering applicants earnings starting from 3,000 rubles ($41) per shift, surcharges for every order, and a commission rate of only 10%.

Sources within the Russian taxi industry expect DiDi to launch in Kazan as early as this month (August), Russian business daily RBC reported in July. From there, the company is looking to expand its operations to Yekaterinburg, Nizhny Novgorod, Moscow, and St. Petersburg before the end of the year.

A DiDi spokesperson told the Nikkei Asian Review that the firm "is currently exploring the Russian market but has not made any formal announcement on its business plans."

DiDi has been signaling its interest in the Russian market for over six months. The company registered a legal entity in Russia in the final days of last year. Russia's sovereign wealth fund, which is an investor in DiDi, announced in late January that the Chinese ride-hailing giant was looking at establishing a presence in Russia.

Jeffery Towson, a private equity investor and professor of investment at Peking University in Beijing, told Nikkei that DiDi's expansion into Russia would be the company's latest move toward becoming the world's leading taxi aggregator app.

"Keep in mind, DiDi dwarfs Uber and all other ride-sharing companies in terms of rider and driver volume," he said. "They have over 95% of the China market and state they are profitable. You don't want to compete with the world's ride-sharing giant."

Since defeating Uber for control of the Chinese market in 2016, DiDi has launched operations in Japan, Australia, Mexico, Chile, and Colombia. It has also bought a controlling stake in 99, the largest ride-hailing app in Brazil, and invested heavily in Singapore's Grab. The company now boasts 550 million users in over 400 cities.

For DiDi, Russia offers a large base of potential customers. A study last year by HSBC bank found that 45% of Russians have downloaded one or more ride-hailing apps on their smartphone, making Russia third after China (51%) and Mexico (46%) in terms of the prevalence of such apps.

But experts warn that despite DiDi's impressive financial resources, the company will have a difficult time outmaneuvering strong local competition.

Mikhail Blinkin, head of the Institute for Transport Economics and Policy at the National Research University Higher School of Economics, explained that DiDi is unlikely to succeed in waging a price war against its Russian rivals, since fares in metropolitan areas such as Moscow and St. Petersburg are already very low.

"Compared to foreign cities or the way things were five years ago, Moscow nowadays has very charitable prices for taxi rides," he said. "If you go any lower, then you start running below service costs, since at the end of the day, gas in Moscow has a certain price and you have to pay drivers a certain amount."

DiDi would not be the first foreign company to attempt conquering the Russian taxi market using its vast financial resources. Uber launched in Russia in 2014 with a plan to acquire market share with the help of low prices. That gambit failed. Just three years later, Uber was forced to exit Russia and ceded its operations in the country to Yandex.Taxi, Russia's largest ride-hailing service.

Yandex.Taxi has 27% of the Russian taxi market, according to the Analytical Center of the Russian government. As a project by Russia's leading search engine, Yandex.Taxi has risen to the top with the help of its parent company's financial backing and sophisticated mapping technology.

Protectionist attitudes are another potential obstacle to DiDi's Russia expansion. Shortly after reports of DiDi's upcoming launch in Russia surfaced, pro-Kremlin lawmaker Anton Gorelkin called for "protectionist measures" against the Chinese ride-hailing giant.

"Obviously, DiDi will severely dump in Russia -- scorching the field of its competitors," he wrote in a post on the Telegram messaging app. "Chinese businessmen have enough resources for this. DiDi has more than 400 million customers in China, and their financial base allows them to reduce prices below any sane threshold. They will bite off a very large chunk of the market ... maybe too big."

Gorelkin also expressed concern that a "foreign company of this magnitude will receive the personal data of tens of millions of Russian citizens," a prospect which he described as unprecedented and "very alarming."

Russia and China have significantly expanded their political, economic, and military cooperation over the past several years. Yet despite the increasingly friendly relationship between the two countries, Chinese companies are not always able to escape protectionist pressures in Russia, explained Alexander Gabuev, a senior fellow at the Carnegie Moscow Center.

"The [Russian] government understands that competition is good for developing the digital economy to some extent, but it wants to ensure that it is primarily driven by local actors," he said. "So they might allow a foreign service, but in DiDi's case it is not a unique service."

Gabuev argued that if DiDi wants to establish itself in the Russian market, its best hope is to form an alliance with a major local player. Several Chinese tech companies have already successfully implemented this strategy. In October 2019, Alibaba and internet giant Mail.ru Group launched a $2 billion joint e-commerce venture in Russia and several other former Soviet republics.

Earlier this year, Huawei partnered with Sberbank, Russia's largest bank, to develop a cloud platform aimed at Russian businesses.

DiDi, however, is likely to have a harder time finding interested partners in Russia than either Alibaba or Huawei did.

"From the perspective of local players, DiDi doesn't bring anything that they don't already have except vast financial resources and the ability to do discounts," Gabuev said. "So, I think Didi will find itself in a pretty tough spot."

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