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Here's Why Didi Chuxing Is Raising Prices

By Chris Neiger – Jul 13, 2016 at 10:28AM

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China's largest ride-hailing service may be increasing its rates because of investor pressure, or simply because it's no longer feeling threatened by Uber.

Image source: Getty Images.

Didi Chuxing is the largest ride-hailing service in China. The company has drivers in 400 cities across the country, 300 million users, and provides 14 million rides every day. Yeah, it's big. 

That's why when reports started coming out that Didi was raising prices, it was kind of a big deal. In some places, the fares went up by one-third. 

It's not unique for a company to raise prices for its services, of course. But doing so marks a shift in a long-term strategy for Didi.

Didi Chuxing is increasing rates

Though Didi has the dominant ride-hailing service in China, it's not the only one wooing riders. Uber says it holds one-third of the ride-hailing market in China (though Didi would dispute that) and has been aggressively spending money to expand in the country. Last year the company said it lost $1 billion building out its services in China. 

The battle for market share previously locked Didi and Uber into a pricing war. That lead Didi to charge less for ride fares than what the ride actually cost, essentially subsidizing them. That helped Didi grow its business and made the rides even cheaper than some taxi services. 

But Didi made it clear this week that the subsidy days are over now. The company said, "We are rid of subsidies in many cities and price our products to market levels," the Financial Times reported..

The company didn't elaborate on why it's no longer fighting the fare wars, but there are two explanations that are very likely. 

Why Didi is charging more

The first is that Didi may be facing some pressure from investors to start profiting from its ride-hailing service. 

Didi has many other transportation services, but its ride-hailing app is its main moneymaker. But the company has spend about $4 billion in China last year and is still not profitable (though the company says it's close). It's pretty normal for start-ups to lose money while they grow, but at 300 million users, Didi is pushing the limits of that idea. 

The company just received $7.3 billion in funding from its latest investment round last month, at a valuation of $28 billion.

Key investors in the latest round include $600 million from China Life Insurance (one of the biggest insurance companies in China) and a $1 billion investment from Apple. Didi has received money from other major investors over the past few years as well, including Tencent Holdings, Alibaba, and others.

It's possible these investors may be be strongly encouraging Didi to raise rates. But even if they're not, the company is already in a good position to do so.

Didi says it has about 80% of the ride-hailing market in China, about $10.5 billion in disposable funds, and hundreds of millions of users. It's hard to argue for the company keeping its subsidized fares when you add all that up. 

There are certainly going to be some Didi Chuxing users who aren't happy with the price increases. But Didi has more investors to answer to than ever before and needs to start losing less money and bringing in more revenue. As long as the company doesn't lose a massive amount of customers, higher prices should start paying off soon.

And if that doesn't work, we may end up seeing another pricing war spring up all over again.

Chris Neiger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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