This story appears in the October 18, 2015 issue of Forbes Asia. Subscribe to Forbes Asia
By Liyan Chen and Ellen Huet
Like thousands of white-collar Chinese, Cheng Wei used to find hailing a taxi a big headache. The eight-year
So three years ago he left Alibaba to enter China's nascent car-hailing app market. It was chaotic, with dozens of choices for summoning taxi service as software developers fought over a Chinese middle class newly armed with smartphones.
Cheng's app, Didi Dache, was not an immediate hit. He and his team spent 40 days pestering drivers at airports and train stations in cold weather just to sign on to their first taxi company. It took a November 2012 snowstorm in Beijing, which trapped a clientele-in-waiting, to push the app into the mainstream. Then, energized with a $15 million investment from Internet giant Tencent, Didi managed to shove aside most rivals. By 2014 only one worthy competitor remained: the Alibaba-backed Kuaidi Dache.
[Full feature story: World War Uber: Why The Ride-Hailing Giant Can't Conquer The Planet (Yet)]
While Didi and Kuaidi fought to be No. 1 by blowing hundreds of millions of dollars on subsidies to undercut each other's prices, a black car quietly crept closer in their rearview mirror. Uber's CEO Travis Kalanick has his eyes set on conquering China, building a local affiliate and investing $1 billion. "Chinese cities, more than any other cities around the world, need Uber," he wrote in a letter to his backers.
Facing a cash-rich invader, the two domestic leaders had to rethink their brutal war. Thus began months of negotiations, in which Cheng and Kuaidi founder Dexter Lu secretly met for beers at locations like a remote barbecue joint and talked about the pressure they felt. There was "a lot of insecurity, a lot of guessing, a lot of worries for the future," Cheng says. The two companies finally announced a surprise merger on Valentine's Day in 2015. "Vicious competition could delay our progress and waste resources," Cheng said at the time.
[See also: Uber Wants To Conquer The World, But These Companies Are Fighting Back: Map]
Cheng admits the necessary merger between two heated rivals wasn't easy. At the beginning a few members on his team complained; others even cried. But no top executive from the original Kuaidi core management team has left the company since. "This is the most successful merger in China's Internet history," Cheng boasts. (Lu, who was named co-CEO in February, rarely speaks to the press.)
As he was working toward the merger, Cheng recruited a key part of his group. Jean Liu had spent 12 years with Goldman Sachs in Hong Kong when she was invited along on a Didi executive retreat to Tibet. The wooing worked--Cheng claims it was "love at first sight"--and today Liu is president of the merged Didi Kuaidi.
Liu's formidable fundraising abilities have filled Didi Kuaidi's coffers: She pulled in $2 billion in three weeks and has added another $1 billion in the round, now the biggest ever for a private tech startup globally and equal to a $16 billion company valuation. (There's a bit of family rivalry in play, too: Uber China's new director of strategy, Liu Zhen, is her cousin.)
Operationally, Didi Kuaidi's first order of business was to move beyond the taxi roots and emulate Uber's model whole cloth. Using rider coupons and driver subsidies, Didi Kuaidi boosted its private car service, which now makes up 40% to 50% of trips, Liu says. The mother of three says her own experience showed her the huge demand for private cars in China. "When I first moved back to Beijing three years ago, I got on the street with my three young kids and I just couldn't get a car. And if I did luckily get a taxi, there's no seat belt in the taxi," she says.
With the Uber battle on, subsidies have remained a potent if draining weapon. Both Uber and Didi Kuaidi know they'll have to phase them out eventually if they want to reach profitability. In recent months the companies have been warily cutting them by better than half. Many angry drivers quit or switched services. "Drivers go wherever there are more subsidies," says a fellow named Min, who runs a 100-plus car fleet for Uber in Guangzhou. Six months ago his drivers easily made 20,000 to 30,000 yuan every month, but they now struggle to make 10,000 yuan--less than $2,000--and many are no longer active. "If it continues to be like this, there will be no drivers," he complains.
Cheng is confident that Didi's homegrown know-how will eventually prevail, subsidies or not. "We believe that local services know the best about local users and provide the best service," he says. The Jiangxi native, who still doesn't carry a driver's license, hopes that young Chinese won't need one, either. "It's impossible for China to be like America, where every family has their own car," he says. "We should focus on increasing efficiency for the cars and transportation system we already have."
Email Ellen Huet at ehuet@forbes.com and Liyan Chen at lchen@forbes.com. Find them on Twitter at @ellenhuet and@chen_liyan.
