In recent years, two online service giants have emerged in China to dominate their respective industries. Meituan-Dianping has maintained a firm hold on the online food delivery sector, while Didi Chuxing retains 90 percent of the country's ride-hailing business, having acquired Uber's China venture back in 2016. Now, however, the two companies have each thrown down the gauntlet, challenging the other for a stake in their main business.

As early as February 2017, Meituan-Dianping quietly unveiled its ride-hailing services in Nanjing. Shortly after, the online platform previously known for ordering food, buying tickets and making reservations opened a special access for this new business line on the Meituan-Dianping mobile application in targeted cities including Beijing, Shanghai, Chengdu, Hangzhou, Wenzhou, Fuzhou and Xiamen.

Meanwhile, Didi Chuxing has shown increased enthusiasm toward the online food delivery sector. In 2015, the world's largest ride-hailing platform made a strategic investment in Ele.me, the archrival of Meituan-Dianping in food delivery services. Last December, media reports began to emerge suggesting that Didi Chuxing had been secretly committed to research and development in preparation to enter the online food ordering business and on April 1, the company formally launched food delivery services in Wuxi, east China's Jiangsu Province.

In reference to the competition between the two Internet giants, CEO of Meituan-Dianping Wang Xing noted that once conflict breaks out, it will not be a battle but a war. Cheng Wei, CEO of Didi Chuxing, responded that Didi is ready for the fight.

Head-on collision

Just a day after Didi's food delivery services debuted in Wuxi, it was withdrawn due to technical failure, which was widely believed to be the result of underestimating the technological barriers associated with the transition. When it resumed operation on April 9, more than 334,000 orders were placed on the platform, according to the company. Before long, however, consumer complaints of delivery delays began to spill forth.

Many experts believe that the integration of online food delivery and ride-hailing is a brilliant innovation, the success of which has already been proven by Uber, with whom Didi once had a bitter rivalry in China.

In 2014, Uber unveiled its online food delivery services in the United States and so far, Uber Eats has spread into roughly 29 countries at a rate even faster than its core ride-hailing services, with its turnover accounting for about 10 percent of the global food delivery industry.

Yet, if Didi is to enjoy the same level of success transitioning into the food delivery business, it has to upgrade its calculation technology for an industry that involves more people, locations and uncertainties than ride-hailing. And since the Chinese market has already been carved up and occupied by heavyweights like Meituan-Dianping and Ele.me, Didi is confronted with brutal competition in which cash burn seems inevitable.

A similar plight is faced inversely by Meituan-Dianping in its attempts to conquer ride-hailing.

Shortly after rolling out its ride-hailing services in Shanghai on March 21, Meituan-Dianping captured the attention of the whole industry by posting impressive early figures—150,000, 250,000 and 300,000 rides in its first three days, respectively. By late March, Wang announced that Meituan-Dianping had seized one third of the market in the places where it had started operating.

Yet these seemingly remarkable results come at a cost. When it began offering ride-hailing services, Meituan-Dianping provided a guaranteed income of 600 yuan ($94) to drivers who were available for 10 hours at a time and handled 10 orders during a shift. For the first three months, drivers are able to use the mobile application commission free. And Meituan-Dianping only charges an 8-percent commission from the outset of the fourth month.

"We have set aside $1 billion to fight the war," said Wang.

"The past development of the ride-hailing sector indicates that cash burn is not sustainable and will load companies with heavy burdens by overdrawing their financial strength, which will ultimately harm the interests of consumers," said spokesperson for the Ministry of Transport Wu Chungeng, who noted that granting high subsidies to drivers breeds a series of problems such as fraudulent transactions and fake license plates. They also risk undermining market equity, competition order and the healthy development of related companies and the entire industry.

Service quality first

"Subsidies are a measure which helps companies scramble for a market share at the preliminary stage. The prices will eventually return to a normal level, and then subsidies will only be employed occasionally," Yu Mu, an analyst with Analysys International, told The Beijing News.

According to Yu, Meituan-Dianping was able to gain a market share in such a short period of time primarily due to high subsidies. But with an unsustainable level of discounts and subsidies set to gradually dwindle, comprehensive strength is what companies should count on in the long run.

"The employment of subsidies depends on how fierce market competition is," said Xu Chen, a partner of Gobi Partners, a venture capital firm specializing in information technology and digital media investments, noting that after initially grabbing customers through discounts and coupons, the companies then need to focus on boosting operations and maintenance.

"Generally speaking, Internet companies have relatively strong online operation and innovation ability and are apt to expand their online businesses with no boundaries. However, their offline operation ability is quite weak in most cases," Guo Xin, co-founder of Shanghai-headquartered consulting firm Pegasus Brigade, told China Economic Weekly.

By virtue of its existing systems of geographical information, online settlement and customer management, Meituan-Dianping only needs to add a new channel on its application to launch its ride-hailing services. When it comes to offline operations, however, the management of drivers and leasing companies comes at a high cost, which requires much more input than online operations.

Liu Run, Chairman of Runmi Consultancy, believes that if the market is monopolized by a single company, it will wield absolute pricing power. In the online food delivery sector, Meituan-Dianping is closely followed by Ele.me, which prevents the former from throwing its weight around.

"However, Didi dominates the ride-hailing market unopposed in China. The challenge posed by Meituan-Dianping will eat into some of the profits monopolized by Didi and stimulate competition, which will eventually benefit consumers," said Liu.

Copyedited by Laurence Coulton

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