(Yicai Global) Feb. 19 -- After Didi Chuxing posted a CNY2.6 billion (USD384 million) loss in 2017, expectations were rife that the world's largest ride-hailing provider would swing into the black in 2018. But its bottom line tumbled to a CNY10.9 billion deficit, baffling market participants about how the firm plowed through such vast amounts of cash.

Many believe that the latest loss was a result of the CNY11.3 billion Didi's operator Beijing Xiaoju Technology paid in subsidies to its drivers last year, but the chauffeurs themselves are adamant that their bonuses are not the reason for the company's misfortune.

Late 2014 through to mid-February 2015, that year's Chinese New Year, was a golden era for Didi drivers, who could easily pick up CNY10,000 (USD1,500) a month and rates triple that amount were not uncommon. China's average salary in 2015 was a little over CNY5,000 a month nationwide, according to official data.

But the cash stopped coming in 2016, when Didi drove American rival Uber out of China to become the country's top provider by a wide margin and ceased to require to win over drivers and users.

One factor that could be a driving force behind the losses is new regulations increasing the cost of compliance. Requirements governing drivers working for online ride-hailing providers are now much stricter, and go beyond just ensuring applicants do not have a criminal record.

Didi said in December that it would accelerate procedures to comply with the new rules and gradually reduce the number of orders dished out to illegitimate drivers before ceasing to provide them work at all. The firm has had to invest money to do so and issues larger subsidies to compliant drivers.

To drive legally for Didi, chauffeurs need three certifications. Drivers who possess all three will be first in line to receive orders, and the additional subsidies they earn may have been a large contributor to Didi's second-half loss last year.

Another factor is Didi's amplified investment on assets. In addition to buying cars and recruiting full-time drivers, the company has increased spending on self-operating vehicles over the past two years as it looks to become more compliant going forward. This contradicts Didi's earlier light-asset model which aimed to make use of idle capacity, a source close to the company told Yicai Global.

Streamlining Operations

After revealing plans to lay off around 15 percent of its workforce earlier this month, Didi founder Cheng Wei said at a monthly meeting on Feb. 15 that he intends to focus on Didi's core travel business this year and invest more on security and compliance. The firm also intends to shut down, suspend or merge its non-main businesses to streamline operations, he added.

Didi expanded quickly in 2015 -- possibly too quickly. When it merged with Kuaidi Dache in February that year it only offered taxi and ride-hailing services, but seven months later it had added ride-sharing and designated driver services, among others, to its portfolio.

"This year we added a new business unit every two months, becoming an absolute leader in each of those segments with the largest market share within just one month of entering the fields," Cheng told Yicai Global in September 2015.

Didi has expanded to run around 30 business units over the past six years, and while finding plenty of success, it has encountered a number of failures from which it has had to learn new lessons.

But this time, a major correction is needed, and the firm announced on Dec. 5 last year that it would be restructuring its most important departments and merging several of its main businesses.

"The restructuring is mainly for the safety of online ride-hailing services and to facilitate compliance management," a company source told Yicai Global, adding that Cheng has a high profit target for the new-look company this year.

Going Global

Despite the reshuffling, internationalization will be a key development for Didi. It plans to recruit 2,500 people this year in safety technology, product and offline driver management, global expansion and other fields, negating the layoffs and taking its headcount back to 13,000 -- the same as it was at the end of 2018.

While Uber has been withdrawing from its overseas markets, Didi's investments abroad are booming. It had been acquiring foreign counterparts until last year, when it began making direct investments into international markets. It and Tokyo-based conglomerate Softbank Group unveiled plans early last year to enter the Japanese market, and Didi also took over all equity in Brazilian taxi service provider 99 last year, 12 months after it first invested in the company.

Didi will evaluate each opportunity to determine whether it would be wiser to cooperate or compete with providers in foreign markets, according to President Liu Qing.

If Didi chooses to explore the new markets alone, it will need to deal with the same issues Uber faced when entering new territories directly, such as adapting to local policies and competing on the ground with local rivals, which can prove costly.

IPO Concerns

Didi is facing long-term uncertainty in terms of future capital, and needs to become leaner, a company insider told Yicai Global, citing Cheng's Feb. 15 speech. Raising cash had been the firm's main battle plan in taking on rivals at home in China, such as its mergers and acquisitions with Kuaidi and Uber.

Liu has been hailed as the hero behind Didi's fundraising efforts. One of the youngest ever managing directors at Goldman Sachs, she joined Didi in 2014 and was promoted to president barely a year later in February 2015, after which the company frequently hit the headlines for its financing efforts.

"Peace is made through fighting, not through talking," early Didi investor Zhu Xiaohu once said, adding that the financial threshold for peace is getting higher and higher, and if you have no cash, you have no hand to play.

Cheng believes Didi is building a mobile travel ecosystem, something no company has done before. But blazing a trail needs funds to support the development of technology and new business lines.

"There is always competition in subdivisions of the personal mobile transport sector, but Didi is the only one-stop platform right now," Liu told Yicai Global. "Not everyone has the confidence to build a one-stop service, because such confidence requires money. It's hard to form the world's biggest one-stop platform without cash."

Money has been a key factor in Didi's rise through the ride-hailing market. Despite being a latecomer to the sector, its vast coffers have enabled it to surpass rivals by offering out huge discounts to win over market share before intensifying operations.

But the firm is going to have to explain to investors where its money is going if it wants to raise more cash, and will need to tighten its purse strings if it wants to have a more stable future in terms of raising capital.

Rivals Uber and Lyft are planning to go public in the first quarter of this year, which piles on the pressure for Didi to list to ensure its cash reserves remain up to scratch. The Chinese firm missed its chance to float last year after two of its ride-sharing passengers were murdered by drivers and regulators stepped in to force the company to shape up.

Didi is planning to re-launch its ride-sharing business, but will be entering a pessimistic market still concerned about the service that claimed two lives.

Editor: James Boynton