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Chinese e-commerce titan Alibaba, WeChat-parent Tencent, and a small handful of automakers have formed a joint venture (JV) that will offer ride-hailing services in China, according to Reuters.

The logo of Alibaba Group is seen inside DingTalk office, an offshoot of Alibaba Group Holding Ltd, in Hangzhou, Zhejiang province, China July 20, 2018. Picture taken July 20, 2018. REUTERS/Aly Song Reuters

The companies will pour $1.5 billion into the newly formed company but didn't disclose when they planned to officially start offering ride-hailing services.

The JV is the third new entrant into the colossal Chinese ride-hailing market in the last several months. In February, a startup backed by Ant Financial — Alibaba's financial services arm — launched a ride-sharing service akin to Uber Pool, and last fall BMW was granted a license to operate a ride-hailing service in a city in southwest China. This trio of new entrants are seeking to tap a massive market: Bain & Co. estimates that China's ride-hailing market is worth $23 billion, making it the largest in the world. The landscape is currently dominated by behemoth Didi Chuxing, which accounts for 90% of China's bookings, but new entrants are right to believe that China's ride-hailing market still holds significant potential.

Here's what makes China an attractive market for ride-hailing companies:

  • China needs new ways to navigate its rapidly urbanizing landscape, but its public transportation infrastructure is not keeping pace. Over the past few decades, the population of China's cities has exploded. The Chinese government initially responded by pouring hundreds of billions of dollars into subways, rail lines, and other mass transit systems. But more recently, its priorities have changed — the government now wants to slow down investment in mass transit to curb deficit spending. With no end in sight to urbanization, consumers need more mobility options in the absence of improved public transit. Ride hailing is well-suited to help address that demand.
  • Many Chinese cities are dense and difficult to navigate, which can make private car ownership challenging. In Shanghai, for example, 26 million people live over a 13 square mile radius, making it one of the densest cities in the world. In comparison, New York City is home to about 8.6 million people over a 302 square mile radius. In environments where space comes at a premium, finding and paying for parking — plus the headache of navigating congested streets — makes ride hailing an attractive alternative to owning a car.
  • China's already-massive ride-hailing market still has room to grow. A Deloitte Insights survey from earlier this year found that over two-thirds (69%) of Chinese consumers rarely used ride-hailing services, while another 17% never used ride-hailing. This demonstrates there are still large numbers of first-time Chinese consumers for ride-hailing providers to tap, and far more they could develop into more-regular users.

Alibaba and Tencent's new JV can succeed by utilizing its parent companies' troves of consumer data to drill down into the most lucrative portions of the Chinese ride-hailing market. The colossal user bases of Ant Financial's Alipay (1 billion users globally and about 700 million in China alone) and Tencent's WeChat (north of 1 billion global daily active users) give Alibaba and Tencent access to huge amounts of consumer data, such as consumers' frequent locations and daily mobility habits. Their ride-hailing JV could analyze such data to predict where ride demand will be particularly high and direct cars in its fleet to those locations, minimizing customers' wait times. In order to execute this successfully, however, the JV will have to recruit enough drivers to satisfy high levels of demand. The road ahead is a challenging one, but the Chinese market appears a suitable target for Alibaba and Tencent's ride-hailing ambitions.

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