Didi Chuxing's Biggest Hurdle: Regulations

By Markets Fool.com

Image source: Getty Images.

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Didi Chuxing is a ride-hailingbehemoth in China. The company currently boasts ride-hailing services in 400 cities across the country, has more than 300 million customers, and delivers 14 million rides every single day.

On top of its business successes, Didi raised $7.3 billion in one of its most recent rounds of funding, which includeda $1 billion investment from Apple.Then, just one month ago, Didi knocked out Uber's competition in China by buying up the company's assets in the country, which brought Didi's valuation to about $35 billion.By all accounts, it has seemed nothing could stop Didi from growing its ride-hailing business even more.

But some of the company's recent success could be overshadowed by new reports that major Chinese cities are considering strong regulations in the ride-hailing market.

Beijing, Shenzhen, Shanghai, and several other cities are looking to restrict the size of vehicles Didi Chuxing drivers can have, some want emergency buttons installed in vehicles for passenger safety, and the cities want only local residents to be able to be hired as drivers, according toThe Wall Street Journal.

Many Chinese cities have traffic congestion problems and part of the regulations are aimed at reducing the number of cars on the road. The regulations would also make it easier for taxi services to compete with Didi because the proposed rules would most likely force Didi and its drivers to raise their prices.

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According to the company, "Millions of online ride-hailing drivers may be about to lose their jobs and paychecks, which would mean millions of families may lose an important income source." Didi said most of its drivers would be forced to stop working if the regulations were put into place, because they don't live where they work.

Where Didi goes from here

The regulations proposed by the cities are just draft rules right now, so nothing is final. It's likely that Didi will fight the regulations, or at least try to have them modified before they're set.

Despite the fact that new rules are likely on their way, I doubt they'll significantly impact Didi's business in the long run. Didi is the biggest ride-sharing company in China and will be even bigger if the government approves Didi's purchase of Uber's business in China. The company simply can't expect to have that dominant position and not be forced to adhere to some regulations.

China just made ride sharing legal over the summer, and Didi shouldn't have been caught off guard to the fact that that meant regulation was on the way, in some form or another.

That's not to say the regulations couldn't hurt its business in the short term. Forcing drivers to have local residency permits and requiring cars to be a certain size with emergency buttons installed for riders would certainly drive up costs. But Didi's influx of funding from its investors and its leadership position in China's ride-hailing market should be more than enough for the company to weather this regulation storm.

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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. Try any of our Foolish newsletter services free for 30 days. 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.