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What Scrutiny Against Didi Says About Chinese Regulators?
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China's regulators allege that Didi illegally collects users' data and has ordered app stores to stop offering its app on Sunday. The development comes days after Didi's IPO on the New York Stock Exchange, rubbing off 11% of its 67.5 billion USD market value.

Didi Global, the Chinese Uber, had hit a potential hitch two days after its debut on the New York share market on Wednesday last week. The CAC, Cyberspace Administration of China revealed a national security-related probe into the ride-hailing giant.

The news rubbed off 11% of Didi’s 67.5 billion USD market value (73 billion USD valuation on a fully diluted basis). Another two days later, the Chinese cyberspace agency stated that the company couldn’t add new users during the investigation.

The Chinese clampdown on Didi comes as regulators alleged that the company has illegally collected users’ data. Let’s read on to know more.

The Investigation

On Sunday, the Chinese Cyberspace regulator stated that it had ordered app stores to stop offering Didi Global Inc mobile app after finding that the ride-hailing company had illegally collected its users’ data.

The CAC had also told Didi to make changes to comply with China’s data protection rules four days after Didi started trading on the New York Stock Exchange. The company raised 4.4 billion USD in an IPO, in what was the biggest listing in the US by a Chinese entity since Alibaba’s 2014 debut (1). 

“After checks and verification, the Didi Chuxing app was found to be in serious regulation violation in its collection and use of users’ personal data.”

Notably, the CAC didn’t specify Didi’s violation nature in its statement on its social media feed. But, the investigation announcement prompted Didi’s shares to drop. 

Didi promptly responded by saying that it had stopped registering new users and would remove its application from app stores. It also added that it would make changes to comply with the regulations and protect users’ rights. 

The removal would not affect existing users but will prevent new users from registering on the nation’s most prominent ride-hailing platform.

“The company will strive to rectify any issues, improve its risk prevention awareness and technological capacities, protect users’ data security and privacy, and continue to offer convenient and secure services to its users,” said Didi in a statement (2). 

Didi, which operates in China and over 15 other countries, collects massive real-time data every day. It uses some of the information for autonomous driving technologies and traffic analysis. 

Didi had made its trading debut on Wednesday last week, in an initial public offering that valued the company at 67.5 billion USD, well down from the 100 billion USD it had hoped for, which potential investors had resisted (3). 

Notably, China has been getting tough on its domestic technology giants over data security and antitrust concerns. 

According to Kirk Boodry, a director at Redex Research, who publishes on Smartkarma, “the CAC move seems aggressive. It indicates that the process can take a while, but they have a huge installed base; hence the near-term impact is likely benumbed for now. (4)”

Adam Segal, Foreign Relations’s cybersecurity expert in New York, stated that while it is hard to know what is going it without much detail, “CAC is looking at all large companies’ data as a part of a clampdown on big tech. (5)” 

 

China Suspends Didi App Downloads 

The removal of its app from app stores had been a major blow to Didi. The announcement effectively needs China’s largest app stores operated by Apple, Huawei, and Xiaomi to strike Didi from their lists of offerings.

The Chinese internet regulators’ surprise investigation and rapid decision add another scrutiny over Didi, who has been grappling over several issues for quite some time. 

As noted, Beijing has been curbing the growing influence of its domestic largest internet corporations, increasing its efforts to tighten the grip and handling of troves of information that online powerhouses from Alibaba Group Holding Ltd to Tencent Holdings Ltd and Didi gather daily from hundreds of millions of users. 

While CAC did not specify what it will look like, the announcement’s timing is significant considering the heels of Didi’s IPO and the Communist Party’s 100th-anniversary celebrations. 

Didi, which appointed 20 advisors, including Goldman Sachs, Morgan Stanley, and JPMorgan, for its IPO, is one of the single largest investments in SoftBank’s portfolio. It had defeated Uber in China in 2016 before embarking on its ambitious international expansion. 

Didi had also been exploring new businesses, from car repairs to grocery deliveries, for a while now, which served it well during the pandemic. When the cities worldwide came to a halt, the company had delivered an 837 million USD profit in the March quarter, a rarity among recent high-profile IPOs such as Kuaishou Technology.

The Didi app is still working in China for users who have already downloaded it. It offers more than 20 million rides in China every day. 

Notably, Didi had flagged China’s regulations in its IPO prospectus and stated, “we follow strict procedures in collecting, storing, transmitting, and using user data according to our privacy and data security policies.”

A notice on Didi’s Chinese app indicated that it had updated its user information and data privacy policy on 29th June, a day before its trading debut. In a statement to Reuters, Didi described the move as a “regular update” after adding two new services under its chauffeur business on the app. 

Nonetheless, the Chinese government’s latest move against Didi underscores the uncertainty around their crackdown on the internet sector. Earlier this year, China’s Administration for Market Regulation announced that it was looking into alleged abuses, including forced merchant exclusivity arrangements at Meituan, which came days after it raised 9.98 billion USD from a record share placement and convertible bonds sale (6). 

 

Didi’s Previous Regulatory Probes

It is not the first time Didi, founded by Will Cheng, has been subjected to Chinese regulatory probes.

Below are some Chinese authorities’ investigations into Didi’s operations (7). 

Data Security

Last week, the Chinese cyberspace agency alleged that it had launched an investigation into Didi to safeguard national security and prevent data security-related risks. It also stated that Didi was not allowed to register new users while the investigation is ongoing. 

Antitrust

In June 2021, the Chinese market regulators had fined Didi multiple times for not reporting merger and acquisition details to the officials. According to sources, the ride-hailing giant is facing an antitrust probe over whether Didi used anti-competitive behaviors to drive out small competitors.  

Operation Licenses

In 2020, several local city authorities in China asked Didi to suspend its new standalone ride-hailing service, Huaxiaozhu, citing a lack of operating licenses for the company in their areas. Shanghai city transportation authorities have also fined Didi several times in the past for hiring drivers with no appropriate license to work in the city.

Safety

In 2018, Did was urged by the Chinese transportation ministry to rework its safety process after two rape and murder cases related to its drivers. Didi waved its Hitch service and billions to add more staff and improve its overall safety standards. 

These regulatory scrutinies Didi faced since 2018 are well reflected in its lower market value of 67.5 billion USD in its IPO, which is barely up from its last funding round in 2019, and far short of the 100 billion USD bullish expectation. 

 

Didi Shares Drop 

Didi’s share had tumbled 7% to 15.26 USD on Friday after the Chinese regulator started a probe into the company.

Notably, Didi lost as much as 11% of its initial market value at one point on Friday. 

The company, which was among 34 internet giants ordered by Chinese regulators in April to correct “excesses,” cautioned in a regulatory filing that it could not assure investors that authorities officials would be satisfied with its efforts or that it would skip penalties. 

On Saturday, Li Min, Vice President of the company, hit out at a “malicious rumor” that the ride-hailing platform had sought an overseas listing to turn data over to the United States. He said on a Weibo post that Didi stores all user information on domestic servers and would never hand over any information to the United States, adding that the firm has planned to sue the person who started the rumor (8). 

Moreover, the news also led to shares of other China-based tech companies sliding in the Hong Kong market as investors took a step back to gauge the impact. 

Tencent, which has a stake in Didi, dropped as much as 4.2% in Hong Kong, erasing its year-to-date gain. Meituan, ordered by the Chinese antitrust watchdog to rectify practices in May this year, lost 5.9%, while the Hang Seng Tech index dropped as much as 2.4% to its lowest since May. 

According to Mattew Kanterman, a Bloomberg Intelligence analyst (9), it is clear that there is a regulatory overhang on the Chinese tech giants at the moment, and it may continue to weigh on the sector’s valuation.

The sector is also meeting increasing selling pressure from technical traders after the Hang Seng Tech Index reached a bearish signal, named a death cross when its 50-day moving average slipped below the 200-day moving average in May. 

“The new challenges on user privacy and data security, its ownership, and use is the biggest question since its monetization is the key to these companies’ revenue,” explained Joshua Crabb, a senior portfolio manager at Robeco in Hong Kong. “If it becomes a risk, the revenue and therefore stock price impact can be much more dramatic than the antitrust penalties we have witnessed so far.”

While lauding China’s scrutiny of Didi in a Monday commentary, the Global Times stated that Didi’s hoard of personal information poses a threat to user privacy and national security (10). Also, earlier today, the Chinese watchdog announced that it had started cybersecurity reviews on several hiring and cargo platforms (11). 

 

The Probe is Only The Start of Didi’s Troubles

Founded in 2012, Didi is particularly popular in China’s crowded cities. Over the years, the platform similar to Lyft and Uber has expanded beyond China into 15 other markets. 

In June, the company had reported a revenue of 6.25 billion USD for the three months to the end of March, with the majority of that coming from its Chinese mobility business (12). 

The Chinese regulators are following crackdowns on its domestic tech companies, including Alibaba and Meituan. 

Moreover, the CAC also said earlier today that it plans to investigate FTA, Full Truck Alliance, a Chinese truck-hauling company. Like Didi, FTA recently went for an initial public offering on the New York Stock Exchange, raising 1.6 billion USD. It had a market valuation of about 20 billion USD at the end of the trading on Friday.

In an interview for the BBC series Asia’s Tech Titans back in 2018, Wei Cheng said, “we are born in China, but we hope to be an international company. We hope to be able to solve the world’s traffic and transportation issues.”

One thing which was apparent from the interview was that Cheng Wei was a man on a mission. He is looking to take the company globally and offer a new vision of what a data-driven company can make possible (13). 

Didi’s much-anticipated public debut displayed that huge ambition last week. However, China’s environment today is very different from 2018.

There is tighter scrutiny now, both inside and outside of China, on domestic tech companies. And Didi’s trouble comes against the backdrop of a broader crackdown on Chinese tech by authorities in the country. And as several analysts point out, the crackdown could be politically motivated as Beijing imposes more control on the dynamic industry.

It means for both Didi and other China-based tech companies that it is likely to be the start of their troubles. There could be more questions from investors from the regulatory outlook for those looking to list in the United States, which can mean an uncertain and difficult time ahead. 

 

History of Didi

The former Alibaba employee Will Wei Cheng co-founded Didi, who currently serves as the CEO. Jean Qing Liu, a former Goldman Sachs banker, joined Cheng and currently holds the President position in the ride-sharing firm. 

Didi counts SoftBank, Uber, and Tencent as its primary backers. 

The company is also known for successfully pushing Uber out of China after the US-based company lost a price war and sold its China operations to Didi for a stake. Liu Zhen, Uber China’s head at the time, is Didi’s Liu’s cousin (14).

It is also worth mentioning that while Uber had previously bowed out to Didi, the recent debut has gained Uber a handsome worth of over 8.1 billion USD for its 12% stake. The deal had left Uber with a 20% stake in its rival; however, it had been selling some of its shares in the run-up to the IPO, reducing its holding to about 12%.

Even though Didi is dominant in the world’s second-largest economy, its momentum in the country has started to slow. According to Didi’s US filings, the company plans to use its IPO funds to invest in technology, increase its footprints in the international markets, and introduce new products. 

 

Wrapping Up

While the drop of market value is a concern for investors now, the long-term question, as we discussed, is what to read into the timing. As the industry experts put it, it could be one way for the Chinese Communist Party to show it is still relevant (15). 

It is almost as if the Chinese larders can not bring themselves to hinder most entities from listing in the US as it effectively did with Alibaba’s Ant, but wants to send a word.  

“It doesn’t matter how much capital is secured, 4.4 billion USD in Didi’s IPO, and however wealthy it becomes on paper, it is still beholden to the CPP,” says Richard Beales, a columnist at Reuters Breakingviews

Claiming a clampdown on anti-competitive practices among Chinese tech giants, Beijing has ramped up a broader effort to clean up the operation of its fast-growing and freewheeling technology industry. 

Chinese authorities are calling out tech companies every week for alleged offenses, such as inconsistent pricing, difficult working conditions, privacy concerns, etc., as reported by The Wall Street Journal.

Beijing is also infamous for using anti-monopoly rules to restrain the foreign companies’ market influence. In April, regulators had imposed a 2.8 billion USD fine on Alibaba, stating that it had abused its dominating position by engaging in a controversial practice. 

Chinese authorities also called out to the country’s citizens to help supervise the tech companies’ behaviors. Businesses have answered with undertakings to be good corporate citizens (16).

But the situation can’t last forever, can it? 

One sure thing is China unabashedly pumps capital into its commercial sector. There are numerous stories of local and national government agencies subsidizing rent, labor and offering cheap business loans (17). 

These government agencies also skew the playing arena in favor of local businesses against foreign competitors, as in the case with Uber. While only some businesses profit, as long as the Chinese government is propping these companies up, they will continue to exist.  

However, the overbearing attitude to tech firms, combined with attractive incentives, is a dangerous cocktail. While the growth story of China’s digitalization is impressive, it won’t be sustainable amid persistent government interventions. 

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Rucha Joshi, currently managing a team of over 20 content writers at TimesNext is fueled by her passion for creative writing. She is eager to turn information into action. With her hunger for knowledge, she considers herself a forever student and a passionate leader.

Disclaimer: The views, thoughts, and opinions expressed in the article have been curated for our audience and does not warrant a 100% accuracy. All the information mentioned in the article is subject to change according to the changing viewpoints. Feel free to reach us at [email protected] for any change or copyright issues.

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Team Rucha Joshi
Team Rucha Joshi
Rucha Joshi, currently managing a team of over 20 content writers at TimesNext is fueled by her passion for creative writing. She is eager to turn information into action. With her hunger for knowledge, she considers herself a forever student and a passionate leader.

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