Why is the Chinese Ridesharing Company Didi in Big Trouble?

China has decided to crackdown on big tech and their collection of personal data and digital security, will this effect Didi?

(image credit: foxbusiness.com)

What is Didi?

Didi is a multi-million dollar ride-hailing company in China. Founded in 2012, it has grown to be the largest ride-hailing app in China, controlling over 90% of the Chinese market. It has received backing from Softbank and Tencent. Uber has also sold its Chinese business to the company in 2016 and still retains a 12.8% stake. Didi was founded and is led by Alibaba veteran Will Cheng, who most recently worked as vice president of the e-commerce behemoth's Alipay payments platform. While based in China, Didi also operates across 15 countries and about 4,000 cities, counties, and towns. It’s a significant player in the ride-hailing industry all over the world.

(image credit: cnbc.com)

IPO

Didi priced its IPO last week at $14 a share, giving the company a valuation north of $67 billion. The firm raised $4.4 billion through the offering in the largest IPO of a Chinese company in the U.S. since Alibaba's (BABA) $25 billion listings in 2014. This turned out to be a modestly successful IPO for the company, however, Didi faces multiple vital problems.

Didi’s upcoming challenges

Didi has cited a $3.9 trillion mobility market opportunity by 2040 in China, and average daily transactions totaled 41 million in 12 months ending in March 2021. A total of 493 million annual active users were on the platform over that period. However, that level of success will soon change if China starts to place stricter regulations on the company. China's internet regulator ordered app stores to stop offering Didi's app, saying that the app illegally collected users' personal data. This removal does not affect existing users but will prevent new users from registering on the platform.

"The company will strive to rectify any problems, improve its risk prevention awareness and technological capabilities, protect users' privacy and data security, and continue to provide secure and convenient services to its users," Didi said in a statement.

That came after the Cyberspace Administration of China (CAC) said: "After checks and verification, the Didi Chuxing app was found to be in serious violation of regulations in its collection and use of personal information." The CAC plans to implement procedures to prevent data security risks, safeguard national security and protect the public interest.

China’s State Council issued a warning to China’s top companies, vowing to tighten their data security and oversight regulations to prevent companies from taking user data and using it for their gain. Many analysts believe that the actual reason behind this action comes from China’s Communist Party leader’s unease over the growing influence of big technology firms. Until recently, tech firms operated in a regulatory gray zone, with relative freedom to create their business models, demand merchants and vendors sign exclusive contracts with their platforms and collect user data to understand their customers better. This also comes after the authorities derailed the planned IPO of fintech giant Ant Group Co. in November and in April hit Alibaba with a record $2.8 billion fine after an antitrust probe found it had abused its market dominance. It has become clear that tech companies like e-commerce giant Alibaba and gaming company Tencent controlled vast amounts of data, said Shaun Rein, founder and managing director of China Market Research Group in Shanghai.

“I think it was in the last year and a half that you can start to see just how much power these technology companies have. Two years ago, Chinese consumers didn’t care, they thought the convenience of apps outweighed any negative benefits,” Rein said. “But now Chinese people are quite concerned about data privacy because Alibaba and Tencent have so much data – even more data than the government.”

Didi, however, said on Monday it was unaware of China’s decision to halt registrations and remove the app from app stores before its listing. Didi also warns investors and the Chinese government itself about the possible repercussions this probe can cause for the companies future growth and revenue, as well as the Chinese economy. Didi plans to fully corporate with Chinese authorities and solve this issue before significant harm is done to the company.

My Analysis:

As a promising new stock on the global exchange, it seemed that Didi could only grow from their IPO. As private investors, many analysts were looking to add Didi to their portfolio as a promising and developing tech giant. With $4.4 billion raised, Didi looked poised to continue to expand its service to even further global limits while also continuing to dominate the Chinese market. However, this crackdown by the Chinese government, if left unresolved, could prove deadly to the ride-hailing platform and the industry in China. Only time can tell how much damage will be inflicted on the company. Still, with almost all new customers restricted from accessing the platform, growth will soon become stagnant, and the yearly net losses the company is currently experiencing will widen and be more pronounced. This could start a domino effect that will have significant implications for other ride-hailing apps and the overall Chinese economy.

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