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Wednesday, April 17, 2024

Didi’s Revival Shows China Can’t Live Without Big Tech

Mr. Wang has five cell phones in his car, each loaded with a different ride-hailing app. He works full-time in a family-owned restaurant in China’s Guangdong Province, but with the hospitality industry struggling under Covid-19 lockdowns over the past few years, he took to driving in the mornings. Using five different phones means that Wang can pick the most profitable trips, and game the apps’ incentive programs to get extra bonuses. In the past month, as more people have started going out for the Chinese New Year holiday, he’s been able to make around 400 RMB ($59) per shift.

“I drive for whichever platform that offers the best deal,” he says. “It’s not a bad job. During the Chinese New Year period I can even make a New Year bonus every ride.”

Drivers in China’s ride-hailing market have had to adapt to survive over the past two years. The industry was hit first by the pandemic, and then in mid-2021, by dramatic action from China’s internet regulator, which banned the largest ride-hailing app in the country, Didi Chuxing, from app stores, cutting it off from new customers and drivers. At the time, Didi had a nearly 90 percent market share in the Chinese ride-hailing business and 13 million active drivers.

The ban led to a rush of smaller apps onto the market, offering incentives to drivers and passengers to switch. But despite the competition and fierce economic headwinds, Didi has remained surprisingly resilient. On January 16 this year, the company emerged from its suspension with its prime position intact—local estimates say it still has around 70 percent of the ride-hailing market. 

As China’s crackdown on its technology sector moves into a new phase, Didi’s punishment, resilience, and rehabilitation show the balance that Beijing must strike between regulating Big Tech and giving it the space to grow and innovate. The country is emerging from years of strict Covid lockdowns and slower-than-usual economic growth, and once again needs its tech sector to pull in investment and drive the economy forward.

“It is quite clear that the current policy priority is to increase growth and boost employment,” says Angela Huyue Zhang, director of the Philip K. H. Wong Centre for Chinese Law at the University of Hong Kong. “So regulators will avoid taking aggressive stances … and making headlines.”

Didi was founded as Didi Dache in Beijing in 2012 as a taxi-hailing app, later adding private hire. Backed by influential investors, including the internet giant Tencent, it grew rapidly and, in 2015, merged with its competitor Kuaidi Dache, which had investment from another of China’s biggest tech companies, Alibaba. The following year, after a punishing price war, the company—now renamed Didi Chuxing—saw off competition from Uber. Didi absorbed Uber’s Chinese operations in exchange for Uber taking a 17.7 percent stake in the company.

In 2021, the company announced plans for an initial public offering, controversially choosing to list on the Nasdaq in New York despite lingering tensions between the US and China over the former’s crackdown on Chinese tech companies.

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Didi went public on June 30, 2021, valued at $68 billion. Two days later, on the evening of July 2, the Cyberspace Administration of China, the country’s internet regulator, announced that it was reviewing Didi’s cybersecurity. On Chinese social media, rumors spread alleging that Didi had sold sensitive user information and traffic data to the US, creating a national security risk. Didi’s management denied the accusations.

On July 4, the regulator made an announcement claiming Didi had illegally collected and used riders’ personal data, and ordered app stores to remove the app. A year later, the Cyberspace Administration decided that the company had violated three laws governing network security, data security, and the protection of personal information—all of which had come into effect only after the ban was announced.

At the time, some analysts thought the threats over data security were aimed at persuading Didi to cancel its US listing and move its IPO to Hong Kong, and that its ban, and the charges against it, were punishment for defying Beijing’s wishes.

Other tech companies certainly took the hint, and several—including content-sharing app Little Red Book, podcast platform Himalaya, and cargo service platform Huolala—shelved their plans to go public in the US.

The pressure on Didi was only part of a much wider crackdown on Big Tech companies in China. In November 2020, the IPO of the massive fintech company Ant Group was suspended after its founder, Jack Ma, criticized China’s financial regulators. At least a dozen companies, including the tech conglomerates Tencent and Alibaba, search giant Baidu, and food delivery company Meituan were investigated and fined under anti-monopoly rules. In mid-2021, an effective ban on after-school tutoring wiped billions of dollars off the value of China’s edtech sector.

“The tech industry has learned not to mess around with regulators’ demands, because they will take drastic action if necessary,” says Rui Ma, a China tech analyst and founder of Tech Buzz China. “Especially in the case of Didi, where it was rumored that the company had been told explicitly not to go ahead with a listing.”

After Didi was cut from app stores, passengers and drivers who had previously registered could still use the service as normal, but it was impossible to create a new account. It felt like a harsh punishment, but came at a point when growth had already stalled in the ride-hailing industry. 

Government statistics show that the number of ride-sharing service users peaked in December 2018, at 389 million. Over the next two years, the number declined to 365 million. The percentage of users who regularly booked rides fell at the same time, largely due to the Covid-19 pandemic and strict lockdowns across most of China.

Jeff Li, a tech analyst and former director at consultancy Accenture China, told WIRED that by the time the Didi Chuxing app had been removed from app stores, most of the country’s potential ride-hailing customers already had an account.

Second-tier ride-hailing companies saw Didi’s suspension from app stores as a great opportunity to gain market share, and began raising funds to spend on marketing and promotions for drivers and customers. Meituan launched a new ride-sharing app in July 2021, and within two months had rolled it out to more than 200 cities. In September 2021, the B2C ride-sharing platform Caocao Travel announced the completion of a RMB3.8 billion ($560 million) Series B. The following month, its competitor T3 announced it had received a RMB7.7 billion ($1.1 billion) Series A. The new apps used the cash to expand into new cities and offer incentives to attract drivers.

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Some drivers did join the new platforms—although, like Wang, they didn’t necessarily drop Didi at the same time. 

Others stuck with what they knew. Wenwen, a driver in Shanghai, tells WIRED that she tried a few of the other platforms, but found their commission, at around 30 percent, was too high, and that it was sometimes harder to find orders on smaller apps, particularly since the start of 2022. As an experienced Didi driver with a high rating, she tended to get priority on the app. Over the past year, she’s been able to earn $118 to $147 per day for a 12-day shift. “You can make money by driving for Didi, but it’s hard and you spend your whole day in the car,” she says. “But I have no better choice since I am not highly educated and don’t have any other skills.”

Smaller companies did manage to build their user bases. By late 2021, Caocao Chuxing had 11 million active users. But, Li said, burning large amounts of cash on discounts and incentives was never going to be a sustainable business model. They also came up against China’s regulators. 

In September 2022, the Ministry of Transportation, together with the Central Cyberspace Administration of China, the Ministry of Industry and Information Technology, the Ministry of Public Security, and the State Administration for Market Regulation came together to chastise ride-sharing companies for recruiting unlicensed drivers and vehicles, and for their marketing methods which, the government bodies said, were creating an unfair marketplace and “damaging the rights and interests of drivers and passengers.” 

In its IPO prospectus, Didi had reported an average daily transaction volume of 25 million rides.  By January 2022, that had fallen to 20 million. It fell further over the next six months—down more than 35 percent year-on-year in July 2022, although that might have had more to do with the Covid lockdowns imposed across Chinese cities, which began in February, than with any competitive pressures.

The first sign that Didi was going to be released from its purgatory came in July 2022, when the Cyberspace Administration fined the company RMB8.026 billion ($1.2 billion) for violating China’s network security law, data security law, and personal information protection law. Six months later, Didi announced on its official Weibo account that it had received approval from China’s Cyberspace Security Review Office to resume new user registration. Within days, Didi was back on the Apple App Store and most Android app stores.

Didi’s revival has led some observers of the Chinese tech sector to speculate that Beijing’s two-year squeeze might finally be coming to an end. In January, People’s Bank of China official Guo Shuqing announced that the crackdown on financial technology companies was “basically over.”

Ma thinks some of the international analysis of the crackdown has overplayed its severity. “Many of these actions are rectifications meant to regulate the platform companies in a way that is more in line with other developed countries,” she says. Investors may also have overreacted. 

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“The trust is broken mostly between regulators and investors in this particular instance,” she says. “US Big Tech regularly loses lawsuits from governments and suffers heavy fines, and yet because these are not huge surprises, no one considers the companies or sector ‘uninvestable’ as a result.”

Li, though, wasn’t so optimistic that regulators are preparing to loosen their grip. Over the past 18 months, the government has been taking “golden shares”—small financial stakes that give voting rights—in tech giants, meaning government officials will have greater influence over companies’ decisionmaking. The state-owned China Internet Investment Fund took a 1 percent stake in ByteDance, the parent company of TikTok, in December 2021. According to the Financial Times, the arrangement allowed the government to appoint a director—the Communist Party official and former censor Wu Shugang—to the company’s board. Beijing reportedly plans to take golden shares in Alibaba and Tencent.

“The Chinese government had been using golden shares to take control of key news outlets and social media platforms like Weibo,” Li says. “After Didi disobeyed the Chinese government’s instructions and went public, the Chinese government will speed up taking golden shares in major tech companies to prevent such things from happening [again], and to better control tech company’s daily operations and decisionmaking.”

However, Li said, Didi’s example also shows the balance that the government has to strike between control and allowing innovative companies to grow. Growth in the Chinese economy has slowed due to lockdowns and a falling global demand. The government needs the tech sector to help drive a revival, and gig economy companies like Didi can provide opportunities for people who are struggling to find jobs in the current environment.

“The Chinese government would love to see tech companies become a major force in increasing GDP and providing job positions,” Li said. “However, it will also closely monitor tech companies, especially those engaged in new technology like AI, and use regulations to avoid potential future risks.”

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