Days after it sold shares to the U.S. public for the first time, Chinese ride-hailing app Didi Chuxing (DIDI) has seen its app removed from Chinese app stores. The company has also been blocked from signing up new customers, a fate that has befallen two other Chinese companies recently listed in the United States.
China's Internet watchdog, the Cyberspace Administration of China, said on Sunday that Chinese authorities forced the app-store suspension due to "serious violations" of how Didi collects and handles the personal information of customers. The company needs to "seriously rectify existing problems" to protect consumer data, the regulator says, without providing any details or evidence of the alleged violations.
The company issued a warning on Sunday that the app takedown "may have an adverse impact on its revenue in China," since new users can no longer download its app. Its app will continue to function for existing customers.
The Internet authority had already on Friday declared a "cybersecurity review" into Didi, and blocked it from signing up new users. The steps are necessary "to prevent national data-security risks, maintain national security and protect the public interest," the regulator says, again without providing any details.
Didi said in a filing dated Friday that it will "fully cooperate" with the government review. It will "conduct a comprehensive examination of cybersecurity risks" and improve its cybersecurity systems, the company says.
Didi went public on the New York Stock Exchange on Wednesday, in an initial public offering that values it at US$67.5 billion. The shares priced at the high end of its range, at US$14, although the company had originally been seeking a valuation of US$100 billion.
The shares fell 5.3% on Friday as word filtered through of the customer-privacy investigation. They crested to a high of US$16.64 on Thursday afternoon, and remain 10.9% higher than their offer price, with a Friday close of US$15.53. Tuesday promises to be a brutal day, the first opportunity for investors to respond to the app-store suspension.
Going public appears to attract negative scrutiny from Chinese regulators. On Monday, the Cyberspace Administration of China also announced investigations into the online-recruitment company Zhipin.com and its owner Kanzhun (BZ) as well as the freight-consolidator app Full Truck Alliance (YMM) , both of which went public on U.S. markets last month.
Kanzhun and the Full Truck Alliance, like Didi, have been ordered to stop registering new users. Again without providing any details or evidence, the Internet regulator says Kanzhun and the Full Truck Alliance are being investigated as national data-security risks.
China has an extremely broad definition of "national security," which covers essentially anything that the Chinese Communist Party does not want to be public knowledge. Regulators have recently become concerned about the sharing of algorithms by Chinese tech companies.
It's unclear if a law passed in December that requires all foreign listings in the United States to file accounts reviewable by the SEC's accounting arm has triggered the Chinese investigations. But China's stock watchdog is considering new rules, apparently in response, that would require all overseas Chinese listings to file listing documents in China as well. The rules would also tighten up the sharing of sensitive information including anything considered of national-security interest.
Didi, or "Beep Beep," has 377 million annual users in China as of the end of March, served by 13 million drivers. Globally, it operates in 14 nations outside China, bringing total worldwide users to 493 million, based on the first-quarter figure.
Didi has run afoul of Chinese regulators before. After two murder cases related to their drivers in 2018, the Chinese transportation department said the company had "lost control" of its drivers, with multiple lapses that had led to criminal cases. It improved its safety controls and background checks for drivers.
Although citizens can expect scant protection of their privacy from government monitoring and intrusion, Chinese privacy rules are generally strong in terms of protecting consumer data. Regulators on May 1 and then on May 10, and then again on June 11 said that a total of 246 apps in various fields were excessively gathering and illegally using information on their customers.
The Chinese Communist Party has become concerned about the huge scope and influence of Big Tech in China. Worried that companies were becoming influential enough that they could drive policy or even dictate terms to the party, the CCP has been looking to bring major technology companies to heel.
Financial regulators called in 13 Chinese tech companies, including Didi, for talks in April, and warned them to stamp out monopolistic behavior, as I explained at the time. The move came after China levied a record US$2.8 billion fine on Alibaba Group Holding (BABA) , or 4% of its revenue in China, for practices such as forcing major retailers to sign an exclusive agreement only to sell on Alibaba's Taobao and Tmall sites. Chinese President Xi Jinping had already intervened at the last minute to scrap the listing of the Alibaba affiliate Ant Group, which at US$37 billion would have been the largest IPO in history.
The 13 companies are all expected to be slapped with fines, more than likely based on their sales in China. They appear to be designed to be hefty but manageable, payable out of cash on hand.
Didi's backers include the world's largest tech-focused venture-capital fund, the SoftBank (SFTBY) Vision Fund, which owns 20.2% of the stock, as well as Tencent Holdings (TCEHY) and Apple (AAPL) . Uber (UBER) has a 12.0% stake after Didi in 2016 acquired Uber's business in China.
Softbank, which has also invested into Full Truck Alliance, saw its shares fall 5.4% in Tokyo trading on Monday.
Didi's revenue fell 8.5% last year to C¥141.7 billion (US$22.2 billion) due to pandemic restrictions. The company did, however, turn its very first profit, of C¥5.5 billion (US$860 million), in the first quarter of this year, although a hefty chunk of that came from spinning off a subsidiary.
Didi is encouraging its drivers to switch to electric vehicles, and has built its own charging network in China. It has also designed a purpose-built electric ride-hailing vehicle, the D1, which debuted in November, and is developing autonomous driving algorithms, with 100 autonomous vehicles already in service.
Since it has commanding market share in China, a temporary suspension of its ability to sign up new users would not overly hurt its financials. The issue is how long the block lasts. Companies are normally swift to implement remedial action and sweet talk Chinese officials to rectify the alleged infractions.