The Chinese ride-hailing giant Didi Chuxing (Didi) filed an initial public offering (IPO) in the United States on June 10. At the same time, the Chinese Communist Party’s (CCP’s) antitrust investigation of Didi was also reported.
According to Didi’s prospectus (registration statement) filed with the Securities and Exchange Commission, the regime’s state-owned companies played an important role in the process of Didi’s monopoly in China.
Prior to the IPO, Didi had raised a total of $23.2 billion in funding over 24 rounds. Their latest funding was raised on April 9, 2021, from a debt financing round, according to a public report.
The prospectus showed Didi’s top three shareholders were SoftBank (21.5%), Uber (12.8%), and Tencent (6.8%). But, Didi listed risks related to doing business in China, especially in relation to the regime’s recent anti-monopoly regulations. It completed the self-inspection and admitted that the results might not be satisfactory and the company may be subject to fines.
In order to comply with CCP’s laws and regulations, Didi conducted its business primarily through variable interest entities (VIE) by contractual arrangements and through seeking overseas listings.
The State-Owned Investors
According to data from ChinaVenture Investment Consulting Group (CVSource), there have been 17 investors with state-owned backing involved in Didi businesses since 2015. Among them were sectors in Banking, insurance, brokerage, and industry.
For example, China Merchants Bank invested in Didi three times in a row, including its strategic investment of $200 million in January 2016, and two rounds of large-scale financing of $4.5 billion and $5.5 billion in June 2016 and April 2017, respectively. Bank of Communications and China Construction Bank also participate through subsidiaries to invest and support Didi’s businesses.
In terms of insurance capital, Ping An and China Life financed Didi with $3 billion in July 2015 and $4.5 billion in June 2016.
Among the financings in February 2016 were CICC (China International Capital Corporation) Alpha, China CITIC Bank, and China Investment; three local state-owned funds, BAIC Capital, Civil Aviation Investment Fund Management, and Sailing Capital; as well as two large private equity funds (PE) with state-owned companies, CDH Investments and Primavera Capital Group. This round of financing was therefore named the “state capital round” by the market.
There were also three industrial investments from state-owned enterprises in the second half of 2016, including Poly Developments and Holdings, Sinomach Automobile, and China Post Capital. Among them, Poly and Sinomach invested $400 million and $200 million, respectively.
Because Didi took over all of Uber China during the 2015 and 2016 period including all the financing and subsidies, Didi was once regarded as a state-owned enterprise.
According to information provided by qcc.com, a Chinese corporate database, Didi received a large amount of financing from China’s state-owned companies during 2015-2016.
The Driving Force Behind Didi’s Victory Over Uber
Didi was launched in September 2012. Tencent’s CEO Pony Ma was the big benefactor for Didi. Meanwhile, Jack Ma’s Alibaba financed Didi’s main competitor, Kuaidi. At that time, China’s carpooling industry was mainly engaged in competing for subsidies.
For example, while bearing huge losses, Didi provided generous subsidies to drivers and passengers. Drivers would get basic order sharing income from the platform, as well as subsidies for remote dispatch, dynamic price adjustments, redemption awards, morning and evening peak awards, and holiday subsidies. Didi’s annual subsidy added up to more than $3 billion at its peak, and a large number of drivers were attracted to join the platform.
In February 2015, Didi and Kuaidi merged to become China’s largest ridesharing company. However, at the same time, the Chinese market ushered in Uber China.
Uber’s aggressive approach in this most important market suddenly stopped in August 2016, and it sold its China business to Didi. While the reason remains unknown, there was speculation that the regime’s regulation was the driving force.
Regardless, Didi clearly defeated Uber China with the help of state-owned capital such as Poly, China Merchants Bank, CICC Alpha, and CITIC, as well as the successive joining of foreign investors such as Hillhouse Capital Group, Sequoia Capital, and Apple in the capital market.
Before the merger in 2016, it was reported that Didi secured $10 billion, while Uber China’s cumulative financing amount was only $1 billion. Outside of the capital market, the regime’s supervisory authorities played a key role in the ridesharing market competition.
To comply with the so-called regulations has always been a challenge to the emerging ridesharing business compared to the traditional car rentals. It relies on the attitude of regulators, and mostly the local authorities.
For instance, in April 2015, the Guangzhou Municipal Government cracked down on Uber’s “illegally operating unlicensed taxis.”
In July 2016, the CCP issued the “Guiding Opinions on Deepening Reform and Promoting the Healthy Development of the Taxi Industry” and “Interim Measures for the Management of Online Taxi Reservations.”
Although these two regulations provide a basis for the legal operation of online car-hailing, they impose higher requirements on licenses, contracts, and other requirements for the transportation industry. In fact, they constitute a greater compliance challenge to the carpool industry, which has positioned itself as a network service provider instead of a transporter.
Uber China, which had difficulty complying with local regulations, accepted Didi’s acquisition offer a few days after the introduction of the new regulations.
On Aug. 1, 2016, Didi acquired Uber China through a share swap. After the merger, Didi occupied more than 90 percent of the ride-sharing market in China.
The Belated Anti-Monopoly Guillotine and the Leaving of State-Owned Companies
Didi’s acquisition of Uber China established its leading position in China’s online car-hailing market, but it also planted hidden dangers in antitrust investigations.
In September 2016, the Chinese Ministry of Commerce stated at a press conference that Didi’s acquisition of Uber China had not been reported to the Ministry of Commerce, and an investigation was pending in accordance with the Anti-Monopoly Law and other regulations.
In July 2017, the Ministry of Commerce once again stated that it had interviewed Didi several times. During that period, the Ministry of Commerce did not announce any progress in the investigation.
The regime’s mouthpiece Xinhua reported that the Anti-Monopoly Bureau of the State Administration for Market Regulation was investigating Didi’s merger and acquisition case in 2018, but the bureau still has not disclosed any progress.
In September 2019, the CCP’s Supreme Court conducted a live broadcast of the trial of Didi for abuse of market dominance, but so far it has not announced the results.
On Dec. 24 last year, the Ministry of Transportation announced that it would strengthen anti-monopoly measures in the transportation sector. Afterward, rumors of antitrust investigations against Didi recurred.
This June, the antitrust probe into Didi was once again reported but not confirmed.
From the State’s Assistance to the Anti-Monopoly Probe, Who Did Didi Offend?
From the rapid rise to the current anti-monopoly investigation, Didi is regarded by the outside world as the next target of the regime, after Jack Ma.
In fact, Didi’s listing may not only become the largest Chinese stock listing in the United States after Alibaba’s 2014 IPO, the anti-monopoly investigation may also be regarded as another heavy blow to Chinese internet companies following the suspension of Ant’s IPO last year.
In November last year, dozens of Chinese internet giants including Didi and Alibaba were interviewed by the authorities regarding the anti-monopoly regulations. On Dec. 14, Alibaba, Tencent, and SF Express received anti-monopoly penalties and were fined $77,500 each.
The current affairs commentator Li Linyi believed that both Didi and Alibaba had inadvertently affected the core interest of the regime.
“Like Alibaba, the reason why Didi was punished or investigated by the CCP for anti-monopoly is not because the CCP cares about anti-monopoly or the welfare of the people, it is because their products and services form the key information foundation. In particular, the big data they control is directly related to the CCP’s so-called national security, that is, national surveillance.”
Li said, “The real purpose of the CCP’s attack on these internet giants is to maintain and strengthen the CCP’s control over the information infrastructure and big data.”
This is indeed the case. Didi positioned itself as a “one-stop transportation solution” in the prospectus. Didi, similar to Alibaba, has extended its business from pure carpooling (or e-commerce) services to public transportation, online finance, and even all aspects of public services. In the process they collected big data from the Chinese people.
Bearing Losses for Eight Consecutive Years, Didi Is to Collect Capitals in the US
Didi’s IPO prospectus disclosed the net loss of $5.47 billion in the three-year period between 2018 and 2020, but a net income of $0.8 billion for the three months that ended March 31, 2021.
However, Chinese media Caixin.com’s opinion article stated on June 21 that the disclosure was “a game of whitewashing” because “there is room to justify its calculation method.”
The Caixin article stated that Didi’s prospectus defined the first quarter of 2021 as the deadline to show its revenue growth of more than 100 percent year-on-year from the first quarter of 2020—during the most severe epidemic in China—as the benchmark for comparison.
It said that since its establishment in 2012, Didi has “burned money” for eight years straight until 2020, with a cumulative loss of approximately $9.28 billion.
Li said, “Didi’s business and capital operations are a bit like what Baidu did. Baidu monopolized the Chinese online search market by relying on the CCP to drive Google away. With its monopoly in China, it went to the United States to tell its story for money making.”
Analysis: CCP Power Struggle Hides in Didi’s IPO
It is worth mentioning that just as Didi investors are about to enjoy dividends from the IPO, two most important domestic and overseas investors will quietly exit.
The prospectus showed that Didi’s largest shareholder SoftBank will withdraw from the company’s board of directors when it goes public. At the same time, managing director of Boyu Capital (a fund company owned by China’s former leader Jiang Zemin’s grandson, Alvin Jiang) will also step down from the board of directors of Didi.
After multiple rounds of financing, Didi has nearly 100 shareholders and a complex structure; but the company’s management maintains control of the company through the AB share structure. Didi’s management team, such as CEO Will Wei Cheng, president Jean Qing Liu, and others have more than 50 percent of the voting rights.
Softbank’s withdrawal has been interpreted by the industry as it may sell shares after Didi goes public, and cash out.
However, Li believes that the retreat of investors such as SoftBank and Boyu may be a sign. “If SoftBank worried about the uncertain future and wanted to cash out, the Boyu’s retreat could signal that more companies will leave.”
The Epoch Times previously reported on how CCP leader Xi Jinping suspended the IPO of Alibaba’s Ant Group—which Boyu Capital holds shares in—in November 2020 with the purpose to defeat Jiang’s faction.
Li believes that the withdrawal of Boyu from Didi could be a signal from Jiang’s faction of its political concession.
Long Tengyun holds a master’s degree in Management Science. He is based in North America and has been focusing on Chinese economy and politics for more than 10 years. In 2011, Long started to report news and write opinion pieces for NTD Television.