The government-relations firepower, which helped keep Didi on the road through safety scandals and lack of operating permits in many cities, failed to fully anticipate how dramatically the regulatory environment was changing as the company ploughed ahead with a $4.4 billion New York listing late last month.
As a result, when the powerful Cyberspace Administration of China (CAC) started a review into Didi’s handling of customer data in the middle of its IPO campaign, many in the company believed the team would be able to “convince” watchdog officials, sources familiar with the matter said.
Just two days after its New York debut, the CAC announced an investigation into China’s dominant ride-hailing company and subsequently ordered the removal of its apps for download in China.
On Friday, Beijing announced that officials from at least seven departments, including the CAC, Ministry of Transport, and State Administration for Market Regulation (SMAR) were conducting an on-site cybersecurity review of Didi.
Didi, which said on Weibo (NASDAQ:WB) that it accepts and will firmly comply with requests of relevant authorities to carry out review and rectification of problems, did not respond to a Reuters request for comment.
Since late last year, China has moved with stunning speed to rein in the giants of its so-called platform economy, which had taken advantage of an often-permissive regulatory environment to achieve what state media has described as “barbaric” growth.
Didi became the biggest and most successful player in ride-hailing despite failing to be in full regulatory compliance in some of its China operations.
Two sources said only 20%-30% of Didi’s business in China are fully compliant with regulations requiring three permits: one for the company to provide online ride-hailing services, a transportation permit for the vehicle and a license for the driver.
In June, the proportion of compliant vehicles among all the fleet taking orders on Didi platform was 30.7%, while driver compliance was at 45.2%, according to the Ministry of Transport.
In its IPO prospectus, Didi said it had obtained ride-hailing business permits for cities that collectively accounted for a majority of the total ride. It did not elaborate.
Didi has also managed to continue to operate in Shanghai without a platform permit and with many of its drivers not having the mandatory local hukou, or household registration permit, two separate sources said.
Didi did not respond to queries about its Shanghai operations and business permits. Shanghai municipal government directed Reuters query to the transportation commission, which did not immediately respond.
All the sources declined to be named as they were not allowed to speak to the media.
Didi shares have tumbled 21% since their debut on June 30th, wiping off $14.2 billion in market value.
RELYING ON ‘GUANXI’
Chinese tech firms stepped up hiring of compliance, legal and government-relations officials in the last few months as they braced themselves for Beijing’s unprecedented clampdown on antitrust and customer data privacy violations.
The crackdown has put a spotlight on the role played by the government-relations teams in particular, which consist of former government officials, as they strive to grasp the regulatory directives that are not always formally communicated.
Didi and its government-relations (GR) team came under heavy scrutiny after two cases of rape and murder in 2018 involving the company’s drivers.
“Since 2018, the GR team has become a super powerful team at Didi,” said another person. “Whenever the GR team has conflicts with other teams from the business side, it’s usually the other teams that end up making concessions.”
In the run up to the IPO, the team came under pressure from senior management to fend off regulatory scrutiny and it, in turn, relied heavily on “guanxi”, or personal relationships, said two of the sources.
The CAC, acutely aware of Didi’s U.S. listing plan, had been looking into whether there is a possibility of some of the company’s data ending up in the hands of a foreign entity given Beijing’s sensitivity about usage of onshore data, said the sources.”What makes Didi more important than any other internet company is because Didi owns real-time data of each individual user’s geographical position. You can identify a person’s location simply using a mobile phone number,” one of them said.
Didi, which has about 377 million annual active users and 13 million annual active drivers in China, provides 25 million rides a day in the country to users who sign up through an app that uses a phone number and password.
Didi, backed by SoftBank, Tencent and Alibaba (NYSE:BABA), also saves videos and recordings with in-vehicle cameras for at least seven days, which, the watchdog thinks, could be dangerous if leaked, another person said.