China’s leading ride-hailing company, Didi, was an operation of dubious legality when it raised its first big bucket of money nearly a decade ago. And in one way or another, it has been testing the authorities ever since.
When a venture capital firm invested $3 million in the company in 2012, Didi lacked several of the state-issued licenses it needed to do business, two people familiar with the matter said. When Beijing, Shanghai and other big cities began requiring that drivers for ride-hailing platforms be local residents, Didi protested. Today, the company acknowledges that many rides are still being provided by drivers and vehicles that don’t meet local requirements.
And when China’s government demanded that ride-hailing services share real-time trip data for safety purposes, Didi dragged its feet, citing privacy concerns — until the rapes and murders of two female passengers finally pushed the company to relent.
Didi and other Chinese internet giants grew big and powerful by learning to thrive in regulatory gray zones. And by and large, Beijing was fine with that. The companies were making China richer, more productive and better entertained. They moved fast, and they might have broken a few rules. But so long as online conversations were filtered, search results were sanitized and videos were censored, internet companies’ success was the nation’s.
Didi, after all, was the homegrown hero that stopped Uber’s global expansion in its tracks. Didi showed that Chinese entrepreneurs could go head to head with Silicon Valley’s brashest and most cunning upstarts, and come out on top.
Those days are over. Under Xi Jinping, the Communist Party’s most powerful leader since Mao, China has taken a hard ideological turn against unfettered private enterprise. It has set out a series of strictures against “disorderly” corporate expansion. No longer will titans of industry be permitted to march out of step with the party’s priorities and dictates.
Silicon Valley may not have managed to halt the Chinese tech industry’s rise. But Mr. Xi might.
On issues like data security, privacy and worker protections, Beijing’s scrutiny is long overdue. Yet Chinese officials have moved against tech companies with a speed and ferocity that might unsettle even the most ardent Western trustbusters.
The United States and Europe also want to tame the excesses and extremes of capitalism in the smartphone age. China is smoothing out the rough edges with a chain saw.
In early July, two days after Didi went public in New York, China’s internet regulator ordered it to stop signing up new users while officials examined its cybersecurity practices. Then Didi’s apps were forced off mobile stores. Then the company was fined for antitrust violations. Then passels of government officials stationed themselves in Didi’s offices.
There is almost certainly more to come.
Didi’s ascent, which more than a dozen former employees described to The New York Times, did not merely end Uber’s business in China. It made Didi the biggest online ride platform on the planet. On average, 156 million people a month used Didi in China in the first quarter of this year, compared with 98 million for Uber worldwide. Didi handled 25 million rides a day in China during that period; Uber, globally, 16 million. Those numbers do not include Didi’s services in Latin America, Japan, Russia and beyond.
China wants to make sure Didi’s next chapter — and the whole tech industry’s — is less unruly than the first. In this age of distrust between China and the United States, one of Beijing’s concerns appears to be whether companies like Didi, with all their data and influence on ordinary lives in China, should really be going public on American stock exchanges.
After Didi’s initial public offering, the company was valued at $79 billion at its July 1 peak. Its 38-year-old founder and chief executive, Cheng Wei, and its president, Jean Liu, 43, who is almost certainly the most prominent woman in China’s internet industry, own shares worth billions.
It is taking much less time to destroy that wealth than it did to create it.
‘This Place Was Never Conquered’
In late January 2015, Zhou Hang, the founder of one of China’s earliest ride-hailing companies, Yongche, got a call from Mr. Cheng. The two met at a luxury hotel near Beijing’s Summer Palace, and over dinner they discussed the possibility of a merger. Yongche had been a pioneer in ride hailing, while Didi was a leader in taxis. A union would make sense.
Soon after, rumors about a tie-up started circulating in the Chinese tech media. Mr. Zhou asked Mr. Cheng whether he had leaked the news. Only the two of them had been at the dinner. Mr. Cheng denied doing so.
But on Valentine’s Day, Didi announced that it would join forces with its biggest rival, Kuaidi. Mr. Zhou now believes that Mr. Cheng used their meeting to push Kuaidi to agree to the merger.
The boyish, bespectacled Mr. Cheng had brought a bagful of cutthroat corporate tricks to China’s booming online rides industry.
He was 22 when he talked his way into a job at the e-commerce giant Alibaba. The sales team he joined was nicknamed the “iron army” for its relentless drive. After climbing Alibaba’s ranks for six years, Mr. Cheng started Didi because of how hard it was to get a cab in Beijing. Populations in China’s megacities had swelled, but the supply of taxis wasn’t keeping up. The company’s name is meant to mimic the sound of a car horn.
In Didi’s early years, Mr. Cheng copied Alibaba’s tradition of ice-breaking rituals for new hires, including intimate questions such as how they lost their virginity, former employees said. Once, as punishment after Didi users reported bad experiences, he forced his chief technology officer to streak, Mr. Cheng told the Chinese magazine Caijing. He ordered other executives to clean bathrooms.
Mr. Cheng also adopted Alibaba’s zest for waging war against rivals.
According to Mr. Zhou, Yongche’s system was inundated with fake orders after Didi started its ride-hailing service in 2014. Cars were dispatched, but no customers showed up, tying up Yongche’s drivers. When Yongche investigated, it found that many of the orders had come from internet addresses near Didi’s offices, Mr. Zhou said.
The Times sent Didi a list of detailed questions for this article, but the company declined to comment. In the past, Didi has denied other allegations about faking orders.
Didi’s tactics against Uber in China could be equally underhanded. According to “Super Pumped,” a chronicle of Uber’s rise by the Times reporter Mike Isaac, Didi managers sent fake text messages to Uber drivers, saying that Uber had shut down in China and that they should work for Didi instead. Didi also sent new recruits to be hired by Uber as engineers. There, they acted as moles, feeding information back to Didi.
The trickery paid off. In August 2016, after the two companies had spent hundreds of millions of dollars fighting each other, Uber announced that it would sell its China operations to Didi. Bloomberg Businessweek splashed Mr. Cheng on its cover and called him the “Uber slayer.”
Like many Chinese business executives, Mr. Cheng is fond of military metaphors. In interviews, he has compared Didi’s years of conflict and competition to the Battle of Verdun. He said he saw his own spirit fighting Uber reflected in Russian propaganda films.
“Napoleon came to Moscow,” he told one interviewer. “Hitler came to Moscow. None of them prevailed. This place was never conquered.”
In the Gray Zone
It was only four-odd decades ago that private ownership was forbidden in China, and the Communist Party has been hot and cold on the concept ever since. Private businesses have long had to figure out how to make a buck under threat of being squashed by the authorities.
If Didi was very worried about the government in its early years, it didn’t show it.
In 2014, when the city of Beijing banned the use of private cars for ride-hailing businesses, Mr. Zhou of Yongche obeyed and took such vehicles off his company’s platform, he said. Didi did not, as officials soon discovered. When Shanghai accused Didi of running an illegal taxi business, the company said it worked only with lawful car-leasing companies, not with individual car owners.
Mr. Zhou now says he made a big strategic blunder. But he had reason to be cautious. Yongche had been under constant pressure from regulators. Mr. Zhou and other executives were regularly summoned to government meetings for criticism and lecturing.
“We knew fear because we had seen the tiger,” Mr. Zhou said. “Cheng Wei didn’t seem to be as afraid.”
Didi had acquired some political capital. In September 2015, Mr. Cheng was the youngest member of the Chinese delegation that accompanied Mr. Xi on a visit to Seattle. Mr. Xi later stopped at Didi’s booth at a Chinese conference and listened and smiled as Mr. Cheng talked about his company’s global ambitions.
But at the time, Chinese officials were also unwilling or unable to challenge tech companies on antitrust grounds. After Didi merged with Kuaidi in 2015, Mr. Zhou filed an antimonopoly complaint to the authorities, but he never heard back, he said.
The next year, China’s Commerce Ministry said it would investigate Didi’s tie-up with Uber. The combined Didi was obviously a behemoth, with something like 90 percent of the Chinese market. But Chinese law did not contain clear rules governing mergers between companies, like Didi and Uber, whose owners were mostly foreign investors. Beijing never unwound their union.
China’s transportation regulators, too, were watching Didi. Many Chinese cities require drivers and vehicles to meet standards and obtain licenses to provide ride-hailing services. The police have regularly pulled over and penalized Didi drivers whose papers aren’t in order.
Yet several former Didi employees said that for many years, most local authorities seemed to know it would be impractical to demand total compliance. In big cities like Beijing, taxi licenses are often held by the rich and politically connected, who use their clout to prevent regulators from increasing the supply of licenses. Officials also understand that ordering Didi to bar unlicensed drivers would put the drivers out of work.
Didi has gotten so used to operating in this legal purgatory that it reimburses drivers for their fines. For Didi, the value of keeping drivers on the road is worth the potential penalties. But for the drivers, this arrangement is no guarantee they won’t be on the hook for fines or hassled on the job.
Many Didi drivers have taken to social media to complain about the company’s capricious reimbursement policies. One driver, Li Pei, had just dropped someone off in February when a police officer stopped him and fined him around $2,300 for not having a ride-hailing license. When Mr. Li, 29, asked Didi for reimbursement, the company said it wasn’t responsible because he hadn’t been carrying a passenger when pulled over.
Mr. Li said Didi had never told him anything about needing a special license.
“Do you think they would tell you that? If they did, who would still drive for them?” he said. “If Didi doesn’t fail, heaven wouldn’t tolerate the injustice.”
Killings Threaten Growth
By 2018, Didi was busy taking over the world. It was expanding into Australia and other overseas markets. It had opened a lab in Silicon Valley to develop “intelligent driving technologies” and had begun contemplating going public.
Then came the murders.
The first victim was a 21-year-old flight attendant in the Chinese city of Zhengzhou. It was May 2018. Didi apologized and suspended Hitch, the car-pooling service the woman had been using when she was killed. But it was not until that August, when another woman was raped and stabbed while riding with Hitch, in the city of Wenzhou, that the company went into crisis mode.
After the second murder, some Didi employees were shocked that the company had brought Hitch back online just a week after suspending it, even if some new safety features had been added in the interim. But Hitch had been lucrative for Didi. It was cheaper to let customers drive one another around than to pay professional drivers. The company had celebrated Hitch’s manager, Huang Jieli, in an internal video that compared her to Hua Mulan, the female warrior of ancient Chinese legend.
It was hardly a secret that Didi had been making breakneck growth a priority. The company had to prove it was worth the eye-popping prices that investors like SoftBank had tagged it with.
At an employee conference that February, Didi’s president, Ms. Liu, had acknowledged some growing pains: “Like a soul that has not kept pace with a body, the maturing of our organization has not kept up with the growth in our business.”
In a contrite letter to employees after the murders, Mr. Cheng went further: “The ‘run like crazy’ model of development long ago planted hidden dangers.”
Not long before the first murder, on a chilly evening in Beijing, Yang Tingting had been in a Didi when she noticed her driver was smirking at her. She tried to ignore him. But then he began asking, “How much do you charge for one?”
Terrified, Ms. Yang, who was 30, thought about trying to jump out of the car.
Back at her hotel, she submitted complaints in the Didi app, but customer service didn’t call her until the next afternoon. When she explained what the driver had done, the male service agent asked: “Did you give him any hints? Could he have misunderstood you?”
When Ms. Yang said she had been dressed professionally and worked in media, the agent said that perhaps the driver had been asking how much it would cost to place an advertisement. She said she had felt that the driver meant to harm her. The agent just laughed.
By that point, Chinese officials had been dissatisfied with one element of Didi’s safety controls for years. Since 2016, the Transportation Ministry had been asking ride-hailing companies to upload real-time data about drivers, cars and trips to a central platform. But Didi was slow to share information, despite sharp warnings from national and local authorities.
“Is there really any need to give real-time data to regulators?” the company’s chief development officer at the time, Li Jianhua, told a reporter in 2017. “If our user information is leaked by a government department, who is responsible then?”
The company tried to win Brownie points with Beijing by hiring 1,000 Communist Party members to work as customer service agents. But its image had suffered.
It didn’t help when, a year later, Didi restarted Hitch in a few cities with a new feature that was supposed to protect women: After 8 p.m., the service would be available only to men. Web users denounced the policy as lazy and sexist. Ms. Liu apologized, and Didi made Hitch unavailable to everyone after 8.
Some employees were taken aback at how badly Didi had botched its big comeback. Even after Hitch functionality was restored, Hitch as a business never recovered.
After the murders, China’s government dialed up the pressure on Didi to get drivers and cars licensed. To defray the costs of upgrading their vehicles to meet standards, drivers demanded higher earnings. That meant higher fares, and higher fares meant slower growth. Slower growth made it difficult to recruit and retain talent. Didi cut bonuses and laid off workers.
In time, though, the convenience of Didi’s services proved irresistible even for customers like Ms. Yang, the writer who had been harassed by her driver in Beijing.
At first, the encounter cast a “psychological shadow,” she said, and she couldn’t bear to ride with Didi.
“But then I realized that the other ride-hailing platforms weren’t necessarily better than Didi when it came to safety, particularly after Didi made its improvements,” Ms. Yang said. She went back to being what she calls a heavy Didi user.
‘Data Is the Lifeline’
Safety concerns of a different kind led Beijing to bring down the hammer after Didi went public in June.
“Data is the lifeline of any business,” Mr. Cheng had told the BBC in 2018. “If you can’t guarantee data security, that’s going to be totally destructive for the business.”
China has enacted a series of laws to ensure that tech companies protect their data and store it locally. Regulators have also ordered the creators of hundreds of apps to stop collecting user information to excess. In regulatory filings ahead of its I.P.O., Didi noted that its business could suffer if the Chinese authorities were not satisfied with its data security and privacy practices.
But those specific risks barely came up in Didi executives’ discussions with investors and bankers before the listing, two people involved in the process said.
One of them said that because Didi had already talked with investors and lined up cornerstone shareholders in the months before, top company brass felt it didn’t need to spend as much time making formal sales pitches as would be standard for an I.P.O. Didi’s underwriting banks agreed, this person said.
Didi filed its preliminary paperwork on June 10. By June 29, it had priced its shares at $14 apiece. They began trading on the New York Stock Exchange the next day.
China’s internet regulator pounced first.
Didi may have hoisted itself into Beijing’s cross-hairs by choosing to go public in this year of crackdowns on Big Tech. Even so, the company is now a stand-in for something much larger than itself. What China does with Didi could tell us how Mr. Xi intends to treat all entrepreneurs and would-be disrupters.
“Something needs to be done; there’s just no question about it,” said Minxin Pei, a political scientist who studies China at Claremont McKenna College. But “the way they are doing it is very counterproductive.”
“The government tends to act in a way that errs not on the side of caution,” Professor Pei said, “but on the side of excess.”
Michael J. de la Merced contributed reporting, and Albee Zhang contributed research.
Growth Capital For Online SaaS and App Businesses | Clearco
This is how you fund your business without giving up any Equity Click Here To Learn How!!