SINGAPORE—China’s regulatory action against
Didi Global Inc.
threatens to impinge on the Chinese ride-hailing behemoth’s growth as it faces increasing competition at home and struggles to expand into new countries and new lines of business.
While the Beijing-based company’s U.S. initial public offering valued it recently at more than $67 billion, Didi faces a raft of challenges even as economies around the world bounce back from the pandemic. It is seeking to stay in the black after years of losses from burning cash to win customers.
Didi reported a quarterly profit of about $800 million in the first three months of this year, most of that because of its market dominance and concentration in China. That commercial strength may now weigh on its prospects as the company comes under regulatory scrutiny at home, analysts say.
On Sunday, the country’s internet watchdog, the Cyberspace Administration of China, ordered mobile app stores to remove Didi’s China app. Two days earlier, the same regulator launched a cybersecurity review of the company. Didi didn’t respond to a request for comment on the impact of the move on its business.
More than 90% of Didi’s first-quarter revenue came from ride-hailing in China, according to its listing prospectus. Rival
Uber Technologies Inc.’s
core ride business, by contrast, accounted for just 29% of its first-quarter revenue; food delivery brought in 60%.
Didi has struggled to diversify into new growth areas. The Chinese company made a push into food delivery in China in the past, but failed to gain much traction in the face of strong market incumbents.
Even in its core business, Didi has faced increasing competition at home from startups offering niche offerings such as luxury car-hailing.
Didi had 96% of China’s ride-hailing market in 2018, according to researcher Deloitte. In recent years, rivals have whittled that down to around 80% to 90%, according to
an analyst at Sanford C. Bernstein in Hong Kong. She estimates that Didi could lose about 6 million new customer installs over the period of the data-security investigation, assuming the probe lasts the standard duration of six weeks.
Didi’s existing troubles are an invitation for rivals to try to steal market share in an industry where Chinese customers are less loyal to brands and highly price sensitive.
“Many competitors are looking for the right opportunity to play offense,” said Tu Le, managing director of advisory firm Sino Auto Insights. “Before this, Didi was a healthy company. Now, they are wounded.”
Chinese automakers such as
Geely Automobile Holdings Ltd.
and its technology peers
Alibaba Group Holding Ltd.
have sought to diversify growth by jumping into the ride-hailing industry. Car-hailing rivalries have captivated Chinese consumers in the past, with steep discounts dangled to woo users, sometimes bringing the cost of a trip of more than three miles to less than $2.
a staffer in a law firm in Shanghai, received a call from Meituan for the first time, offering 50% off trips of more than 20 yuan, equivalent to $3.09, for existing users like her.
Didi’s prospects for expansion and profitability outside of China are bleak, given increased competition and changing labor laws, said
an investment analyst at equity research firm New Constructs. The recent investigation makes the task only more challenging, since its international competitors won’t have to deal with similar issues, and the episode could lead to a loss of confidence in the app’s usability, said the Brentwood, Tenn., analyst.
In its prospectus, Didi said it was the second-largest ride-hailing platform in Latin America, citing data from China Insights Industry Consultancy Ltd. and iResearch Consulting Group. Didi has 493 million active users globally, with users in 16 countries beyond China accounting for 12% of that number.
Didi now faces potential lawsuits from several U.S. law firms acting on behalf of investors, who allege that Didi may have issued misleading business information prior to its listing.
Didi raised $4.4 billion in its IPO, but after it came under the scrutiny of regulators, its shares tumbled 19.6%, falling below the IPO price. Weeks before Didi went public, Chinese regulators had suggested that the company delay its IPO, people familiar with the matter said.
Didi’s new regulatory troubles come as it tries to escape the impact of the pandemic, which was less severe in China but still cut the company’s revenue last year by 8.4%, to 141.74 billion Chinese yuan, equivalent to $21.9 billion. Some 94% of that came from China mobility services.
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Didi’s fall from grace is noteworthy given that the company was once heralded as a source of national pride. In 2015, the scrappy technology startup headed by internet entrepreneur
who is now 38 years old, took on Uber in a battle for China’s ride-hailing market. After a bitter price war, the Chinese company acquired Uber’s China operations in 2016 in a share swap.
As a privately held company, Didi was also one of China’s most valuable technology unicorns, and highly sought after by investors. Its backers include
Softbank Group Corp
At home, the company has branched out into bike-sharing and logistics. Its flagship China app provides services including home moves and financial loans, though these represent only a tiny fraction of its overall business.
Even so, analysts say that Didi’s current dominance in many of China’s largest cities may cushion the impact. Didi also runs Huaxiaozhu Dache, a second ride-hailing app that is targeted at consumers in lower-tier cities and is still available on Chinese app stores.
The main Didi app has already been downloaded by many Chinese smartphone users, and the banning of new users is unlikely to have a big impact, said
head of IPO research at Aequitas Research, who publishes on the Smartkarma platform.
“Given its market dominance, it’s a given that anyone who uses ride-sharing services in China probably already has Didi on their smartphone,” said Mr. Singh.
—Raffaele Huang and Trefor Moss contributed to this article.
Write to Liza Lin at Liza.Lin@wsj.com and Chong Koh Ping at firstname.lastname@example.org
Corrections & Amplifications
Kyle Guske works with equity-research firm New Constructs. An earlier version of this article incorrectly referred to it as New Construct. (Corrected on July 7.)
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