It was an unusually frigid December weekend when Cheng Wei summoned his inner circle to his Beijing office. The founder of Didi Global Inc., dressed entirely in black, told his lieutenants to slash spending by a fifth in 2022 and begin layoffs after staff return from Lunar New Year vacations. He delivered his bombshell flanked by a giant Powerpoint slide that read: “Don’t live with illusions. Face reality.”
“We had a tough year,” said the reserved billionaire known as Will, who that day seemed even gloomier than normal, according to people briefed on the gathering. “But next year will be even tougher.”
That somber gathering encapsulated what many in the room already suspected -- the ride-hailing champion once feted for running Uber Technologies Inc. out of China was no more. In its place was a defeated shell worth a fifth of its value at the peak, bleeding users, blocked from raising funds for cherished projects -- and whose executives were constantly wary of provoking Beijing.
Didi’s ordeal since it debuted in New York despite regulators’ objections has become one of the clearest object lessons in the dangers of doing business in China. Through interviews with more than a dozen insiders, staff and Didi investors, a picture emerges of how an $80 billion company was brought to its knees in a matter of months by a series of unprecedented government decrees.
Didi shed about 80% or more than $60 billion of market cap in a year -- the single biggest destruction of shareholder value ever witnessed over the first 12 months of an Asian IPO that raised over $1 billion. To investors and executives who’ve struggled for decades to come to grips with the world’s No. 2 economy, the Didi saga is a jarring tale of competing government factions, billionaires’ miscalculations -- and the systemic failure of even the savviest tech industry leaders from Alibaba Group Holding Ltd. to Tencent Holdings Ltd. to gauge a rapidly changing climate under Xi Jinping’s watch.
“There cannot be business as usual again, not after looking at this saga,” says Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “Didi is part of a very worrying picture of how domestic private companies are treated, let alone how foreigners are treated in China, and I don’t think that can ever be forgotten.”
Representatives for Didi, the Cyberspace Administration of China and the State Council Information Office didn’t respond to written inquiries seeking comment for this story. At the center of the government’s year-long crackdown is the concern that sensitive information -- including data on the movements and behavior of millions of users across China including officials -- may leak to a foreign power if Didi were a US-listed entity.
It’s been six months since Cheng’s pow-wow in the heart of Zhongguancun, China’s Silicon Valley. And one year since Didi’s $4.4 billion IPO, the largest Chinese debut in New York after Alibaba’s.
The aftermath has been well-chronicled, how it sideswiped some of the savviest investors from SoftBank Group Corp. to Apple Inc., triggered an investigation by China’s internet overseer into the data that underpins the tech industry’s growing power and froze billions of dollars of US IPOs by China’s largest firms. To cap it off, Beijing ordered Didi to delist just a few months after trading began -- acting to close the alleged data loophole. The series of actions effectively made it the poster-child of a crackdown on Big Tech that humbled China’s biggest corporations, and irrevocably crippled others.
What’s previously unreported was what unfolded behind the scenes.
Days before the company filed for its IPO, its bankers and investors abruptly caught wind of regulatory pushback, according to two people with knowledge of the matter, asking not to be identified for fear of retribution. They turned to Didi management, which refused to spell out the problem but assured them the company was working to address regulators’ concerns, the people said. Without clarifying whether or not those hurdles had been removed, executives told bankers to go ahead -- but to keep a lower profile.
That’s why management and backers skipped media interviews and celebration -- unheard-of for such a prominent debut, the people said. But unusually, investors and even some Didi executives were kept in the dark. The day Didi started trading -- June 30 -- one department was still preparing an IPO presentation for July, one of the people said. At the time, many linked the silence to the Party’s 100th anniversary on July 1 -- private firms are leery of being in the media spotlight during sensitive government occasions.
Then on July 2, the CAC announced an investigation into possible violations of security at Didi -- including the potential for leaking sensitive data to foreign entities in the wake of its US listing. Over the next few days, Didi’s main app vanished from mobile stores and China’s highest governing body issued an effective moratorium on foreign IPOs.
Turns out the CAC -- the powerful agency that once served as a liaison between East and West versions of the internet -- had asked Didi to postpone the IPO, people familiar with the matter said at the time.
But Cheng and his co-founder Jean Liu decided to take a chance, according to three people familiar with the matter. Didi had separately received the blessing of other regulators, and the window of opportunity was closing as markets gyrated because of the pandemic, they said. The duo had grown impatient, after two Didi drivers were convicted of murdering their passengers in 2018, spurring a nationwide #deleteDidi boycott, and the 2020 pandemic scuppered earlier plans. Its valuation had already slid from as high as $100 billion in private fundraisings.
Cheng and Liu, like many other tech billionaires, have refrained from commenting publicly about government intentions and investigations. Didi did not respond to requests to make them available for comment.
“Didi management knew their IPO rush would irritate the CAC but they thought they would be forgiven,” one of the people added. “After all, Chinese internet companies are used to an ‘act first, report later’ approach.”
Cheng was “shocked” by the CAC’s probe and the immediate fallout, according to people close to him. Even many in the highest levels of government were surprised, according to another person who experienced the reaction first-hand. Very few regulators had been notified before the CAC made its move, the person recalled. Over a frantic week, officials played phone tag, seeking to know more about the probe, the people said.
Meanwhile, the CAC’s subsequent investigation stunned Didi executives. Its full extent became apparent in July, when Bloomberg News reported that the overseer was considering getting Didi to scrap its New York listing -- a mere month after the debut.
“No one expected the punishment to be so harsh,” said one of the people close to the company.
The surprise stemmed in part from the fact the CAC had rarely exerted its influence since the days when then-chief Lu Wei -- jailed in 2019 for graft -- mugged for photos with Mark Zuckerberg and accompanied Xi on a state visit to the US. The Didi probe declared its resurgence and galvanized several arms of government.
At one point, officials from seven agencies filled a vast ballroom on the ground floor of Didi’s Dawn Mansion in Beijing. Working at enormous round banquet tables, they summoned a parade of executives for questioning -- including Cheng and Liu, according to the people familiar with the matter.
The investigators barred Cheng and Liu, the daughter of renowned Lenovo founder Liu Chuanzhi, from their offices for months, forcing the pair to work close by in case officials had questions, the people said.
Yet that fall, Didi management remained confident things would turn out all right, according to people familiar with the situation. In fact, days after the apps removal, managers told employees to start preparing a relaunch strategy. In meetings after the CAC unveiled its action, executives began deliberating various amounts to set side for a potential fine, at one point budgeting 10 billion yuan ($1.5 billion), people familiar with the deliberations said -- a pittance by Didi’s standards at the time. Liu was in “good spirits” despite the questioning, joking with friends on phone calls, said one person familiar with the matter.
That initial confidence arose from Didi’s history of surmounting challenges. Cheng -- a former Alibaba salesman who enjoys boxing and war history -- first fought regulators who tried to block his then-nascent ride-hailing service, then a slew of rivals once the model took off. Liu, who joined from Goldman Sachs in 2014 to help Cheng, fought and won battles of her own.
Executives scrambled over subsequent months to obey, and resolve its stasis. But in a now-familiar pattern, kept its stakeholders in the dark, according to people familiar with the matter.
There were many plans hatched back then that failed to bear fruit. At one point, Guangzhou Automobile Group was poised to take a stake in Didi’s autonomous driving affiliate, providing a much-needed infusion of capital. But Didi scrapped the deal at the last minute, telling prospective investors they didn’t know who would own Didi after the CAC probe, according to people familiar with that deal. They didn’t want to further cloud the shareholder structure, the people said. GAC representatives didn’t respond to calls and emails seeking comment.
Once promising projects stalled, one person familiar with the plans said. Didi suspended ambitious plans to grow its local community commerce business Chengxin Youxuan and returned funds to investors; it pulled the plug on a European operational expansion; and it jettisoned embryonic efforts to expand into trucking and battery-charging, the person said.
Didi also drew suitors for the company itself. The city of Beijing proposed taking Didi private with the help of state-owned automakers, Bloomberg News reported, though the municipal government later denied it. And Didi also proposed outsourcing its user data handling to state-owned Westone Information Industry Inc., to resolve concerns around security, according to people familiar with the matter.
It wasn’t till December that they finalized plans for a delisting and decided to go ahead. They informed board members -- which then included Alibaba chief Daniel Zhang and Tencent President Martin Lau -- just before they planned to announce their intentions, according to the people familiar. They did so with a 34-character post on Twitter-like social media service Weibo, triggering a Chinese stock selloff.
“The Didi experience scarred everybody and it’s hard to get my head around it. That’s where you have the trust issues, because it’s just too hard a game to play for a regular US investor,” said David Waddell, CEO and chief investment strategist at Waddell & Associates in Memphis, Tennessee, which has exposure to Chinese tech companies.
“I’m trying to figure out if China tech is a trade or an investment over the long term,” he added via telephone. “With political changes, Covid lockdowns and delisting risks, I feel it is more like a trade than investment.”
Indeed, after the fallout from its IPO, Didi from then on made sure to align its moves with the CAC’s directives. There was just one problem -- the agency wasn’t the only one calling the shots, according to people familiar with the matter.
As 2021 drew to a close, Didi was hard at work cementing ties with the regulator. Among the items they discussed was what appeared a silver bullet to Didi’s woes: a plan to delist from New York and relist in Hong Kong simultaneously, Bloomberg News has reported. That would take Didi closer to home, minimize disruption for its powerful backers, and address many of the CAC’s concerns around data security. Cheng and Liu were ready to attempt a comeback.
That plan got derailed just before Didi was poised to file for its Hong Kong listing. In March, executives found out their months-long engagement with the CAC was “informal discussions” and that top leadership had never formally endorsed a Hong Kong float, according to three people with knowledge of the matter. Worse, some in Beijing rejected the CAC’s separate proposal of penalties to wrap up their data security probe, saying they were too lenient, Bloomberg News has reported.
No one explained to Didi what exactly Chinese leaders didn’t like about the proposal -- nor what the company should do now, according to the people familiar with the matter. But worsening US-China relations may have played a role, according to a person familiar with the central government’s thinking. Senior officials did not want to rush into a decision that may imbalance an already tricky relationship with Washington, the person said.
The high-profile Didi case was considered a potential flash point because of the way Beijing caused billions of dollars in losses for American institutions from Fidelity and Sequoia to Goldman Sachs Group Inc. and Tiger Global Management. The Securities and Exchange Commission has launched an investigation into Didi’s debut.
“We don’t have clarity on what the problem is, and that uncertainty is precisely the hang-up here,” says Tom Nutlist, a tech analyst with Beijing-based consultancy Trivium China.
Didi’s future now hinges on resolving the investigation to Beijing’s satisfaction. Insiders and investors close to the company are divided on what happens next -- some are convinced Beijing is in no rush to rule on Didi’s fate, others say that its track record of complete compliance has finally mollified Beijing, which may soon restore its apps and allow the company to again sign up new users. Once that’s done, it may be allowed to list in Hong Kong.
But whatever transpires, the damage may have been done. The clearest takeaway of months of drama, about-faces, missed opportunities and market carnage is that investors remain wary of how Xi administration is seeking to clip Big Tech’s wings.
“There’s still an enormous amount of skepticism among US investors when getting headlines out of Beijing, such as the potential wrap-up of the Didi probe, because they have been burned by Chinese tech shares over the past year or so,” Waddell said. “There’s just enough of a case being made that it is bottoming out, but you need more time to reassure the American investors that this isn’t just another head fake.”
The Didi episode has already carved out a spot in modern Chinese history -- an emblem of a campaign that’s been remarkably effective at curtailing tech pioneers from Alibaba to Tencent and Meituan whose services encompassed every facet of Chinese life. It’s become an invaluable lesson to anyone seeking to do business or deal with China -- that rules are opaque in China and no one can truly gauge Beijing’s intentions.
“China is still struggling to understand the value of transparency when it comes to building markets,” Howie said.
“If this was a story of the 1990s or the early 2000s, you could make allowances. But China is the world’s second-largest economy, and there has been trillions of dollars flowing in for advancement, and yet we’re still having these issues of transparency. That’s the real problem.”