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Didi Sinks as China Steps Up Scrutiny of Ride-Hailing Sector

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·3 min read
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(Bloomberg) -- China will step up oversight of its ride-hailing and on-demand trucking companies from Didi Global Inc. to Full Truck Alliance Co., adding to a widening campaign by Beijing to rein in its internet sector.

Some firms in the industry are currently operating irregularly and disrupting fair competition, the transport ministry said in a statement Friday that didn’t identify any specific firms. Companies must protect the rights of drivers, root out illegal cars and drivers and also strengthen data security management.

What Bloomberg Intelligence Says:

Didi’s domestic mobility profit could collapse if regulators force it to pay higher fees to drivers, a possibility that emerged after the government declared some ride-hailing companies infringe on their rights. Driver fees are the biggest cost in the business, which eked out Ebitda margins on gross transaction value of 2.2% and 6.8% in 2020 and 1Q21, respectively. That would leave little room for Didi to shoulder additional costs, especially with its international and other businesses losing money.

-- Matthew Kanterman and Tiffany Tam, analysts

Click here for the research.

Didi’s U.S.-traded shares were down about 5% in premarket trading in New York. The statement is the latest in a series of pronouncements by Xi Jinping’s government on the tech industry. In the past week, the internet industry regulator, antitrust watchdog as well as the State Council have issued statements or new regulations concerning everything from after-school tutoring to illegal internet activity and food delivery.

Read more: Why China Is Cracking Down on its Technology Giants: QuickTake

Scrutiny over the tech sector has fueled a sell-off in tech shares, as investors struggle to price in Beijing’s tightening regulatory grip. The government’s decision to ban large parts of its tutoring industry from making profits or raising capital was swiftly followed by the announcement of a six-month campaign by the Ministry of Industry and Information Technology to rectify illegal behavior online. Regulators also this week ordered online food delivery platforms to ensure workers earned at least the local minimum wage, adding to the uncertainty.

And earlier Friday, the Internet Society of China, acting on behalf of MIIT, ordered 12 internet giants including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. to step up data security protections, including the exporting of key information. The Politburo also issued a statement that pledged tighter supervision of overseas share listings.

Didi, the country’s largest ride-hailing firm, as well as Full Truck Alliance are currently being probed by the Cybersecurity Administration of China for data security. In the prospectus for its troubled U.S. listing, the Beijing-based company had warned that it could face penalties if its vehicles or drivers didn’t have required licenses or permits.

Bloomberg News had previously reported that Didi chose to list in New York because rules there proved more amenable and it expected a better valuation from investors familiar with Uber Technologies Inc. The Hong Kong exchange had questioned Didi’s compliance with Chinese regulations: for instance, it didn’t have licenses to operate in certain cities and many of its drivers lacked a household registration (or hukou) for the cities where they lived, part of municipal requirements for providing on-demand ride-hailing services.

(Updates shares. A previous version of this story corrected attribution of the quote from Bloomberg Intelligence)

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