(Bloomberg Opinion) — Didi Global Inc. is bringing its dominant ride-hailing position in China to the U.S. stock market. While the Beijing-based company’s 80% share of the sector has made it attractive to Wall Street investors, that dominance has also brought on an investigation by China’s competition authorities. Didi seems to have decided to navigate between those two interests by driving through the electric-vehicle economy.
Despite early excitement over the stateside initial public offering, the company is dealing with lowered expectations. Documents for its $4 billion New York listing show a company with tight margins and slowing growth. Didi now seems content on a market cap of about $67 billion as those regulatory shadows and growing concerns over cash burn temper expectations. Its valuation is barely up from the last funding round in 2019 and far short of the most bullish $100 billion expectations.
Reasons for the muted enthusiasm are dotted throughout the New York filing. Despite the “global” tag — including a footprint in nearly 4,000 cities, counties and town across 16 countries — 94.3% of revenue last year came from its China mobility business, 97% of which came from rides with the rest including e-bikes, and bicycles. Ride-hailing was 78.6% of Didi’s China gross transaction value — the amount received before deducting consumer and driver incentives. With driver earnings being the largest component of costs, there’s not a lot of room to budge. Its adjusted earnings before interest, taxes, and amortization (Ebita) for China ride-hailing was only 3.1% of the GTV.
Didi’s China mobility business was already declining before Covid-19 hit in early 2020. The number of transactions fell 1.4% in 2019 while GTV dropped 1%. These metrics may pick up after Covid passes, but the data shows that growth isn’t guaranteed. And with turnover stagnant, there are only two ways to boost revenue: raise prices, or take more of the ride fee for itself and share less with drivers. Yet in China’s tier-one cities — the biggest in terms of population — drivers make only around 10,000 yuan ($1,548 ) a month, 10% below average incomes and barely more than standard taxi drivers, according to Bernstein Research. “Further take-rate increase will trigger complaints from drivers,” Bernstein notes.
The alternative — raising prices for consumers — is precisely the kind of move that draws the attention of antitrust authorities in any jurisdiction. In April, according to Didi’s prospectus, Chinese regulators called in more than 30 major internet companies for a chat and to self-identify possible violations of anti-monopoly and anti-unfair competition laws. “Our business practice and expansion strategy may be subject to heightened regulatory scrutiny,” the company wrote.
But Didi has a new story to tell both investors and the government. The term “electric” (car, vehicle, mobility) comes up more than 180 times in its prospectus, and it plans to spend 30% of the funds from this offering to boost technology in areas such as shared mobility, electric vehicles, and autonomous driving.
Didi consistently talks up its EV credentials: More than 1 million on its platform last year, the world’s largest network, accounting for about 38% of China’s electric mileage, and over 30% share of the nation’s vehicle charging.
And it’s not just passively signing up electric vehicles. The company is actively putting them on the road. In November Didi released the D1, developed with BYD Co., which it bills as the first EV developed specifically for ride-sharing. It’s also signed collaboration deals with BAIC Motor Corp. and Guangzhou Automobile Group Co. Progress appears slow, however, with just 4,000 D1 models in commercial use.
The EV push is justified, Didi says, by the fact that the cost per kilometer to operate a shared mobility electric car is more than 25% lower than for a combustion engine. The company also sees itself tapping into China’s push to be be a global leader in EV adoption. By 2040, global electrical vehicle penetration is expected to hit 29.3% (from 1% last year); in China it’ll climb to 50.2%, Didi said, citing estimates from China Insights Industry Consultancy.
Beijing desperately wants its home-grown EV industry to flourish — and Didi fits the need. There’s still the small matter of its possibly monopolistic model. That’s where a reconciliation may be reached.
We’ve seen this punished-to-patriotic conversion before. Three years ago, Tencent Holdings Ltd. was hit by a ban on new game approvals, a halt that crimped revenue and drove its stock down. But it returned with a new patriotic video game called “Homeland Dream” and a renewed appreciation for Chinese regulators. Also, a year ago, the government penalized at least 10 owners of live-streaming services, including ByteDance Ltd., for allowing questionable content on their platforms. A new wave of self-censorship and pro-Beijing propaganda ensued. Ant Group Co. had its IPO nixed at the end of 2020. Now it’s reported that the fintech giant is in talks to share data with state-owned firms.
By helping drive the electric-vehicle ecosystem, which includes autonomous driving, Didi can boost its business while showing itself a good corporate citizen. If there’s any lesson to be learned from history, it’s that Beijing is intent on ensuring fealty to Team China — and if you want to avoid punishment, you have to learn to play ball.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.