The Chinese Communist Party is on a campaign to reign in the private sector and some analysts say it is just the beginning. According to Wall Street Journal:
Investors, analysts and company executives believe the government is just getting started in its push to realign the relationship between private business and the state, with a goal of ensuring companies do more to serve the Communist Party’s economic, social and national-security concerns.Jing Yang, Keith Zhai, and Quentin Webb, “China’s Corporate Crackdown Is Just Getting Started. Signs Point to More Tumult Ahead” at Wall Street Journal.
Last November, the Chinese Communist Party (CCP) reined in Ant Group, Ltd. which was poised to open on the Shanghai and Hong Kong index with a $37 billion initial public offering. While some analysts pointed to an October 2020 speech by Jack Ma where he criticized China’s banking system, the real problem for the CCP was Ant Group’s power in China’s economy and potential competition with the state bank.
Ant Group’s power was in the form of data. And now Beijing is looking to rein in other companies that acquire troves of user data. The CCP is concerned domestically with large companies potentially competing with the state, and internationally with foreign governments accessing data about China or Chinese government officials.
One of the major companies that was reined in by Beijing this summer: DiDi Chuxing (Didi Global Inc.).
Didi is the largest ride-hailing company in the world, beating its competitor, Uber, because of its two biggest advantages — cornering the Chinese market and its sophisticated algorithm:
And the company’s foray into artificial intelligence — both for autonomous driving and mapping capabilities — could herald a new era of “smart cities.” Today, Didi has so much information about how traffic moves around China that it helps cities manage flow. In about two dozen Chinese cities, its data determines when an additional lane should open or street lights should change, making it indispensable to local authorities and very much part of the public infrastructure.Ambreen Ali, “Didi’s Big Debut” at The Wire China
Didi’s traffic and mapping algorithm allows the company to partner with cities across China to regulate traffic flow. This is made possible by the massive amount of data Didi obtains from its 30 million drivers and 550 million users, which, according to The Wire China, amounts to 90% of China’s ride sharing market. But the company’s size, influence, and data put it in the crosshairs of Chinese regulators, and not entirely without reason. Didi had been dinged for not getting proper permits and for safety violations after two instances of female passengers being murdered by Didi drivers and several other women saying they were sexually assaulted by drivers.
Part of Didi’s safety overhaul is additional monitoring of drivers, routes, and conversations within the car. Didi worked to please regulators and the Chinese Communist Party as many Chinese tech companies do by working with the government and demonstrating how their data can solve infrastructure problems. The company also hired 1,000 members of the CCP, but as The Wire China reports, that was not enough.
Chinese officials discouraged Didi from going public on the New York Stock Exchange until the company had met certain security requirements. However, new laws by the Chinese government regarding data sharing make it difficult for private Chinese companies to meet the audit requirements to list an IPO on the U.S. stock exchange. In 2020, the U.S. passed a law requiring audit papers for U.S.-listed foreign companies for regulatory inspection. The CCP is concerned that the audits will contain sensitive information, including the company’s interaction with the Chinese government.
Didi collects user location and trip route data, for safety and data analysis, and routinely publishes reports illustrating its “big data” analytics, showing, for example, what times people in certain cities finish work, or which employers have the longest work hours.
The company also equips cars with cameras monitoring road conditions, and what is happening in the car, collecting data on 100 billion kilometres of Chinese roads per year. It stores all this Chinese user and roads data on domestic servers.Julie Zhu, “EXCLUSIVE Didi in talks with state-backed Westone to hand over data control-sources” at Reuters
The company has access to conversations, what people say, and even how often someone is dropped off at government offices.
Even though Didi listed its initial public offering on the NYSE for $4.4 billion on June 30, by July 2, the Chinese government put Didi under a security review:
[Beijing] put Didi under cybersecurity review and banned it from accepting new users. Over the next few days, it told app stores to stop offering Didi’s app, and announced it was tightening rules for Chinese companies listed or looking to list overseas… The officials made clear to Didi, according to the two people, that the government didn’t intend to block the IPO, but wanted the company to wait until it had carried out the proper security checks and made sure the documents it would present to the U.S. regulators contained no sensitive information.Jing Yang, Keith Zhai, and Corrie Driebusch, “Didi Tried Balancing Pressure from China and Investors. It Satisfied Neither” at Wall Street Journal
The Chinese government’s probe into Didi spurned a review of several other mobile apps, and the WSJ reports that more overseas IPOs will be suspended over concerns of “data security, cross-border data flow and other confidential information management.” New regulations from the Cyberspace Administration of China will require all tech companies that obtain user data in China to be evaluated by the administration before publicly listing on a foreign stock exchange.
According to Bloomberg, the CCP has recognized the threat that private companies pose:
Didi’s listing in the U.S. came just as Xi is looking for ways to control the vast reams of data held by tech giants, in part to ensure the Communist Party spreads the wealth beyond a small circle of billionaires. Regulators are waking to the threat posed by private companies. In 2017, the government passed laws that required foreign companies like Apple Inc. or Amazon.com Inc. to store Chinese data within the country, while forcing them to secure local partners to manage that hoard of information via local datacenters.“Didi Weighs Giving Up Data Control to Appease Beijing” at Bloomberg
A Reuters exclusive reports that Didi may be working with Westone Information Industry Inc, a state-owned cybersecurity firm to store and manage its data. In other words, Didi is considering giving up control of its data and giving control to state-run firms.
Didi Global had its problems, particularly with oversight, safety, and licensing, but where it ran afoul of the CCP was in collecting too much data and listing with the U.S.
In an authoritarian government that sees data as power, Didi is one of several tech companies that have been subdued by the CCP’s recent crackdown. Next time we’ll look at how the Chinese government is making sure China’s Big Tech as well as its lucrative online tutoring sector serve the government’s goals.