There has been an ongoing crackdown against tech companies as China takes down another tech firm. This time, China has banned its largest ride-sharing company from adding new registrants. According to recent IPO documents, the company already has 377 million users and generates 88% of its revenue in China. The timing of this crackdown is bad news for investors in DiDi (NYSE:DIDI), the ride-sharing firm. The company just launched its U.S.-listed IPO on June 30. Now, the firm says it might experience significant revenue declines in China.
Shares of DiDi plunged as much as 25% on Tuesday. Other Chinese stocks like Baidu (NASDAQ:BIDU) and Alibaba Group (NYSE:BABA) fell a few percentage points. Analysts do not fear a notable drop in profits, saying the existing user base in China is large. Therefore, the removal of the app would have no impact on existing users, they said. DiDi arranges an average of more than 20 million rides in China every day. In addition to China, the ride-hailing company operates in 15 other countries.
The China Administration of Cyberspace (CAC) had banned the DiDi app from being downloaded from smartphone app stores on Sunday. This is because DiDi had illegally collected personal user data, the agency said. The authority had already begun an investigation into the company, citing possible national security threats. On Friday, DiDi would not be allowed to acquire new customers in China.
The company reiterated on Sunday it was following the instructions. DiDi collects large amounts of mobility data for technology research and traffic analysis. It also said it would fix any problems and protect users’ privacy and data security. Previous users were able to access the services unchanged on Sunday. It’s important to understand why this is happening before China takes down another tech firm.
What’s Really Driving This Action?
We need to dig a little deeper under the hood to understand what is happening with DiDi. Chinese officials have been cracking down on tech companies over the last year. For example, the regulators canceled the highly anticipated IPO of Ant Group. This was a big blow to investors like Alibaba and Jack Ma.
In addition, China slapped Alibaba with a record fine in the billions and said that the company was engaging in monopolistic behavior. Keep in mind, these crackdowns come when Chinese companies must meet U.S. auditing requirements to remain listed on foreign exchanges.
China has said that it will punish companies that engage in fraud or other crimes. This has raised concerns that such activity is rife among firms that list foreign markets. However, one other hypothesis is that Chinese leaders see the number of power companies like Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Facebook (NASDAQ:FB) has in the United States. The crackdown enables that none of these firms grow large enough to compete on influence with the Chinese government.
This is a significant trend that Garrett has discussed in recent weeks. Look for a note from him tomorrow on the best way to profit from this ongoing crackdown. He’ll also detail the new problems caused by the weakening in relations between the United States and China.