The true story behind why Didi filed IPO in the US instead of China
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Didi is a mobile application based on the sharing economy that can be used to reserve or share a ride, taxi hailing, private car-hailing, bike-sharing, etc. As of 2021, Didi Chuxing had 580 million users, making it the world’s largest travel service platform.
(1) Background
The establishment of Didi goes back nine years. In 2012, Didi’s parent company, Xiaoju Technology, was established in Haidian, Beijing. This year, with the outbreak of the Alipay VIE incident and the China-United States trade war, the US’s trust in Chinese listed companies dropped to an all-time low. On June 20, the SEC formally required the Big Four accounting firms to submit audit papers of Chinese companies listed in the United States.
Earlier on May 9, the SEC initiated a lawsuit against Deloitte Shanghai, accusing it of refusal to submit audit papers from Chinese companies, which seriously violated US securities laws.
The SEC claimed that if Deloitte Shanghai refused to enforce it, it would stop operations being forced by the SEC. As one of the Big Four, PWC also issued a statement shortly after, stating that it had received many formal and informal requests from the SEC to submit audit papers for China’s concept stocks, and the pressure was huge. Of course, the results of the engagement show that the China Securities Regulatory Commission, CRSC, had withstood the pressure and stood firm that it would rather pay the price of China’s concept stocks not listing in the United States for two consecutive years, and will not allow the SEC to take away an audit paper. The SEC is, of course, not reconciled and has been secretly wrestling with CRSC for this. But in the past nine years, it has not been able to go one step further.
So, what is an audit paper? Why should China hold such a firm attitude towards auditing papers? Let me summarize in one sentence: Audit papers are the paper-based forms of a company. Among them, all user data, all meeting records, all communication documents, a summary of all questions, and all program forms. Even emails over the years are not immune to all the confidential information exchanged between government departments. Because companies that go public in the United States are among the leaders in their industry, they cover tons of details about Chinese citizens’ life and work. So, once the US got audit paper from the SEC, it would be equivalent to stripping the whole of China naked and revealing itself in front of the United States.
It is also because the audit manuscript covers all the business secrets of a company, so for the accounting firm, keeping it strictly confidential has become the top priority of its business. Once the secrets are leaked, the credibility of the accounting firm would be ruined. At the same time, the accounting firm is liable for the losses of the audited company. Therefore, many accounting firms will destroy audit papers when the confidentiality period expires. But at the same time, China also knows that there is no absolutely secure system in the world. Even if the accounting firm is reluctant to disclose client secrets, there is still force majeure. In two cases, the audit manuscript can still be transferred for inspection, and it is not a leak: 1. The court, the procuratorate, and other state departments have reviewed it in accordance with the law and have gone through the necessary procedures in accordance with the regulations. 2. The Institute of Certified Public Accountants or its appointed entities shall inspect the practice of accounting firms.
In the past two years, as the China–United States trade war escalated into a cyberwar, the SEC, as the leader of the war, has greatly increased its power. They once again found an opportunity to require the Big Four to submit audit papers for China’s companies. In this round of national games, the biggest prey targeted by the SEC is Didi.
(2) Motivation
In the early morning of July 1, Didi went public in silence. There were no announcements on the official website, no photos of ringing the bell on the Internet, and no moments from employees. It is unheard of that a giant with a market value of 400 billion going public so quietly. All in all, it shows that the amount of fundraising is no longer important. What matters is the result of the IPO. It’s done.
The next day Didi went public; Weibo was like being pressed the mute button; there was no previous hot search. It wasn’t until July 2 that Didi received a national security review process from the Chinese government; it is unavoidable that Didi began to appear in top news.
The pressure on Didi comes from their list of investors that fill up an A4 paper — burning money hundreds of billions for nine years and raising funds 23 times. The essence of Didi is that it is an enterprise supported by investors’ money, so it does not have any right to speak against capital. However, if Didi does not file for IPO, once the time window is missed, capital may lose the opportunity to get their money back forever. At that moment, the SEC launched a new round of onslaught. All parties are beginning to worry that unless the Chinese concept stocks hand over the audit papers, they will be prohibited from listing in the United States. The worries of capital are also reflected in collective action. Beginning last year, China Concept Stocks started an unprecedented wave of secondary listings back to Hong Kong, and BAT gathered on the Hong Kong Stock Exchange for the first time.
But Didi and BAT are different. Success is from capital, and failure is also from capital. Its destiny is not in its own hands.
After madly burning 150 billion yuan within just seven years, Didi’s operating losses continue to expand. This means that whether they IPO as Chinese stock or Hong Kong stock, it is almost impossible for Didi because the former requires the company to make profits for three consecutive years, and the latter requires the net profit of the most recent year to be no less than 20 million Hong Kong dollars. So in the eyes of capital, Nasdaq has become the last choice to exit. Didi aimed at Nasdaq, and the SEC also aimed at Didi. Finally, as we have seen, after weighing all the pros and cons, Didi still chose to list on Nasdaq. Please note that we are still not 100% sure that Didi has given the SEC audit papers. Just pushing forward from the results, Didi’s almost weird listing and the extremely strict wording of the Cyberspace Administration of China have infinitely magnified this possibility.
In 2015, the data released by Didi had already undergone significant desensitization. Just like the user portraits published by WeChat every year, even if the US gets it, there is no usable value. Of course, the premise of all this is that Didi will not go public in the United States in the future or hand over audit papers. Because in the audit manuscript, all data are raw data without any desensitization. Once the US gets it, it will not only know which ministries and commissions work more overtime, but also know where A from A is living, whom B from B has met, and C from C’s daily itinerary. Speaking of this, for the time being, more interpretation is left for everyone to diverge freely.
In 2017, Didi launched the Orange Vision Driving Recorder, which has captured China’s urban and rural high-precision surveying and mapping data in one fell swoop. That year, after several safety incidents, the public opinion on Didi reached its peak. Not only is the entire driving process recorded, but all drivers are forced to install it; otherwise, they will lose their driving qualifications. In October last year, after the 3rd anniversary of the launch of Jushi, Chai Hua, general manager of Didi Maps Division, announced a set of data at the annual meeting of the Chinese Society of Surveying and Mapping: The accuracy of the basic data of Didi Maps has exceeded 95%, and it is updated daily. The increased trajectory data exceeds 108TB. These trajectory data and scenes are characterized by massive, continuous, and high quality. In addition, 550 million passengers will report hundreds of thousands of traffic incidents every day. More than 10 million Didi vehicles pass through Orange Vision every day to become Didi’s real-time street view surveying and mapping vehicles. Once the United States obtains these data, national security is bound to face a great crisis.
For Chinese consumers, this is a dilemma that will inevitably be faced when using Internet services: If the platform side does not need to bear the responsibility, it will inevitably increase various risks. If the platform is allowed to take on more responsibilities, it is bound to give up more privacy. For the Chinese government, the Didi incident will also bring about profound reflections: In the future, even if users hand over more data, the servers that store the data must all be subject to government supervision. A platform similar to Didi can collect this data in the future. But if it is not a special situation, they will not have permission to obtain the data.
(3)Future
In the face of severe investigations by the Cyberspace Administration of China, the worst result that Didi is currently facing is the death of the product, the shutdown of the platform, and even the arrest of a few key persons in charge to eat in prison. Some people say that this is a fantasy because millions of people are tied to work, food, and clothing, and hundreds of millions of capital are fighting behind the scenes, and the country is absolutely impossible to shut down Didi. What I want to point out is that the person who said this made two mistakes. First, underestimate the country’s determination. Second, the importance of Didi is highly regarded. If national security is really threatened because of this, ten Didi will face the same situation.
In reality, the replacement of Didi is still very easy. Earlier, Didi smashed a huge amount of capital to get users, and then through the acquisition of Uber China, this step was successful, and it successfully monopolized travel services. But in the capital market, there are still some small players, such as Dida, Cao Cao, and Yangguang, who are still alive and well. If Didi dies later and the driver changes to another platform to take the order, and we change to another platform to take a taxi, life will not be affected in any way. These companies that rely on piling up capital to create demand for users are destined to quickly lose the hearts of users after being abandoned by capital. From this perspective, where the Didi incident will ultimately go is a secondary issue. Most importantly, at the key point of the 100th anniversary of the founding of the Communist Party, the country is taking advantage of the Didi incident to once again release a strong determination: The Chinese Communist Party has its roots in the people, blood in the people, and strength in the people. Any enterprise that sells the interests of the Chinese people. Doomed to no good results. Stop provoking the bottom line of the country. Do this again, and everything you have now will be lost.
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