Shares of China’s leading online taxi company DDT have fallen as much as 30 percent from their peak in a week after the company came under security review on July 2, causing major losses for U.S. investors and sparking heated debate among Chinese netizens. In response, analysts say this is a consistent tactic by the Chinese Communist Party to suppress private technology giants and the capital forces behind them on the grounds of cybersecurity. They said the drop, which was warned by officials but still insisted on going public in the U.S., is likely to lose nearly 6 million new users as a result of its disobedience.
In time for the Communist Party’s 71st anniversary, Drip went public in the United States, once valued at more than $67 billion. But within 48 hours, China’s National Internet Information Office (NIO) not only launched a cybersecurity review of the company, but on July 4 further demanded that it take down the app and suspend new members on the grounds that Drip was collecting personal information in serious violation of the law.
In the past week, Drip’s share price has fallen sharply, closing at $11.21 per share on July 8, down 30% from its high of $16.4 per share on July 1, leaving U.S. stock investors wailing.
In addition to DDT, the crackdown by China’s Internet Information Office also affected two other major online companies – the job market information platform Watch.com, and the leading digital freight forwarding company Full Help Group, which also went public in the U.S. in June, with its apps “Transport Full”, “Van Help” and “BOSS Direct”. “and BOSS Direct must suspend registration of new customers.
Meanwhile, China’s State Council also warned large companies that it will tighten data security across the board and tighten oversight of overseas listings.
Chinese netizens are buzzing
The official crackdown on China’s technology industry is nothing new, but the Drip incident has sparked a lot of debate among Chinese netizens.
Mr. Liu, a drip driver in Guangdong Province, said via a video uploaded to Weibo, “If the drip is good, we may not be good. But if the drops are not good, we are definitely not good. The government’s regulation of drops, for ordinary people like us, we can only watch the fun, that’s all.”
Other passenger netizens posted on Weibo their experiences interacting with Drip drivers, with some saying:- “Drip has been attracting countless people to register for years on the basis of financial power and huge high subsidies, collecting a lot of private data, and if it really sells important Chinese data to the United States, the government can openly arrest people and don’t let the capitalists get away.”
Other netizens were unconcerned, saying, “Even if something happens to Drip, passengers or drivers can switch to other platforms such as T3, and it won’t have much of an impact.”
After the regulation of Drip, the Internet is widely rumored that Drip is because of the listing, fearing that the sensitive Chinese user and road data will be leaked to the U.S. government, so that triggered a backlash from Chinese officials, to strictly check the data out of the country.
However, Li Min, vice president of Drip, clarified via Weibo as early as last weekend: “Like other Chinese companies listed overseas, Drip’s domestic user data is stored in Chinese servers, and there is no way that the data will be given to the United States.” Drip also said it would cooperate with the review.”
Drip fears losing six million new users
But the review is likely to have a major impact on Drip’s business, especially given the low brand loyalty of China’s online riders and drivers,” Cherry Leung, an analyst at Sanford C. Bernstein in Hong Kong, told the Wall Street Journal. During this period, Drip could lose 6 million new users.”
Founded in 2012 in Beijing, China, Drip has leapt to dominance of China’s online taxi market with 550 million users worldwide in nine years after a total of 21 financing rounds and two mergers, but most of them are in China. By the end of last year, it had an 88% share of China’s online taxi market. The largest shareholder behind Drip is Japan’s SoftBank Group, and other shareholders include Tencent Group, Alibaba, GSR Ventures, Sequoia Capital and others.
However, Drip has not been successful in promoting business diversification and exploring new markets, with about 90% of its business in the first quarter of this year still coming from China’s online taxi service, which has shown losses for the past three years. In its core business of online taxi, it is facing fierce competition from other peers such as T3 and Cao Cao car, the common feature of Chinese online taxi is to spend a lot of money to attract passengers and drivers.
Faced with huge competitive pressure, Drip is eager to expand into overseas markets and needs huge funds to support its operations. Therefore, despite warnings from Chinese authorities to reform operations and improve unfair treatment of drivers, Drip is actively promoting its plans to go public in the US.
Rush to raise funds for U.S. IPO
China has been scrutinizing technology giants for a long time, and Drip has not only been warned by the authorities once, but why has it not learned from the temporary halt of Ant Group’s IPO and instead accelerated the process to go public in the US?
Ltd. told the Voice of America: “Drip early (on) know that the Internet Information Office (in) investigation, so accelerate the U.S. listing, listing speed, we did not expect, generally expected to be listed after six months, did not expect a couple of weeks on the market. The company basically wants to be fundraising, do not want to be called off before listing like Ant Group, or what money can not get, this is purely a business decision has nothing to do with politics.”
Crackdown on the Red Family
However, lawyer and political commentator Samp believes that the CCP’s move also has a political purpose of suppressing the power of private capitalists. Speaking to Voice of America, Samp said, “Under Xi Jinping’s dictatorial politics, the internal struggle within the CCP is still very serious, and in the case of DDT, it is in response to the complex and huge capital and shareholder structure behind it, which has many foreign investors, but also many red families, and the main purpose is to suppress the red families and weaken their capital and power.”
He added: “This wave of crackdown by the Chinese authorities has a political purpose. There are Communist Party units in Chinese companies, and certainly in companies such as DDT. The authorities have repeatedly warned Drip, but Drip has repeatedly disobeyed, and through the secrecy of the accelerated way to actively go public in the United States, and the Chinese Communist Party after its listing to strike a heavy blow, which is tantamount to hit Drip hard in front of everyone, to warn the consequences of disobedience, is to face a heavy drop in share price and more severe scrutiny.”
And Lin Zongnan, a professor at NTU’s Department of Electrical Engineering, believes the crackdown also has a saber-rattling effect on the United States. He told Voice of America, “In the U.S.-China confrontation pattern, the Internet and data security are just excuses for the Chinese Communist Party to enforce regulation and suppression, which is to crack down on Chinese companies listed in the U.S.”
According to Chinese media reports such as Watchdog.com, this would be the first regulatory action enforced by China since the Cybersecurity Law hit the road in mid-2017. According to the Wall Street Journal, the Netizen Office appears to have assumed regulatory responsibility for Chinese companies listed in the U.S., and its rising powers reveal that Beijing wants to address the lack of coordination between regulatory, economic and financial regulators.
In addition to the Cybersecurity Law, China will introduce the Data Security Law and the Personal Information Protection Law in the future to establish a more complete legal system for regulating online data. The Data Security Law is scheduled to be formally implemented on September 1, while the Personal Information Protection Law is reported to be considered at the August meeting of the Standing Committee of the National People’s Congress, basically reaching the stage of three readings and generally expected to pass smoothly.
Beijing’s high-level regulatory views are divided
The Data Security Law will regulate the process of data collection, use, processing and transmission, especially Chapter 3, which states that a number of mechanisms will be established for data classification protection, risk assessment, emergency response and security review. Another notable focus is to regulate how data collected by companies in China should be exported. Beijing’s top brass is reported to hold different views on data regulation. Chinese Premier Li Keqiang and other officials advocate giving private companies greater autonomy in data collection and processing to facilitate innovation. But security services and financial regulators argue that tech giants are expanding too much and refusing to share data with the government, and that regulation should be tightened.
Analysts believe that China’s flurry of crackdowns has nothing to do with cybersecurity because, with China now having party branches at companies, it is not difficult to obtain data. They also say that the successive implementation of China’s Internet data regulation laws is intended to make the crackdown more dynamic division, which means that, in the future, both Chinese and foreign companies will face severe regulation, and the road to the U.S. listing of Chinese technology companies will be frozen.
Crackdown Kills Innovation
In an interview with CNBC, Scott Kennedy, senior advisor and director of China business and economics at the Center for Strategic and International Studies, a U.S. think tank, said China has a case for cracking down on companies involved in monopolies, but fears that it will stifle innovation in the private sector, which is a major driver of China’s economy.
The same view is shared by Lin Changnian of Hong Kong SmartEast Securities. He said, “Tighter regulation of China’s technology network industry is bad news, by the decline of China’s science and technology network stocks can be known, the impact on the overall economic development may be able to see in six months.”
But Samp disagreed, saying that the innovation of China’s technology network industry is not strong enough to drive China’s economic development. He said, “China’s technology industry will be strong and a large number of overseas students returned to China have a relationship, you can see the development of Zhongguancun in the 80s and 90s is quite prosperous, when there are (pen and electronic business) Lenovo and other large enterprises, and now Zhongguancun is relatively lonesome. The innovative power of the (Chinese) science network industry cannot be compared with its European and American counterparts, take Drip for example, basically the same technology as Uber. Therefore, to say that strict Internet regulation will kill China’s Internet industry, it would be better to say that the Chinese Communist Party is trying to nationalize the data held by Internet companies, which will have a limited impact on the industry, let alone on the overall economic development. China’s innovation and technology development is still not at a high level, and it still relies mostly on labor-intensive industries to drive the overall economic development.”
Tighter regulations create business opportunities?
Some Chinese media and experts are also optimistic about the business opportunities in the Internet data market after the implementation of the Data Security Law. They believe that the law regulates the data classification and classification protection system, different types of data assets will therefore have different protection mechanisms, which may give rise to new technologies such as privacy computing and related market business opportunities.
In this regard, Taiwan’s Information Policy Council Technology Law Institute group leader Fang-Yu Hsu slightly agreed. She told Voice of America, “In the Chinese environment, it is indeed possible, because they are based on the data itself to do classification and grading, but because the details are not yet released, it is impossible to judge the actual situation. China’s legislative starting point is different from other countries, in terms of non-personal data, the management objective of Taiwan’s information and communication security management law is not the data itself, but really for different organs and different information systems to do information security classification and grading judgment.”
However, NTU professor Lin Zongnan does not agree. He said that the more stringent regulations will not give rise to more market opportunities. Lin Zongnan said: “Alibaba and other large technology network companies currently have a lot of personal information and network data, and has not been subject to a large number of regulations, the market opportunities that can be created independently is huge. The authorities through the implementation of the Data Security Act and other network management laws, only to make the crackdown more famous, and later, together with the same approach against foreign companies.”
He added, “Even without the Data Security Law, the information that the Chinese government wants private companies to have is easily accessible to the Chinese authorities. Under China’s current legal system, all companies have to cooperate with the Chinese government’s national security reasons to provide the data that the government needs.”