Didi’s China Probe Adds to Business Challenges at Home and Abroad

Didi reported a quarterly profit of about $800 million in the first three months of this year, most of that because of its market dominance and concentration in China. That commercial strength may now weigh on its prospects as the company comes under regulatory scrutiny at home, analysts say.

On Sunday, the country’s internet watchdog, the Cyberspace Administration of China, ordered mobile app stores to remove Didi’s China app. Two days earlier, the same regulator launched a cybersecurity review of the company. Didi didn’t respond to a request for comment on the impact of the move on its business.

More than 90% of Didi’s first-quarter revenue came from ride-hailing in China, according to its listing prospectus. Rival

Uber Technologies Inc.’s

core ride business, by contrast, accounted for just 29% of its first-quarter revenue; food delivery brought in 60%.

Didi has struggled to diversify into new growth areas. The Chinese company made a push into food delivery in China in the past, but failed to gain much traction in the face of strong market incumbents.

Even in its core business, Didi has faced increasing competition at home from startups offering niche offerings such as luxury car-hailing.

Didi had 96% of China’s ride-hailing market in 2018, according to researcher Deloitte. In recent years, rivals have whittled that down to around 80% to 90%, according to

Cherry Leung,

an analyst at Sanford C. Bernstein in Hong Kong. She estimates that Didi could lose about 6 million new customer installs over the period of the data-security investigation, assuming the probe lasts the standard duration of six weeks.

Didi’s existing troubles are an invitation for rivals to try to steal market share in an industry where Chinese customers are less loyal to brands and highly price sensitive.

“Many competitors are looking for the right opportunity to play offense,” said Tu Le, managing director of advisory firm Sino Auto Insights. “Before this, Didi was a healthy company. Now, they are wounded.”

Chinese automakers such as

Geely Automobile Holdings Ltd.

and

FAW Group

and its technology peers

Alibaba Group Holding Ltd.

and

Meituan

have sought to diversify growth by jumping into the ride-hailing industry. Car-hailing rivalries have captivated Chinese consumers in the past, with steep discounts dangled to woo users, sometimes bringing the cost of a trip of more than three miles to less than $2.

This week,

Jennifer Hu,

a staffer in a law firm in Shanghai, received a call from Meituan for the first time, offering 50% off trips of more than 20 yuan, equivalent to $3.09, for existing users like her.

Didi’s prospects for expansion and profitability outside of China are bleak, given increased competition and changing labor laws, said

Kyle Guske,

an investment analyst at equity research firm New Construct. The recent investigation makes the task only more challenging, since its international competitors won’t have to deal with similar issues, and the episode could lead to a loss of confidence in the app’s usability, said the Brentwood, Tenn., analyst.

In its prospectus, Didi said it was the second-largest ride-hailing platform in Latin America, citing data from China Insights Industry Consultancy Ltd. and iResearch Consulting Group. Didi has 493 million active users globally, with users in 16 countries beyond China accounting for 12% of that number.

Didi now faces potential lawsuits from several U.S. law firms acting on behalf of investors, who allege that Didi may have issued misleading business information prior to its listing.

Didi raised $4.4 billion in its IPO, but after it came under the scrutiny of regulators, its shares tumbled 19.6%, falling below the IPO price. Weeks before Didi went public, Chinese regulators had suggested that the company delay its IPO, people familiar with the matter said.

Didi’s new regulatory troubles come as it tries to escape the impact of the pandemic, which was less severe in China but still cut the company’s revenue last year by 8.4%, to 141.74 billion Chinese yuan, equivalent to $21.9 billion. Some 94% of that came from China mobility services.

Didi’s fall from grace is noteworthy given that the company was once heralded as a source of national pride. In 2015, the scrappy technology startup headed by internet entrepreneur

Cheng Wei,

who is now 38 years old, took on Uber in a battle for China’s ride-hailing market. After a bitter price war, the Chinese company acquired Uber’s China operations in 2016 in a share swap.

As a privately held company, Didi was also one of China’s most valuable technology unicorns, and highly sought after by investors. Its backers include

Softbank Group Corp

,

Apple Inc.,

and

Alibaba.

At home, the company has branched out into bike-sharing and logistics. Its flagship China app provides services including home moves and financial loans, though these represent only a tiny fraction of its overall business.

Even so, analysts say that Didi’s current dominance in many of China’s largest cities may cushion the impact. Didi also runs Huaxiaozhu Dache, a second ride-hailing app that is targeted at consumers in lower-tier cities and is still available on Chinese app stores.

The main Didi app has already been downloaded by many Chinese smartphone users, and the banning of new users is unlikely to have a big impact, said

Sumeet Singh,

head of IPO research at Aequitas Research.

“Given its market dominance, it’s a given that anyone who uses ride-sharing services in China probably already has Didi on their smartphone,” said Mr. Singh.

—Raffaele Huang and Trefor Moss contributed to this article.

Write to Liza Lin at [email protected] and Chong Koh Ping at [email protected]