Yves here. Uber is serving to demonstrate how long misguided financial backing can keep a fundamentally and hopelessly unprofitable, cash flow negative business going. Another example has been most US shale gas plays, but their money spigot is finally running dry.
By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants
Programming Note: On August 4th Uber plans to announce its second quarter 2021 earnings, and the forthcoming Part 26 of this series will summarize those results and the current state of Uber’s economics.
One of the central arguments in this series is that Uber’s business model and the economics of “ridesharing” were always completely hopeless. There was no way to produce the ongoing, sustainable profits from urban car services needed to justify tens of billions in investments from capital markets. None of the massive corporate valuations Uber or any of the other ridesharing companies have achieved have anything to do with technological or efficiency breakthroughs or powerful network/scale economies that created major marketplace competitive advantages or sustainable consumer benefits.
On June 30th, Didi Chuxing, the “Uber of China” went public for the first time (as Didi Global), issuing 316 million American Depositary Shares that are now traded on the New York Stock Exchange, but these shares quickly lost over half their original value after the Chinese government announced moves to rein in its tech industry.
This Part 25 post will focus on how the financial results reported in Didi’s IPO prospectus. They confirm our previous findings about the terrible economics of ridesharing. This post will also discuss how the growth and survival of the ridesharing industry has been the direct result of national economic policies towards the tech industry. Beijing’s recent announcements represent an explicit rejection of a move to a US policy approach that the Chinese tech industry had been aggressively pushing for.
The Didi and Uber Business Models Are Virtually Identical
Didi Chuxing illustrates an ideal execution of the Uber business model. That model started with raising a massive cash war chest from investors and using it to subsidize extremely rapid growth in customer volume and market share. Uber had long claimed that it would inevitably achieve global dominance because its ridesharing business model was so powerful that it could easily overwhelm competitors in any market it entered. But Didi adopted an extremely aggressive version of Uber’s massively funded subsidies approach and forced Uber to abandon China in humiliating fashion. 
Didi thus achieved the impregnable home market position that Uber had hoped for but never achieved and has had a market share over 92% for the last five years. Like Uber, Didi’s believed the combination of home market dominance and the network power of its “platform” would allow it to easily enter a wide range of other markets beyond ridesharing.
Didi also enjoyed several other advantages. Chinese cities are much more attractive to car service operators because of their much higher density of demand and low car ownership rates. This supports higher revenue and utilization rates than US operators can achieve.
The impacts of Covid-19 were also much smaller in China. Didi’s ridesharing revenue only declined 8% in 2020, while Uber’s declined 43%. Unlike Uber, Didi did not have to deal with the long-established local regulatory regimes and did not suffer from any major, self-inflicted governance or “cultural” crises. 
Didi’s IPO Prospectus Claims Cannot Hide That a Business That Cannot Make Money With a Market Share of 90+% Is Not a Viable Business
But despite enjoying much more favorable conditions than Uber, Didi remains unable to generate operating profits.
The prospectus for its June IPO reported GAAP net losses of $2.3 billion in 2018, $1.5 billion in 2019 and $1.6 billion in 2020.  Thanks to those favorable conditions Didi’s operating margins have not been as bad as Uber or Lyft’s, but it has clearly is not demonstrating any of the steady margin improvements needed to eventually “grow into profitability.” Prior market growth depended on massive subsidies. Even with the complete absence of competition it cannot charge customers the full cost of its service, and core market growth was plateauing prior to the pandemic.
Didi’s IPO prospectus emphasized how international and non-ridesharing markets would drive long term growth, just as Uber’s IPO prospectus had. But the data in the prospectus shows Didi has not been able to use its powerful home market position as a springboard to international growth—only 2% of its revenue is earned outside China. Nor has its ubiquitous app “platform” led to profitable expansion into other businesses. . Didi was unable to expand from ridesharing into food delivery because the Chinese market was already controlled by companies owned by Alibaba and Tencent.
Didi’s IPO prospectus, like Uber, did not hesitate to use indefensible accounting data. It emphasized “adjusted EBITDA” over GAAP profitability, allowing it to hide a half-billion in compensation expense.  It claimed a 2020 “profit” by including equity received after the disposal of unwanted assets as “operating income.” Its future “total addressable market” potential included all the maximum worldwide potential of all the food delivery and foreign ridesharing markets it had never penetrated.
It claimed profits would increase as it introduced driverless taxis even though it has not developed any AV technology and there are no prospects that driverless vehicles will be allowed to roam Chinese cities in the foreseeable future. It used a “flywheel” graphic cribbed from Uber’s prospectus (that Uber had cribbed from Amazon) to infer powerful scale and network economies that can’t be seen in any of the operating or financial results.
Beijing’s Open Displeasure Collapses Didi’s Valuation
Didi’s US IPO raised $4.4 billion, valuing the company at $67 billion. Because of strong demand, Didi increased the number of shares available by 10% and sold them at the top of its expected price range. Didi’s US-traded stock reached a high of $16.40 the day after the IPO but has fallen over 50 percent in the four weeks since.
Over the last year, Beijing had been openly working to rein in the growing power of its big tech companies and the plutocrats who run them. Ant Group (Alibaba) was forced to scrap an October 2020 IPO that was expected to raise $37 billion and value the company at over $300 billion, reportedly on the direct instructions of Xi Jinping. Major investigations of antitrust and governance rules were initiated and Alibaba founder Jack Ma, who had openly criticized Beijing’s efforts to regulate Alipay, his financial services company, has largely disappeared from public view. 
Beijing announced a major antitrust investigation of Didi and openly expressed concerns about upcoming Didi’s IPO but Didi ignored these signals. 
In the week after the IPO, new cybersecurity tax avoidance and other investigations were announced and Didi’s app was removed from Chinese app stores. Beijing’s policy offensive rapidly expanded and investigations have begun at a wide range of tech companies. US investors suddenly realized that it could not value Chinese companies the same way it valued US firms and over $400 billion has been wiped off the valuations of Chinese tech companies traded in the US. 
Softbank, which owned 22% of Didi, needed the proceeds of the IPO to cover major recent losses from investments such as WeWork. The collapse of Didi’s stock price cost Softbank roughly $4 billion and shrank the value of Uber’s 13% shareholding in Didi by about $2 billion. Uber took a second hit when Softbank began selling one-third of its stake in Uber in order to replace some of the cash its Didi stock was supposed to generate. 
What Should National Policies Towards the “Tech Industry” Be?
One interpretation widely publicized in the western business press is that the Chinese Communist Party was so obsessively concerned with anything that might ever pose any threat to its absolute political authority that it was willing to terrify foreign investors and impose huge costs on the Chinese entrepreneurs whose huge innovations had made the Chinese people much richer. But without discounting the CCP’s desire to protect its hegemony, it may be useful to look at Beijing’s actions from a different angle.
Beijing’s attitude towards its rapidly growing tech industry reflects its understanding of the longer history of tech industry growth in the US, and the impacts of US policies toward the tech industry. US policies have three major components—direct industry oversight, the links to national macroeconomic policy, and the influence of the industry over the Federal Government.
With one major exception, direct government oversight of the tech industry is essentially non-existent. Laissez-faire is the guiding principle and once tech companies reach a certain size they are largely free to ignore any laws and regulations they find inconvenient. Governmental bodies designed to protect broader public interests (antitrust/competition, labor and consumer protections, etc.) may nominally still exist but have been largely gutted. The major exception is national security, where the government can ensure that tech companies support its data collection and surveillance programs.
US macroeconomic policy prioritizes the ongoing appreciation of equity values and a number of other similar asset classes. This has crippled the ability of capital markets to evaluate and price risk and has broken the link between corporate values and the creation of economic welfare benefits. No one cares what causes stock prices to go up as long as stocks go up, and the higher up they go the better.
Since it is far easier to boost stock prices by eliminating competition and exploiting workers and consumers than by developing new technologies or management processes that improve efficiency and quality, innovation declines while predatory value extraction increases. The financial world becomes dominated by artificially manufactured narratives, a far easier way to pump stock prices than complicated analysis of economic fundamentals.
This focus on equity appreciation is also largely divorced from any industrial policy considerations. As long as the stock market keeps rising it does not matter if massive investment has been funneled into the production of cat videos or if an excessive focus on short-term stock prices have crippled the semiconductor and aircraft manufacturing industries.
Years of non-enforcement of routine laws and regulations under laissez-faire, and the ability of a handful of tech companies to achieve unprecedented sizes produced an outcome where both political parties strongly support the interests of the tech industry. This effectively blocks policies (e.g. tax rules, labor laws) that could materially hurt the tech industry. It also means that it is virtually impossible to address externalities created by these policies. These include things like the rapid growth of inequality, the destruction of traditional channels of political discourse and the rights of individuals to privacy and to control their personal data. It also includes the awful, widespread fallout that would result if (when?) the Everything Bubble created by these policies bursts.
Beijing may have come to believe that a system where the Jeff Bezos’ Mark Zuckerbergs and Travis Kalanicks of the world were given unfettered freedom to flaunt any rules they didn’t like may not have been producing efficient outcomes for the rest of society. It is one thing to allow investors who have developed major product and efficiencies to become rich, but a quite different thing if those investors suddenly capture previously unimaginable levels of wealth without actually improving overall economic welfare.
Jack Ma demanded that Beijing’s regulators back off so that Alibaba would have Amazon’s freedom of action and so he could pursue Bezos’ level of wealth. Beijing seems to have decided that this was the point where it needed to start sending signals, and when Didi blew off its concerns about the IPO it realized those signals needed to be stronger and clearer.
The tech industry plays a much different role in the economy in China than in America. When US tech companies were boosting their wealth and power into the stratosphere they were following a path that finance and other industry had already laid out. In China the Communist Party retained strong control over banks and most other major industries. The tech industry represents the breakthrough case where private capital accumulators could achieve enough power to circumvent or thwart central government policies they didn’t like, and industry leaders clearly wanted to entrench a US-type approach. This was the point where Beijing had to decide whether to reestablish some type of meaningful control, or allow the tech industry to pursue increasing US-style laissez faire freedom,
For better or worse, the CCP sees itself as the manager of the Chinese economy, and the political survival of the CCP depends on the perception that it has done a good job and dealt effectively with problems. Beijing is fully aware that inequality in China has been skyrocketing while productivity growth has been stagnating.  A growing perception that the benefits of economic growth are no longer being widely shared could do much more to undermine that authority of the CCP than any criticisms from tech titans ever could. If China’s IPO bubble bursts, the CCP would need to move rapidly to ensure damages did not spread throughout the economy.
As the manager of the Chinese economy, the CCP appears concerned that giving greater control of the tech industry to more independent, less accountable people could undermine its ability to manage other parts of the economy. Much of the power and growth of the “tech” industry stems from the Alibaba and Tencent financial payments companies. Beijing may be fearful that increased power and independence could limit Beijing’s ability to control its currency and trade policies, or to fix problems with its fragile shadow banking system or to funnel capital to industries (such as semiconductors or Belt and Road investments) deemed to be major development priorities.
Beijing’s recent statements have noted the importance of developing and controlling “big data”  and have raised “national security” concerns about Chinese companies doing IPOs abroad. It is not clear why control of Didi’s information about ridesharing users or sending Didi’s financial reports to the SEC would be major policy/security issues, but it was also not clear why the Trump Administration saw the Tik Tok and WeChat apps as a major threat. In both countries economic policy issues can quickly become very murky once diplomatic and national security policies enter the mix.
Beijing clearly had no desire to go further down the US laissez faire path where private capital accumulators would steadily more powerful. It presumably believes that the benefits of reigning in its tech industry clearly outweigh costs and risks.
The situation will continue to evolve, and it is foolish to try and reduce it to a good-versus-evil narrative. The owners of Didi, Tencent and Alibaba are not heroically resisting encroaching Beijing bureaucrats who are fighting to stifle economic innovation. Beijing’s announced investigations directly focus on longstanding tech industry abuses but it is wildly premature to predict that Beijing’s new policies might turn out to be a major boost for competition and Chinese consumer welfare.
Uber and Didi are Direct Products of These National Policies
It is one thing to document the terrible economics and financial results of companies like Uber and Didi. The more important question is to explain how companies with years of staggering losses can continue to be seen as innovative and successful, and how they can continue to extract billions from investors despite the complete absence of evidence that they could ever become sustainably profitable.
To date this series has emphasized Uber’s construction of artificial narratives and their ability to manipulate the mainstream media into enthusiastically promulgating them.  As noted, Didi’s IPO prospectus closely followed the narratives highlighted in Uber’s prospectus. But the US policies toward the tech industry, described above, put that process into a broader context.
When Travis Kalanick blew off every inconvenient law and regulation, he was completely in line with the laissez faire policies that that national elites wanted. It represented a major break from how traditional taxi operators and local regulators worked, but the people who ran the New York Times and the Wall Street Journal believed that taxi service would be substantially improved if government oversight was completely eliminated. It did not matter that those laws and regulations had been established under legal and democratic processes. Uber was not manipulating the media into favoring something contrary to its interests or core beliefs—they were simply providing the narrative explanation as to why Uber fit the approach they already thought was best.
Uber’s investors were not only single-mindedly focused on personal enrichment but were focused on achieving corporate valuations wildly beyond what anyone could have ever imagined for a taxi company. Instead of stopping and asking for evidence as to how this might be possible, those elites became fanatical supporters. The sole objective of business was to create massive equity values. No one cared whether some of those personal gains might come from suppressing driver wages or openly destroying competitive alternatives. No one cared whether capital has been misallocated from much better uses. Both political parties were in full agreement that Uber was a wonderful company.
Uber has continued to survive despite terrible economics because it was the poster child for the elite policies that demonized any government oversight of business and lionized the monomaniacal pursuit of capital accumulation. Membership in those elites required fully supporting those policies, just as membership in Chinese elites requires a full commitment to support the policies of the Communist Party. Despite $25 billion in losses, no one from those elites can admit that Uber might have massively reduced overall economic welfare, because that would require admitting that their overall worldview was badly flawed, and their status as elites might have been illegitimate.
Didi was following Uber’s exact business model and exact IPO approach because it believed that the Communist Party would gradually reduce its control over the economy and would allow the Chinese tech industry to expand under the US policy approach. Given what happened to Alibaba last year, and the events of the past month, that seems to have been a serious miscalculation.
 The Uber business model is documented in detail in Hubert Horan, Will the Growth of Uber Increase Economic Welfare? 44 Transp. L.J., 33-105 (2017) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933177and in Hubert Horan, “Uber’s Path of Destruction” American Affairs, vol 3, no 2, Summer 2019, pp.108-133. https://americanaffairsjournal.org/2019/05/ubers-path-of-destruction/. The TLJ article explains the importance of global dominance at p. 46 and the Uber China debacle (where Uber lost over $1 billion) at p. 99.
 For the story of the awful publicity in 2017 generated by Uber’s cultural and governance problems see Can Uber Ever Deliver? Part Ten: The Uber Death Watch Begins, June 15, 2017
 Didi prospectus filed June 29, 2021 with the SEC https://www.sec.gov/Archives/edgar/data/0001764757/000104746921001227/a2243300z424b4.htm
 David Trainer, Didi Chuxing: Different Country, Same Bad Business Model, Forbes Jun 23 2021. This was the only article I found in the US business press focused on Didi’s dubious economics
 Can Uber Ever Deliver? Part Nineteen: Uber’s IPO Prospectus Overstates Its 2018 Profit Improvement by $5 Billion, April 15, 2019
 Jing Yang and Lingling Wei,China’s President Xi Jinping Personally Scuttled Jack Ma’s Ant IPO, Wall Street Journal, Nov 12, 2020. Ma’s personal wealth was estimated as nearly $60 billion at the time.
 Julie Zhu, Pei Li, China’s IPO-bound Didi probed for antitrust violations, Reuters Jun 17, 2021
 China Orders 25 Tech Giants to Fix Raft of Problems, Bloomberg News, July 30, 2021; Juliet Chung Justin Baer and Dawn Lim, Investors Lost Hundreds of Billions on China in July, Wall Street Journal, 30 July 2021
 Deirdre Bosa, Jordan Novet, Uber shares drop as Softbank plans to sell shares to cover Didi and other losses, CNBC Jul 28, 2021. Uber had acquired a 17% share in Didi in exchange for abandoning its failed Uber China venture. Its share fell to 12% after selling shares in order to cover losses.
 For a good discussion of how these inequality and productivity problems create a huge problem for the Chinese government see Matthew Klein and Michael Pettis, Trade Wars Are Class Wars, Yale University Press, 2020, pp 101-130.
 China’s Didi Crackdown Is All About Controlling Big Data, Bloomberg News, July 8, 2021
 For the development and effectiveness of Uber’s manufactured narratives see the TLJ article pp.76-90 and the AAJ article p. 115-117