Last week saw Didi go through a blockbuster IPO in New York Stock Exchange, only for this week to see the company’s share price collapse. Didi is the biggest ride-hailing company in China. It was so successful that Uber was forced to exit China in 2016. But within two days after Didi’s IPO, the share price tanked more than 25%. That’s because the Chinese government has taken Didi out of China’s app stores. It would be like Uber disappearing from the Apple App Store overnight.
It was said that Beijing was worried about Didi’s mapping function. It contains too much sensitive information. Location data such as government buildings may disclose where top brass officials work. Since Didi is listed on the New York Stock Exchange, such data may leak because of the required financial auditing.
All these sound a little like hyperbole. But whatever the real concern is, the sanction came down hard and fast. Beijing gave no chances for negotiation, nor did it issue any serious warnings ahead of time.
One could only think of the move as another round of crackdowns on tech giants. But this crackdown doesn’t appear to be universal. Yes, Alibaba’s financial arm—Ant Group—was subject to extreme scrutiny to the point that its IPO was all but scrapped. Besides Didi, Tencent had also its taste when it was forced to pull its popular online game.
Still, there are national champions who continue to globetrot, experiencing far less headwind. Big names like Haier, Huawei, Lenovo, Geely, and BYD come to mind. I discussed one reason on CNBC this week. I think it’s because Chinese tech giants mostly rely on the domestic market. Those who continue to gain support from the Chinese government are the ones that have gone international early. Those who are big on export.
Here is the difference: Having gone international means that these companies are bringing hard-earned foreign profits back home. Relying on the domestic market means the companies are disrupting local incumbents—state-owned enterprises included—without showing much strength abroad.
Even if Alipay is now seen from Madrid to Amsterdam, the payment app targets Chinese consumers traveling abroad. It’s still a Chinese app serving Chinese people. As for Didi, more than 90% of its revenue is derived inside China. That doesn’t fit Beijing’s aspiration of becoming a global power.
From this angle, we can start projecting the electric vehicle (EV) frenzy. This week, another Chinese electric vehicle maker—Xpeng—was listed in Hong Kong. It’s the company’s second listing after its IPO on the New York Stock Exchange in August last year.
Xpeng, NIO, Li Auto, and BYD are benefiting from a red-hot capital market. It’s a market that disproportionately favors new entrants. Whether it’s your pension fund or a foreign sovereign fund, institutional investors see car companies as having very different growth prospects. The chart below is one way of looking at things. It illustrates the market valuation over revenue – that is, at how much investors are willing to pay to buy each of these companies’ stocks for every dollar the company makes in sales.
Will the Chinese EV players encounter the same headwind as Didi? Most likely not.
For one thing, no one is a monopoly. The Chinese car market—unlike ride hailing—is extremely fragmented. Beside EV upstarts, you have traditional car companies competing against other foreign brands.
Most important again, car making is an export business. NIO is pushing into Norway. And BYD is producing 90% of electric buses purchased around the world. These Chinese carmakers, unlike tech giants, have been far more international from day one.
Maybe that’s why Warren Buffet remains a major shareholder of BYD.
Thanks for reading—and be well.
This article has been co-authored with Angelo Boutalikakis, a Research Associate at IMD’s Center For Future Readiness.