From a 20,000-foot view, DiDi Global (NYSE:DIDI) seems to hit all the right notes. A ride-sharing company, DiDi bills itself as the world’s leading mobile transportation platform. When you consider that China has about four times the population of the U.S., it’s not an unreasonable claim. And, of course, this tailwind puts DIDI stock in an enviable position.
Except for the little nagging detail that it doesn’t — at least not when you compare where DIDI stock is relative to the hype that surrounded its initial public offering last June.
Indeed, just days ago, our own Will Ashworth pondered whether the underlying company was the most disappointing IPO of the year so far. However, in context, the situation might not be so bad as he stated, so long as you recognize that Chinese firms have higher geopolitical risks.
Others are not quite as generous in their assessment of DIDI stock. For instance, InvestorPlace contributor Muslim Farooque posited that the increased scrutiny by Beijing over its technology sector makes the ride-sharing firm a risky proposition. Farooque wrote, regarding its much-anticipated IPO:
However, a month later, the Cyberspace Administration of China (CAC) announced it was opening up an inquiry into DiDi for national security purposes. Since then, DIDI stock has been on a downward spiral and has investors concerned about its future. Moreover, it appears that the government will continue to put roadblocks in front of DiDi, which could lead to state ownership.
Further, he pointed out that the regulatory crackdown has had severe consequences for DIDI stock, noting that the underlying platform lost more than 30% of its users. As well, new users “were banned from signing up on its platform, and its application was removed from most app stores.”
Californian Gig Economy Journey Bodes Poorly for DIDI Stock
Farooque mentioned why the trend of crackdowns was so ominous. “It’s clear that we haven’t seen the last of these regulatory incidents, and can happen more often in the long run.” While we obviously don’t know what will ultimately happen to DIDI stock, his is a reasonable assumption given the track record.
In addition, the woes surrounding the ride-sharing giant also ties into a bigger issue in China. There, like here, the gig economy is booming. Similarly, the novel coronavirus provided a catalyst for gig work, with many taking advantage of the unique nuances of the pandemic. On paper, this supports the case for DIDI stock.
What doesn’t are calls by China’s state trade union for the development of special branches to address gig worker grievances. Sensing the potential for social unrest, Beijing has not been shy about exercising draconian controls.
Don’t get me wrong: abuse of workers, whether classified as employees or independent contractors, should never be tolerated. However, the dependence on government to solve such business-related matters has a spotty track record. California would know best.
In the U.S., the gig economy is a big deal. According to ADP Research Institute’s analysis, the gig economy has the “second-highest number of work opportunities offered,” with the sector worth $248.3 billion in 2019.
Yet what did California do to resolve ride-sharing drivers’ grievances about their classification as independent contractors (and thus denying them benefits like health insurance)? The Golden State introduced Assembly Bill No. 5,which, in short, reclassified all sorts of workers as “employees,” causing a mad dash for gig workers to find loopholes (such as operating as an official business) to fend off the abrupt change.
If California can ham-hand business innovation, don’t hold much hope for draconianly communist China.
Great Idea, Not Great Governance
To be fair, not all Californians were onboard with AB-5. Frankly, given the status quo nature of Republican policies, the bill had the appearance of certain ambitious Democrats wanting to make waves simply to make waves.
If I’m being really honest, AB-5 was an attempt by its proponents to virtue signal a political agenda to their base. This was about getting votes, not about doing right for the California economy. Therefore, it’s not entirely appropriate to suggest that the Chinese government will follow suit.
However, Beijing has not just targeted DIDI stock but many others to impose its own political and social interests. Thus, the geopolitical risk isn’t merely higher for Chinese tech firms — it could be significantly so based on its own track record.
That makes DiDi simultaneously a worthwhile but speculative idea.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.