Didi Chuxing’s drivers are treated as independent contractors and the platform merely matches drivers and consumers. This means that the company does not accurately place the costs of drivers, fuel, car maintenance, etc. on their balance sheet. These only become costs once the company hires their mobile workforce as employees.
Didi makes numerous statements in their SEC filing in relationship to drivers and “lowering their operating costs.”
For example, it claims that: “In the future, Didi still sees promise in autonomous driving, in the hope of cutting out the need to pay drivers, which accounts for 50 per cent of the company’s costs.”
Another example: “Factors such as inflation, increased fuel prices, and increased vehicle purchase, rental, or maintenance costs may increase the costs incurred by drivers when providing services on our platform. Many of the factors affecting driver costs are beyond their control. In many cases, these increased costs may cause drivers to spend less time providing services on our platform or to seek alternative sources of income. A decreased number of drivers on our platform would decrease our network liquidity, which could harm our business and operating results.”
Didi continues to warn that: “Reclassification could also impact our current financial statement presentation relating to our International segment, including the calculation of our revenues, cost of revenues and expenses, as further described in our significant and critical accounting policies in the section”
It is clear that when Didi states that “Our cost of revenues consists primarily of driver earnings and driver incentives” it does not actually incurs these costs, but merely transfers fares it collects from consumers to drivers.
In that same way, a payment processor, such as Visa collects a payment from a consumer and transfers that payment to a local store that has just sold her some kind of a product. In this scenario, it is the local store that incurs hard costs of operations, buying that product, paying their cashiers, etc. Visa, of course, should not show these payments as revenue, and neither should it account for store’s costs of operations as their own.
In effect, Didi is lying in their financial disclosures of what their actual costs are. The actual costs Didi incurs have to do with maintaining their platform, hiring software developers, marketing, etc. Didi’s revenue is the take rake it imposes on the services of drivers, who are working as independent contractors to deliver transportation services directly to consumers, and not Didi.
Why is this important?
Antitrust law generally holds that price-setting activities are permissible within business firms, but bars them beyond firm boundaries. Didi does not provide transportation services to consumers directly. Instead, the company connects riders and drivers, sets service terms, and collects fares. The antitrust law’s firm exemption strictly applies to entities that a firm directly controls, such as employees.
Because Didi drivers are not employees and Didi sets the terms on which they transact with customers, including prices, Didi acts in a violation of the ban on restraints of trade. Either that, or it misclassifies drivers as contractors, and owes them back pay. There is no third option. Didi is currently under a regulatory review by the China’s market regulator, the State Administration for Market Regulation (SAMR) but the company has refused to comment on the nature of the investigation.
The difference in how the costs are accounted for is very important because right now Didi is able to control something that it does not pay for, in effect, it can set prices much lower for consumers while shifting the negative effects of lower fares on their mobile workforce entirely.
Reading further into the company’s IPO filing, we find this highly revealing statement: “To remain competitive in certain markets and generate network scale and liquidity, we sometimes lower fares or service fees, offer significant driver incentives and offer other consumer discounts and promotions. We may engage in these practices to try to gain a leading position in a market or to try to protect a leading position against competitors. We may continue to offer these discounts and incentives on a large scale for an indefinite period of time if we feel it is necessary.”
To anyone living in the real world, this is DiDi admitting to price fixing fares for independent contractors in order to maintain an unlawful monopoly over competitors by means of suppressing fees that it does not directly pay for with direct costs of operations, meaning, fares are established outside their firm with a sole purpose to gain a leading market position.
A similar price fixing dynamic is used in the United States by platforms such as Uber, DoorDash, Instacart, and Lyft, where neither of these platforms claims to offer a service of a transportation carrier, or a delivery service, and instead price fixes rates for independent contractors who actually perform said services. These gig platforms, similarly to Didi, refuse to hire their mobile workforce, in some cases, threatening to quit local markets when forced to comply with labor regulations.