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What Does a Merger between Taxi-hailing Apps Mean for Market Competition?
   2015-02-27 15:40:08    CRIENGLISH.com      Web Editor: Xie Tingting

By Zhao Yang (About the author)

The merger between popular taxi-hailing app Kuaidi Dache, backed by e-commerce giant Alibaba, and rival Didi Dache backed by Internet giant Tencent has made many people think about market competition in recent days. The recent merger of China's largest railway train manufacturers, CSR Corp and China CNR; and the study of a possible merger between China National Petroleum Corporation (CNPC) and its main domestic rival China Petrochemical Corporation (Sinopec), involved the international competitiveness of state-owned enterprises competing in foreign markets against overseas mega companies. Meanwhile, the proposed merger of taxi-hailing apps Didi and Kuaidi, presents a very different scenario whereby the entities involved are separately backed by two of China's largest privately held Internet groups - Alibaba Group Holdings Ltd. and Tencent Holdings Ltd., respectively.

Up until now, conventional wisdom dictated that due to weak global market conditions, strong international rivals and domestic overcapacity, China needed to consolidate its state-owned international oil and rail businesses so that they could more effectively compete against overseas competitors, and just as importantly stop competing against one another.

Speaking to the Wall Street Journal in relation to the proposed oil mergers, a topic which also implicitly covered the rail market, Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University stated, "(China) wants to create a big Chinese brand to better compete overseas... If you are focused on the foreign market, you certainly want to consolidate because it's more competitive abroad," Lin also stated, "If it's just for the domestic market, it's better to have more competition, because competition leads to efficiency."

The proposed merger of domestic taxi-hailing software competitors Didi and Kuaidi seems to negate this line of thinking, and bring up questions about the recent anti-monopoly drive, which has seen millions levied in fines and has required corrective actions.

In terms of what is up for grabs, Didi and Kuaidi account for 99.8 percent of the taxi-hailing market in China. The data mining and targeted marketing opportunities are enormous. As those who use the services tend to belong to the affluent middle class, they represent a desirable demographic. Being able to mine and deliver this type of information to those selling goods and services would be lucrative.

In follow-up stories, the spin has been that Didi and Kuaidi are in essence teaming up domestically so that they can compete internationally with the popular taxi service app Uber. But, this seems rather simplistic. Baidu announced in mid-December, 2014, that it had invested in Uber; an announcement meaning that Didi and Kuaidi will be in essence closing off part of the domestic market to a fellow private Chinese competitor. While Didi and Kuaidi dominate the lion's share of the Chinese taxi-hailing market, Uber uses a different model that competes with taxis, but uses locally licensed car rental companies that already provide services for hotels or tourists. Baidu, as the dominant online map company in China, could make it difficult/expensive for its new competitors to use its map resources, meaning they either have to pay Baidu, or pay to develop their own maps. Complicating matters further is the fact that Baidu and Tencent are joint venture backers of Wanda's O2O e-commerce venture.

Is this actually an issue or a tempest in a teapot?

Gross revenues worldwide for taxi services are believed to be about 100 billion U.S. dollars. Uber is currently valued at 40 billion U.S. dollars, even though its market share is quite small in comparison to the total market. As a private company, it does not have to report its revenues but its gross profitability is estimated to stand at 20 percent. In all, Uber faces stiff challenges from existing competitors, like the taxi companies, as well existing and planned regulations carried out by financially hard pressed local governments who earn fees from taxi licenses. Uber is also cited in hype concerning other services, such as logistics, that it could provide; but these are mature markets with very sophisticated hardware and software components and suppliers who will be tough competitors. All in all, Uber is probably more hype than reality; the latest apparition in an overblown tech market bubble. If this is the case, then it does not seem like the situation faced by the Chinese rail and oil SOEs from existing major overseas players for international deals.

In terms of Didi and Kuaidi, it would be interesting if the merger was approved, as that would then bring up the question of which other private industries and companies would then make a case for creating monopolies. Beijing-based Yidao Car Rental Company has filed a complaint with the related government departments, claiming any merger between taxi-hailing apps would be a violation of China's anti-monopoly law. Yidao reported Didi and Kuaidi to the Ministry of Commerce's anti-monopoly bureau and the National Development and Reform Commission's price supervision and anti-monopoly bureau for contravening reporting obligations. It is seeking an investigation and asking that the merger be denied, with a spokesman noting that, "If the merger succeeds, well-balanced competition in the market will be eliminated."

The Ministry of Commerce spokesman Shen Danyang said the ministry has not received any centralized declarations from interested trade operators. Prior to Yidao's accusation, Tao Ran, a senior vice-president with Kuaidi told media that since the two companies' combined revenue is far lower than the standard, they are not obliged to report to the Bureau. China's anti-monopoly law states that companies which want to merge should report to the Ministry of Commerce's anti-monopoly bureau if their combined turnover in the last fiscal year exceeded two billion yuan (about 320 million U.S. dollars) and if at least two of them reported turnover of more than 400 million yuan.

The intention for a merger between the two taxi-hailing apps was announced on Valentine's Day by Cheng Wei, chief executive of Didi, who said, "It is a gift to the Chinese people and our great journey is about to start from here." But, many users of the two apps have expressed concerns about the "marriage." On China's popular microblog Sina Weibo, people immediately expressed concern about the potential loss of money saving coupons. According to Sina Weibo, 63.6 percent of users said they won't use the apps if coupon subsidies are reduced.

Jack Ma, founder of e-commerce giant Alibaba, praised the merger, saying it makes a contribution to the "mobile transport" sector. Ma Huateng, chief executive officer of Tencent Holdings Ltd., also stated that "Internet plus transportation" will become a new Internet-based industry.

But, as Alibaba and Tencent, two of the nation's three Internet giants, stand to gain a monopoly and stem the tide of losses from their zero sum cost cutting wars, it is doubtful others will share their enthusiasm. The merger will also probably not dampen the competition for the market from other players. In addition to Uber, there are still local players like Beijing-based rental firm CAR Inc., which launched a ride-on-demand service in January and there is always the logical question of why the taxi companies are not offering a better hailing service themselves. For now, while this appears to be a tempest in a teapot, if it goes through, it could have profound implications for market competition.

About the Author

Zhao Yang hosts a China Radio International business flagship program Biz Today. Before that, she has been a financial reporter for CRI's London correspondent bureau. She was actively involved in reporting the financial market in the city of London, and the Chinese economy as well.

The opinions expressed here are only personal, and do not necessarily represent CRI's official policy.

Read all opinion stories by Zhao Yang



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