There's no competition.
Photograph by Amanda Hall — Getty Images
By Scott Cendrowski
February 16, 2015

For two Chinese startups blowing through money, it was a Valentine’s Day hookup to remember.

China’s top taxi-hailing apps, the Alibaba-backed Kuaidi Dache and Tencent-backed Didi Dache, said on Saturday they would merge and cease a relentless two-year war for market share in the country.

The companies promised to rollout more details after the Chinese New Year holiday ending Feb. 24. For now, they said co-CEOs will run the combined business and keep the brands independent. There was no talk of great synergies, or combining back offices. Instead, it was about cutting losses. “The fierce competition between Kuaidi and Didi is not sustainable. The merger is the result of strong desires from all the investors of both companies,” Kuaidi’s CEO Dexter Chauanwei Lu said in an internal memo posted on news site

The companies together control 99.8% of the taxi hailing app market in China, said Analysys International, and each now offers premium ride-on-demand programs to fend off competitors like Uber, which is new to the country where 170 million people use taxi-hailing apps. Based on their previous fundraising rounds, the combined companies could have a $6 billion value.

If a deal is done, “it could mark a permanent truce in the ‘taxi wars’ that have cost both [Alibaba and Tencent] substantial amounts of marketing and promotional support,” said HSBC analysts led by Chi Tsang in Hong Kong in a note.

That was the biggest takeaway from the tie-up announced Saturday. Competition was too brutal. Last year Didi (which translates into Honk honk, get a cab) and Kuaidi (Quickly get a taxi) spent more than $400 million offering discounts to win market share in just the first half of 2014 alone, Xinhua reported. They grew so ridiculous that for a time early in the year, you could get a free ride. Beijing’s starting fare is 13 RMB for the first three kilometers and Didi was offering users almost 20 RMB a ride.

But their solution, a merger, creates a monopoly with 99% market share. Presumably, Chinese regulators will look into the deal’s monopolistic overtones, which are pretty obvious.

In their statement about the deal, the companies said taxi hailing is just a small part of China’s total transportation market. While that may be true, few other online-to-offline market as popular in China right now. Kuadi says it has raised a total of $725 million from investors including Alibaba; Didi has raised more than $800 million from Tencent and others. Jixun Foo, managing partner at GGV Capital in Shanghai, which is an investor in Didi, said despite their size, the companies combined market share is tiny compared to total taxi hails. He estimates their combined daily rides are in the single-digit millions, compared to 50 million total daily taxi rides in China.

Even so, regulators may be interested. China’s Ministry of Commerce, MOFCOM, which has merger review, can begin an investigation even if Didi and Kuadi don’t have to file for consideration because their sales fall short of the mandatory filing amount of 400 million RMB ($65 million) sales each and a combined 2 billion RMB ($320 million).

If regulators scrutinize the deal, those who believe China’s market is shifting toward more mature regulation may be vindicated. If it passively OKs the tie-up, regulators may appear to be at least somewhat biased after launching many high-profile cases against foreign companies past two years for monopolistic practices.

Now that bitter rivals Alibaba and Tencent have called a truce in their taxi-hailing offshoots, the attention turns to the third company in China’s tech triumvirate, Baidu. Two months ago, Baidu, partnered with Uber to help bring the U.S. car service to China, investing an estimated $600 million. Uber’s chauffeur model is a much different from Didi and Kuaidi’s model of hailing taxis via a smartphone, but they tread on similar turf. The merger could build a stronger Uber competitor. “This really speaks to our strong confidence in the Chinese market…the market is growing, and that will ultimately benefit riders and drivers,” Uber said in an emailed statement.

Another Uber-like competitor, Beijing-based Yidao Yongche, which runs a car rental service and chauffer services and also has a partnership with Baidu, sneered at the merger. “Two companies—they look exactly alike, share exactly the same products rhythm and operation methods—have merged,” the company’s unattributed statement said on Chinese news sites. “We might not have that many coupons and driver subsidies, but we do have cars. Large doesn’t necessarily mean great.”

Of course, the Kuaidi and Didi don’t see it that. An internal memo from Didi Dache’s CEO Wei Cheng also made it onto Chinese sites, in which Cheng says the tie-up between rivals “is a Valentine’s Day’s gift to the Chinese people and our great journey is just getting started from here.”

It seems a stretch to say two startups giving up on cut-throat competition is a gift to the consumer. But then, Chinese regulators might be thinking that already.




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