INTERNET: Antitrust Watchdog Finally Gets Tough with Didi, Uber

Bottom line: The antitrust regulator’s decision to review Didi’s proposed union with Uber China marks the start of a new era of much-needed government oversight of major Internet mergers.

Antitrust regulator starts review of Didi-Uber union

After years of turning a blind eye to rapid consolidation in many emerging high-tech industries, China’s anti-trust regulator has finally adopted a more active posture with its recent decision to review the proposed landmark merger of homegrown car services firm Didi Chuxing with the Chinese unit of US rival Uber. The announcement by the Ministry of Commerce that the deal would require its approval caught Didi and Uber by surprise, since such a review would be the first for a major Internet deal since China rolled out its anti-monopoly law 8 years ago.

Despite their relatively small size at present, many such emerging industries have huge growth potential and could easily become multibillion-dollar businesses in the future, supplanting older sectors like taxi services and traditional retail stores. Accordingly, it’s quite appropriate that the regulator become more aggressive about preventing individual companies from becoming too dominant in these areas during their formative years.

Didi Chuxing and Uber China were the nation’s two leading players in an emerging sector that is challenging traditional taxis when they announced their surprise merger last month. That deal would create a $35 billion company that controls the vast majority of the Chinese market that links urban commuters with privately owned car drivers using global positioning technology.

The deal was driven by huge losses being incurred by both companies, as each offered generous subsidies to drivers and passengers in a bid to quickly build share in the fast-growing market. Uber recently said it lost $1.2 billion in the first half of the year, with a big portion of that in China. Didi Chuxing, itself the product of a merger between China’s previous two leading private car service operators, is believed to be losing similarly large money, and raised a massive $7 billion in new funding in June to continue its battle for market share.

In a sign of things to come if the latest merger plan is completed, media reported last week that Didi was raising the price for its Shunfeng car service by 20 percent to bring it roughly in line with the cost of taxi fares. Didi probably felt confident about making the hike due to its pending merging with Uber, which is under similar pressure to reduce its losses.

But shortly after the deal was announced, the Ministry of Commerce announced the union would require its approval for anti-competitive consideration. Didi said at the time it believed such a move was unnecessary because the industry was still too small to meet minimum review requirements. (previous post) For the ministry to have jurisdiction over such deals, each company must have revenue of at least 400 million yuan ($60 million), and the combined new entity must have at least 2 billion yuan in annual revenue.

Taking a Stand

At a regular news briefing last week, a commerce ministry spokesman reiterated that the deal must receive antitrust approval, saying it “will protect fair competition in the relevant market and safeguard the interests of consumers and the public.” (English article; Chinese article) The spokesman said that Didi had not initially notified the ministry of the deal because it believed it did not require a review, but that subsequently the two sides have held two meetings to discuss the situation.

The ministry’s more aggressive stance contrasts sharply with its past behavior, when it stood by and did nothing as similarly large players emerged on nation’s booming Internet. Two of the earliest of those were Baidu (Nasdaq: BIDU) and Alibaba (NYSE: BABA), which used their large size and aggressive tactics to grab well over half of the lucrative online search and e-commerce markets, respectively. Other recent mergers that have created companies with similar market clout include former rivals Meituan and Dianping in group buying services, and Ctrip (Nasdaq: CTRP) and Qunar (Nasdaq: QUNR) in online travel services.

All of those mergers created companies that could have easily qualified for antitrust reviews. And yet the ministry did nothing to intervene, to the detriment of consumers and third-party merchants who suddenly found themselves being squeezed for more money due to dwindling competition.

Such mergers are often necessary and an important part of the development of new industries, since long-term losses are unsustainable in any emerging sector. But a more controlled consolidation process that leaves at least 2 or 3 major players in each new industry should be the more desired long-term outcome, and only a more active role by the regulator can ensure such development.

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