Bottom line: China’s anti-trust regulator’s assertion that the Didi-Uber China mega-merger will require its approval could mark the beginning of a new, tougher stance towards the nation’s rapidly consolidating Internet sector.
After years of sitting by and doing almost nothing to stop the formation of near monopolies in a number of emerging high-tech sectors, China’s anti-trust regulator may finally be taking notice of rapid consolidation happening in the country’s cyber realm. I’ve frequently complained that China’s commerce ministry has taken a relatively tough position on cross-border M&A for anti-competitive reviews, but pays little or no attention to similar domestic deals that could have similar effects for local consumers. But perhaps that may finally be changing, with word that the Ministry of Commerce is saying its blessing will be necessary for the newly announced mega-marriage between private car services giants Didi Chuxing and the China unit of global leader Uber.
Frankly speaking, this particular deal doesn’t completely qualify as a domestic merger, since Uber is a global company with origins in the US. But this marriage certainly seems worthy of an anti-trust review, since it would combine the nation’s 2 largest private car services companies to create a giant with an overwhelming majority of the market.
The mega deal announced earlier this week would see the 2 companies combine to create a giant with a market value of around $35 billion. (previous post) Didi Chuxing would hold about 80 percent of the combined company, while Uber would hold the rest. The merger was largely driven by the 2 companies’ investors, who were tired of the billions of dollars both Didi and Uber China were losing in their costly battle for market share.
Didi and Uber both felt that the deal wouldn’t require an anti-trust review due to their loss-making status, according to the latest reports. But the commerce ministry seems to think differently, and has publicly said that such a merger would require its approval. (English article; Chinese article)
A commerce ministry official made the remarks in response to a reporter’s question at what appears to be a regular news briefing, so there’s not much explanation for its thinking. The quoted official simply says the ministry hasn’t received any application from the 2 companies yet regarding a merger, and that all transactions must apply to the ministry in advance.
Didi contested the assertion that the deal would require regulatory approval, mostly because neither company is profitable. Didi also said that Uber’s China revenue was less than 400 million yuan ($60 million) last year, a threshold above which all mergers automatically require approval by the anti-trust regulator. Frankly speaking, I have difficulty believing Uber China had such a low revenue last year due to its huge size and spending in the market, and perhaps the commerce ministry is also skeptical.
I’ve been quite critical of the commerce ministry in the past, as it sat idly by and did little or nothing to halt anti-competitive deals on the Chinese Internet. One of the most recent of those saw online travel services leader Ctrip (Nasdaq: CTRP) swallow up chief rival Qunar (Nasdaq: QUNR) last year, capping a string of Ctrip-led deals that effectively eliminated nearly all major competition from the market. (previous post)
The regulator has also stood idly by as Alibaba (NYSE: BABA) built up a near monopoly in the C2C e-commerce market, and as Baidu (Nasdaq: BIDU) built up an equally strong position in online search. It has also failed to intervene in a recent merger between the nation’s 2 leading group buying sites, Dianping and Meituan, and 2 of the largest online classified advertising services companies, 58.com (NYSE: WUBA) and Ganji.
While the ministry has overlooked many of these anti-competitive deals, it has been far more aggressive in reviewing M&A involving foreign companies in China, occasionally putting conditions on its approval of such deals. China has also launched anti-competitive probes against a number of foreign firms operating in the market, including makers of milk powder, cars and high-tech products like software and smartphone chips.
The big scrutiny of foreign companies and far less attention to domestic mergers has led to accusations of bias, even though official sources have denied such bias. Requirement for a regulatory review of the Didi-Uber deal may do little to dispel the foreign bias allegations, though it’s worth noting that that this case is slightly different from others in the past.
That’s because in this case a foreign company is being acquired by a larger Chinese rival, whereas in the past it’s usually a foreign company swallowing up a significant but smaller local competitor. Regardless of any bias, I have to commend the regulator for finally taking notice of the Internet and high-tech realm, and flexing its muscle to say that such deals will also be scrutinized for anti-competitive overtones.
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