INTERNET: Taxi App Mega-Merger Hits Monopoly Speed Bump

Bottom line: China’s regulators are unlikely to veto the merger of taxi apps Didi and Kuaidi, and should encourage similar consolidation to allow for creation of Internet firms that can be globally competitive.

Yongche accuses Didi-Kuaidi of creating monopoly

Just a day after China’s leading 2 taxi apps announced their plan to merge, a series of observers are voicing concerns that the marriage would be anti-competitive and should be vetoed on antitrust grounds. The sudden debate about the merger of Kuaidi Dache and Didi Dache isn’t too surprising, since it would create a company that would control the vast majority of China’s market for taxi and private car services. But the regulator will need to decide whether such talk of monopoly is justified, since in many ways the newly merged company is still quite small and will also face strong competition from global rivals.

I’ll begin with my own view that the merger of Didi and Kuaidi should get regulatory approval, even if it does create a company that can steam roll over smaller rivals like Yongche, which is one of the parties raising antitrust concerns. My reasoning is quite simple, namely that this particular industry is still in its infancy. What’s more the new company will still face competition from global rivals like Uber, which has also recently launched service in China.

This particular merger is also being driven purely by market forces, since both Didi and Kuaidi are privately funded companies that make their decisions based on what’s best for their own interests. That contrasts sharply with mergers of big state-run firms, which Beijing often combines or breaks up based on its own agenda that can be commercial but also often has political motivations.

All that said, let’s look at the new sounds of protest that are coming from both industry experts and rivals. One of the first to voice its concern is rival operator Youngche, which said it has formally complained about the proposed merger to several of the nation’s anti-monopoly regulators, including the Ministry of Commerce and the powerful National Development and Reform Commission (NDRC). (Chinese article)

At the same time, other reports are citing other unnamed industry experts also saying the merger would have anti-competitive overtones, since the combined company would have nearly 100 percent of the market. (Chinese article) At the same time, however, those same reports point out the taxi-hailing app industry may not qualify for the definition of monopoly since it is quite small and still developing.

To meet the definition of monopoly, they say, the involved parties must have annual revenue of more than 2 billion yuan, or $320 million. Kuaidi and Didi don’t announce financials since they’re both private. But they’ve said their merger would create a company with a market value of $6 billion (previous post), which is relatively small and doesn’t seem to rise to the level of monopoly.

From a bigger picture perspective, China already has quite a few Internet companies that would be much better candidates for anti-monopoly probes if any regulators wanted to pursue such a route. Alibaba (NYSE: BABA) controls the big majority of the nation’s e-commerce sector, while Tencent (HKEx: 700) is dominant in online games and messaging and Baidu (Nasdaq: BIDU) owns over half the online search market.

But that said, all of these companies will face stiff competition someday if they ever decide to move outside China from global names like Google (Nasdaq: GOOG) and Facebook (Nasdaq: FB), and all could also someday face similar competition at home from those giants. For that reason, I seriously doubt the regulators will be sympathetic to complaints from Yongche or other rivals. At the end of the day, this merger looks like a healthy deal for the market’s longer-term development, and could someday produce a Chinese company that could compete globally with the likes of Uber.

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