Uber-Didi merger in China raises monopoly, subsidy concerns

Uber agreed to sell its business in China to its archrival Didi Chuxing. Photo: technewstoday.com

The rumor about a merger between Uber China and Didi Chuxing, two bitter rivals competing for China's ride-hailing market, has become a reality.

On Monday, Uber agreed to sell its assets in China including brand, operation and data to its archrival Didi Chuxing in exchange for 20 percent stake in the Chinese company in a strategic agreement, a compromise that some of Uber's investors have long urged Travis Kalanick to make due to their impatience with the unprofitable investment in the country.

The merger dashes Kalanick's wild dream of building Uber's operation in China as an independent unit in the country.

Kalanick, co-founder and CEO of Uber, has admitted that his company spent $1 billion last year in China in an effort to grab more market share by offering subsidies split between drivers and riders, while Didi Chuxing invested $4 billion to take control of the market.

In a statement, Didi Chuxing said that its founder and CEO Cheng Wei and Kalanick will join each other's boards as part of the deal, which also keeps Uber China as an independent brand and operation in China.

Kalanick depicted the merger as a way to "free up substantial resources for bold initiatives focused on the future of cities, from self-driving technology to the future of food and logistics" in a statement.

In recent two years, Uber and Didi Chuxing have engaged in a fundraising war. In June, Didi Chuxing raised $7.3 billion from Apple, Alibaba Group and China Life Insurance in its latest fundraising round after Uber announced to receive $3.5 billion in investment from Saudi Arabia's sovereign wealth fund, which brought its total fundraising to about $11 billion.

In a blog post that has gone viral in China's social media platforms, Kalanick said, "Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there."

"Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term," he added.

Zhu Wei, deputy director of the Research Center of Law of Communication at the China University of Political Science and Law, said that the big financial losses of Uber and Didi Chuxing caused by their fundraising war in the Chinese mainland where the latter holds a big share led to the merger. "Didi Chuxing may seek a listing after the merger, which will be a good option for the two sides," Zhu said.

The announcement of the merger came after the Chinese government mapped out industry regulations to legalize ride-hailing business on July 28, which will take effect in November and is widely seen as a factor contributing to the merger.

Concerns of drivers and riders

The merger has perturbed Uber and Didi drivers and riders who are worried that it may lead to a decrease in the subsidies.

In response to the fears, Didi Chuxing said that it will continue to subsidize drivers and riders for a long period in order to enhance users' riding experience.

In April, tens of thousands of drivers for Uber and Didi Chuxing took to the streets in Beijing during rush hours, in protest against the reduction in subsidies imposed since January.

The new industry regulations released on July 28 stipulate that the price for calling a web-based taxi must be determined by the market, which indicates that the ride-hailing apps are entitled to fix a price.

Didi Chuxing said in the statement that it now serves 16 million riders every day, a small figure compared with the 800 million population in China's urban areas, predicting that the rigid demand for ride-hailing service will exponentially rise in the future.

Meanwhile, Kalanick also revealed in his blog post that Uber is doing more than 150 million trips a month in China, an unbelievable feat given the fact that most American technology companies struggle to crack the code there.

As the merger likely marks the end to subsidized fares, Hong Bo, an information technology commentator in China, said, "A less competitive ride-hailing market is detrimental to consumers."

Anti-monopoly probe

There are some Internet users asking the Chinese government to launch an anti-monopoly investigation into the merger, because it is creating a single dominant company seizing more than 80 percent of the Chinese ride-hailing market.

According to China's anti-monopoly law enacted in 2007, companies which plan to merge must submit to a review by the Ministry of Commerce if their combined turnover in China surpasses 2 billion yuan and if the companies separately had turnover of at least 400 million yuan.

Didi Chuxing said that the merger is not subject to the anti-monopoly review because neither of the two companies have gained profit in China.

In February 2015, Yidao Yongche, a small ride-hailing company in China, lodged a complaint to the Ministry of Commerce and the National Development and Reform Commission (NDRC), asking for the blocking of the merger between Kuaidi Dache and Didi Dache on the grounds that the move would create a monopoly which would control more than 90 percent of the Chinese market for online taxi hailing.

On February 14, 2015, Kuaidi Dache and Didi Dache merged to create China's largest smartphone-based transport company Didi Kuaidi, which was renamed as Didi Chuxing.

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