Uber and Didi Chuxing Merger Threatens Traditional Taxis

Ride-Hailing Apps Expand Quickly; Traditional Cruising Taxis Argue Unfair Competition

　As of June 2016, Didi Chuxing boasts a mobile transportation platform covering more than 400 cities across China. The Chinese online ride-hailing service giant’s main competitor, Uber, has expanded the Chinese arm of its global business to cover more than 60 cities in the country, with an aim to reach 100 cities by the end of 2016. The ride-hailing services provided by Didi Chuxing and Uber have caused a major disruption to China’s monopolistic taxi industry, arousing strong opposition from taxi drivers. The low-price strategy of Didi Chuxing and Uber make them an appealing alternative to consumers, many of whom are now choosing to reserve rides using online ride-hailing platforms rather than hail a cruising taxi on the street. Taxi drivers have thus seen a gradual decline in customers. Recently, taxi drivers went on strike in several cities in China to push for the boycott of online ride-hailing platforms like Didi Chuxing and Uber. In June 2016, Dazhong Transportation, one of Shanghai’s largest taxi companies, wrote a letter to the Ministry of Transport of the PRC to request an investigation into such mobile ride-hailing apps in order to enforce fair competition. Shortly after, on July 28th 2016, the Ministry of Transport released their official regulation on online ride-hailing platform operation and services.

　Didi Chuxing Became Chinese Ride-Hailing App Giant through Merger

　Didi Dache and Kuaidi Dache were both established in 2012. The two companies offered mobile ride-hailing apps with only a taxi-hailing function, which was warmly welcomed by traditional taxi drivers as they could receive tips from passengers as an incentive for pick-ups. As of 2014, more than 80% of taxi drivers had installed these apps. The two companies engaged in fierce competition by offering massive subsidies to both taxi drivers and passengers. By the end of 2014, Didi Dache and Kuaidi Dache owned market shares of 56.5% and 43.3% respectively. Eventually, the vicious subsidy war drove them to merge into Didi Kuaidi on February 14th 2015, and then change their name to Didi Chuxing on September 9th 2015. By the end of 2015, Didi Chuxing was receiving 14 billion orders through its platform, and the number of registered drivers and users reached 15 million and 300 million respectively. According to Trustdata, as of 2015, Didi Chuxing occupied a share of around 79.1% and 43.1% in domestic express rides and premium rides, respectively.

　Uber Introduced Non-Profit Platform to Snatch Chinese Market Share

　Uber, the global pioneer of ride-hailing apps, operates in more than 70 countries. The company announced its entry into the Chinese market in February 2014. Initially, Uber limited its services in China to Uber X and Uber Black, successfully gaining popularity through its premium and luxury car offerings. In order to avoid legal issues, Uber chose to partner with car rental companies, and those car rental companies would provide qualified cars and drivers to Uber. In October 2014, Uber introduced People’s Uber, a non-profit platform similar to the original Uber which allowed private cars to offer riding services. According to Trustdata, Uber occupied around 20.9% of the market in the Chinese express ride market as of 2015. Since Uber’s business overlaps with that of Didi Chuxing, it did not take long for a new round of subsidy wars to begin. However, during a press conference in June 2016, Uber stated that they have reduced their cost-per-order by 80% compared to last year; in some cities like Shenzhen, the cost-per-order could be 20-30% lower than its competitors.

　In May 2016, Didi received its biggest single investment of USD 1 billion from Apple. This was Apple’s first investment in a start-up company rather than a buyout. Apple CEO Tim Cook stated that the investment was made for a number of strategic reasons, including the opportunity to learn more about certain segments of the Chinese market. Didi Chuxing President Liu Qing said that the companies would benefit from each other’s products, technology and marketing and on many other levels. One of the speculated reasons for the investment is that Apple is attempting to expand the coverage of Apple Pay in China. Since Didi Chuxing has a large user group of 300 million people, the collaboration will be a good entry point for Apple to increase Apple Pay penetration. Right now, Apple has partnered with 19 Chinese banks, representing 80% of UnionPay cards issued in China, and takes around 0.07% of each transaction from the banks. Considering the huge population in China and the growing consumption capacity, Apple is fairly likely to earn a significant profit through the introduction of Apple Pay in China. In addition, Apple Car has been rumoured to be in development for quite some time, indicating that Apple could potentially use this product to offer car rental services to Didi Chuxing and its drivers in the future. Another guess is that Apple is investing with its cash hoard in China to avoid the huge amount of tax (tax rate=40%) which will be imposed if the cash is transferred to the U.S. According to Moody’s, Apple’s cash hoard overseas totalled USD 200 billion in 2015. After the merger of Didi Chuxing and Uber China announced on August 1st 2016, Apple will indirectly hold shares in Uber China. The growing potential customer base of the newly merged entity will bring Apple a greater return on investment.

　Taxi Industry Under Threat; Presents Downward Trend

　The taxi industry began in the 1990s in China, and taxis now have a presence in almost every city across the country. Several vehicle types such as sedans and vans are on offer. As of 2015, taxis accounted for 30.4% of China’s urban transportation system, second only to buses (58.7%). The total number of taxis in China reached 1.39 million, growing at a CAGR of 2.58% from 2010 to 2015. According to the Ministry of Transport, total taxi running mileage in China increased by 3.1%, 1.7%, and 1.6% YoY in 2012, 2013, and 2014 respectively, while the total number of passengers increased by 3.5%, 3.1%, and 1.0% YoY in the same years. Didi Dache and Kuaidi Dache were introduced in 2012 and were at first very popular among taxi drivers. Beginning in 2014, however, these apps began providing express ride and premium ride services, which took a portion of business away from taxis. Finally in 2015, under the double threat of Didi Chuxing and Uber, the taxi industry entered a downward trend. The total number of passengers in 2015 stood at 39.67 billion, with total running mileage at 160.24 billion kilometres, down by 2.3% YoY and 1.0% YoY respectively.

　Major Taxi Companies Overwhelmed by Ride-hailing Apps

　Shanghai Qiangsheng, Shanghai Jinjiang, and Dazhong Transportation are the major taxi companies in Shanghai, occupying more than 70% of the local taxi market. In 2015, these companies presented differing levels of decrease in terms of segment revenue. Shanghai Qiangsheng saw a decrease in segment revenue by 1.3%, and the other two companies saw decreases of 1.42% and 6.73% respectively. Shanghai Qiangsheng mentioned in its FY2015 report that the company was facing unfair competition brought about by the integration of the internet and the taxi industry (i.e. online ride-hailing apps). The other two companies also recognized such integration as a rigorous challenge to traditional cruising taxis.

　Gap in Taxi Quantities Drives Development of Ride-hailing Apps

　The Ministry of Housing and Urban-Rural Development has published a guiding standard for the number of taxis per 10,000 people, according to which there should be no less than 20 taxis per 10,000 people in large-size cities, and no less than 5 taxis per 10,000 people in small-size cities. The quantity for middle-size cities should be in between these numbers. However, when dividing taxi quantity for a city by the permanent resident population, only Beijing (31.2) and Shanghai (20.86) comply with this standard. Other large-size cities like Chengdu, Wuhan and Shenzhen present figures between 10 and 15, much lower than the guiding quantities. As such, there exists a potential supply-demand gap which Didi Chuxing and Uber could easily fill.

　Didi Chuxing and Uber Apply O2O and Commission Model

　Both Didi Chuxing and Uber apply the O2O model, where for every ride order they take a percentage as commission. As platform providers, they do not own any vehicle. Rather, they have drivers register on their platforms with their own private vehicles. For some premium rides, the companies will partner with car rental companies such as Hertz and hire drivers to provide riding services. As mentioned earlier, People’s Uber is a non-profit platform, but for Uber Black and Uber X, Uber takes a 20% commission. Didi Chuxing also takes 20% from express and premium ride orders, another 1.88% as a labour dispatching service fee, and CNY 0.50 as an insurance fee. In fact, Didi Chuxing and Uber drivers do not make much profit after commissions. However, at the current stage, both Didi Chuxing and Uber provide subsidies to drivers. For example, Didi Kuaiche drivers can get CNY 60 as a bonus when they complete 3 orders during morning rush hours from 6:00 a.m. to 8:30 a.m.

　Taxi Companies Charge Taxi Drivers Fixed Vehicle Rental and Management Fees

　According to the Measure for the Administration of Urban Taxis issued jointly by the Ministry of Housing and Urban-Rural Development and the Ministry of Public Security, only taxi companies or individuals owning operation licenses (granted by local governments) are permitted to offer taxi services. However, due to harsh qualification requirements, most operation licenses are granted to taxi companies rather than individuals. Taxi companies in China either hire drivers to drive taxis or contract vehicles to drivers. Either way, taxi drivers must pay a fixed amount of vehicle rental and management fees to taxi companies every month, with the amount varying by city and by shift. The fees on operation licenses were introduced by local governments to raise entry barriers, as well as to charge cruising taxis for occupying limited road resources and increasing traffic congestion. For example, in Shanghai, a double-shift taxi driver needs to pay around CNY 8,000 (including vehicle rental and management fees, insurance fees and depreciation fees, etc.) to taxi companies every month. In Suzhou Province, the amount is around CNY 6,700 for one-shift drivers and CNY 7,000 for double-shift drivers.

　Competitiveness and Weakness Comparison among Didi Chuxing, Uber and Traditional Taxis

　The express ride services provided by Didi Chuxing and Uber present the main threat to the taxi industry due to much lower fares. Didi Chuxing and Uber drivers are usually owners of their vehicles, which means they save significantly on vehicle rental and management fees compared to taxi drivers. People’s Uber charges an even lower fare because it is a non-profit platform, meaning that Uber is sacrificing commissions to compete for market share. Didi Chuxing and Uber require vehicles to have been purchased within 6 years and 5 years respectively and vehicles have to be priced over CNY 100,000. As such, vehicles registered under Didi Chuxing and Uber’s express ride are usually in better condition compared to regular taxis. The two ride-hailing platform operators also apply rating systems for drivers, which encourages drivers to provide good service to passengers. By contrast, taxi drivers have long been accused of offering poor service. In some areas, taxi drivers have bad attitudes and force car-pooling, while denying passengers is also common. In comparison, Didi Chuxing presents a success rate of 94% for order matching and Uber’s mechanism of assigning orders to the nearest available driver guarantees fast order matching as well.

　On the other hand, there are a number of potential safety hazards in utilising Didi Chuxing and Uber. Due to incomplete information verification processes and lax supervision, some registered drivers use another unregistered vehicle (usually of worse condition) to offer services. Several drivers have been accused of sexual harassment during riding services and robbery and murder have also been reported. Although the platforms suspend these drivers’ accounts immediately, such belated efforts are insufficient to prevent these incidents from reoccurring in future. Stricter background checks and supervision could decrease the incidence rate of such accidents.

　Low switching costs also puts Didi Chuxing and Uber at a disadvantage. People usually have more than one ride-hailing app installed on their smart phones, and they can easily switch to whichever offers a lower price or higher bonus. Even drivers have very low switching costs as well because the registration process is relatively straightforward. As a result, drivers can easily choose the service that will provide higher payments. Currently, platforms can do nothing but offer a higher bonus than its competitors. Over time, if a platform is unable to sustain a sufficient number of drivers, it would likely encounter problems with matching orders in a prompt fashion.

　Didi Chuxing Aims to be Model of the Industry through Active Dialogue with Government

　Didi Chuxing, as the leader in Chinese ride-hailing platforms, has been actively engaged in dialogue with the government. The company intends to shape itself as a model for the new industry through its involvement in the formulation of regulation. On July 10th 2016, Didi Chuxing published a restriction list regarding drivers’ qualifications. It is also currently the only platform collaborating with national authorities to screen criminal records. Additionally, Didi Chuxing is expanding its business outside of ride-hailing services and now allows users to hire drink and drive services and bus services with customised routes using its online platform. With the company’s name change to Didi Chuxing (“Chuxing” means “travel” or “commute” in Chinese), it seems that it plans to broaden its business reach into every means of transportation in the future.

　Uber Reinventing Itself as a Lifestyle Brand to Avoid Head-on Confrontation

　Uber appears to be taking steps to move away from direct confrontation with Didi Chuxing in the ride-hailing market. From UberRush to UberEATS, the company has introduced a variety of new functions branching off from its ride services. As of May 2016, Uber states that more than 1 million Chinese users have used Uber in 70 overseas countries and 374 cities; while more than 3 million foreign visitors have used Uber in 24 cities in China for riding services. Sensing further opportunities in the tourism market, Uber China launched its new strategy “Uber+Travel” in June 2016. The company hopes that this strategy will enable it to obtain greater market share. Under “Uber+Travel”, Uber will partner with local travel companies, including Hainan Airlines (investor of Uber China), Baidu, Qunar.com, Tongcheng Tourism, etc., to provide car services between places of interest.

　Taxi Companies Offering Online Reservation Platform or Aiming for Partnerships

　Before the intrusion of ride-hailing apps into the taxi industry, telephone dispatch was the most common way to reserve a taxi. According to Shanghai Qiangsheng, in 2015, taxis were dispatched via telephone 2.86 million times, accounting for around 53% of total dispatches in Shanghai. However, alongside the increasing penetration of smartphones and 4G networks, the number of taxis dispatched by telephone has decreased by more than one-third YoY. Taxi companies such as Shanghai Qiangsheng and Dazhong Transportation have thus developed their own online ride-hailing platforms with the hope of recapturing some market share. Meanwhile, Haibo Taxi has chosen to partner with Didi Chuxing, placing 500 operationally qualified taxis on Didi Chuxing’s platform and offering three levels of business. The partnership is a win-win strategy as Haibo Taxi benefits from the large user base on Didi Chuxing’s platform and Didi Chuxing gains a group of operationally qualified vehicles.

　Regulation on Online Ride-hailing Services Enforces Passenger Safety and Fair Competition

　On July 28th 2016, the Ministry of Transport of the PRC (MOT) published Interim Procedures on Online Ride-hailing Services, which will become effective on November 1st 2016. The interim procedures basically legalize online ride-hailing services and permit private cars to provide riding services. The regulation states that online ride-hailing platform operators must apply for an operation license from the administrative department. In addition, drivers and vehicles should receive a driver’s license and transport certificate for online ride-hailing services before operation. Drivers are required to have three years of driving experience and should not have any record of violent crime, accident crime, drug-related crime, or drunk driving. Drivers are also required to sign labour contracts with platform operators. Qualified vehicles should be at most 7-passenger vehicles, with recording GPS and emergency alarms installed. Also, vehicles should not be more than 8 years old, or have more than 600,000 km of usage. These stricter supervisions should help to ensure passenger safety. The interim procedures also enforce fair competition, stating that online ride-hailing platform operators should not compete unfairly with extremely low prices (lower than costs) to freeze out competitors or monopolize the market.

　Government Action for Improving Taxi Industry

　The arrival of online ride-hailing apps has helped bring to the government’s attention the various problems caused by high vehicle rental and management fees in the traditional taxi industry. In March 2016, the Ministry of Housing and Urban-Rural Development and Ministry of Public Security announced the repeal of the “Measure for the Administration of Urban Taxis”. Under this measure, urban taxi operation licenses were granted by the government to taxi companies or transferred privately between taxi companies for a certain amount of money. Such charges were then passed on to drivers as part of their vehicle rental and management costs. After the repeal, several local governments, including Shenzhen, Suzhou, Wuxi and Changzhou, responded by cancelling vehicle rental and management fees. For example, in Wuxi, there are around 4,000 taxis in Wuxi, with annual fees for each taxi at CNY 8,000. Following the cancellation of vehicle rental and management fees, the government will surrender income of more than CNY 30 million, which will in turn reduce costs for drivers and increase their earnings. On July 28th 2016, the General Office of the State Council of the PRC issued “Guiding Opinions on Deepening the Reform to Further Promote the Healthy Development of the Taxi Industry”. The guiding opinion encourages the integration of the taxi industry with online platforms so that the ratio of unoccupied taxis can be largely reduced. It also indicates that local governments should not charge for any newly granted urban taxi operation licenses, and existing fees should be gradually phased out. Finally, taxi companies will be granted management rights only if they are able to meet service standards. As such, the service quality of the taxi industry should improve and taxi drivers’ earnings should increase in the near future.

　Didi Chuxing and Uber China Announce Merger in August 2016

　Prior to entering the Chinese market, Uber’s CEO Travis Kalanick once gave Didi Chuxing an ultimatum: sell us 40% of your shares or be defeated. However, on August 1st 2016, after two years of fierce competition, Didi Chuxing announced that it would acquire Uber China, including the brand, its domestic business, data and other capital. The value of the newly merged entity is estimated to be USD 35 billion. Upon the strategic deal, Uber will hold a 5.89% stake in the new entity, equaling an economic interest of 17.7%. Other existing Uber China Investors will own a combined 2.3% economic interest of the new business. At the same time, Didi Chuxing became the only company invested in jointly by Alibaba, Baidu and Tencent (BAT). Didi Chuxing will further invest USD 1 billion in Uber Global, accounting for around 1.6% of Uber’s latest estimated value (USD 62.5 billion). Meanwhile, Didi Chuxing founder Cheng Wei will join Uber Global’s board of directors, while Travis Kalanick will join Didi Chuxing’s. It was reported that the merger was driven by the investors behind each company, with both Didi Chuxing and Uber eager to make a profit as soon as possible. Didi Chuxing also indicated that Uber China would continue to operate as an independent brand in the Chinese market. The merger is expected to help the two teams integrate their strength in management and technology, share resources and grow together.

　Whether the Merger Leads to a Monopoly Remains to Be Seen

　According to Trustdata, in 2015, Didi Chuxing and Uber accounted for almost 100% of the express ride market, while Didi Chuxing alone had a market share of around 45% in the premium ride market. The Anti-Monopoly Law of the PRC states that an entity occupying over half of the market will be presumed to be a monopoly. Thus, it calls into question whether the new entity caused by the merger between Uber and Didi Chuxing will monopolise the Chinese online ride-hailing market. Under “Provisions of the State Council on Thresholds for Prior Notification of Concentrations of Undertakings”, a concentration of undertakings (i.e. merger of undertakings) must file a prior notification with the competent commerce department of the State Council if the undertaking reaches any thresholds. Until now, neither Didi Chuxing nor Uber China has submitted prior notification of concentrations of undertakings. Although Didi Chuxing did not publish their financial performance in 2015, it was reported by the media to have generated a net revenue and net loss of CNY 6.16 billion (≈USD 946 million) and CNY 4.28 billion (≈USD 657 million) respectively. Didi Chuxing told the media that Uber China’s turnover was falling short of the threshold, and neither of the two companies has turned a profit. Nevertheless, the provision also mentions that when a concentration of undertakings does not reach any of the thresholds, the competent commerce department of the State Council shall initiate an investigation in accordance with the law if enough facts and evidence are collected to indicate the presence of such concentration effects (i.e. elimination or restriction of competition). On the other hand, according to the “Guiding Opinions on Deepening the Reform to Further Promote the Healthy Development of the Taxi Industry”, both traditional cruising taxi services and online ride-hailing services are included under the taxi service industry. As such, the merger may not be considered as a monopoly on the level of the overall taxi service industry. Whether the merger of Didi Chuxing and Uber China will be considered monopolistic therefore remains to be seen.

　Huge Potential Market for Online Ride-hailing Services

　According to Yidao Yongche CEO Zhou Hang, the whole online ride-hailing services industry spent more than CNY 20 billion on subsidies in 2015. Didi Chuxing was estimated to have spent more than CNY 10 billion on subsidies, while Uber was reported to have incurred losses of USD 1 billion in China. The successful merger of Didi Chuxing and Uber China will likely result in reduced subsidies for both companies. However, in addition to the two giants in the online ride-hailing industry, there are a handful of other platforms offering similar services, such as Yidao Yongche and Shenzhou Zhuanche. The abundant subsidies offered by each platform operator have already shrunk in the second half of 2015. Although Didi Chuxing said that the subsidies would not stop immediately after the merger, the subsidy war is expected to come to an end soon. In the long run, online ride-hailing platform operators will compete based on the quality of their services and the speed at which their technologies are able to match orders. According to the National Bureau of Statistics, nationwide consumption spending on transportation and communication in 2015 was CNY 2,087 per capita, growing at a CAGR of 13.33% from 2013 to 2015. According to Roland Berger, market demand for online ride-hailing services will reach CNY 500 billion by 2020, and demand will exceed supply by then.

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　Threshold

　(1) the combined worldwide turnover of all the undertakings concerned in the preceding financial year is more than CNY 10 billion, and the nationwide turnover within China of at least two of the undertakings concerned in the preceding financial year is more than CNY 400 million; or (2) the combined nationwide turnover within China of all the undertakings concerned in the preceding financial year is more than CNY 2 billion, and the nationwide turnover within China of at least two of the undertakings concerned in the preceding financial year is more than CNY 400 million.