Chinese taxi app merger to reshuffle market

After a year of bitter rivalry, a merger between two Chinese major taxi hailing apps on Valentine's Day was the day's biggest surprise.

Didi Dache and Kuaidi Dache, both start ups, announced that they would put their differences aside and explore the sector together.

Didi CEO Cheng Wei said the deal was the largest merger in China's internet history and the combined entity would find its way on to the list of the top 10 Chinese Internet-based companies.

The newly founded company, which is yet to announce its official name, has been valued at $6 billion.

CHANGING WINDS

Industrial experts say that taxi-hailing apps will challenge established companies.

While passengers will reap the benefits of convenience and cheaper fares from the new merger, established taxi giants will not be so fortunate.

One of the most lucrative businesses in China, taxis reap considerable profits each year from exclusive government deals, but offer little in return for the end users.

The sector was untouched by the economic downturn as passengers had no other alternative, and most cab drivers' operation licenses were linked to companies.

However, after Kuaidi and Didi both launched ride-on-demand services last year, clients left traditional companies for better service and a more comfortable ride.

The apps generally provide two types of service: A taxi-hailing service, which is welcomed by cab drivers and ensures passengers are picked up by licensed cabs; or the more expensive ride-on-demand service, which offers higher quality vehicles that are owned by car-rental companies.

In east China's Hangzhou City, where Kuaidi's headquarters are located, its ride-on-demand service has 4,000 cars, accounting for nearly 40 percent of all licensed cabs. Cab drivers, already plagued by high contract fees, responded by striking for three days in August over falling passengers numbers, which they blamed on the apps.

Zhang Xu from Analysis International described the apps as a breath of fresh air in the rigid sector.

Industrial experts believe the merger will compel taxi firms to restructure.

"Taxi companies should have a sense of urgency," director of the Shanghai Municipal Transportation Commission, Sun Jianping said.

A VIEW TO PROFIT

Didi and Kuaidi invested heavily to secure a market share last year, awarding both passengers and taxi drivers huge subsidies. But neither managed to discover a feasible way to make profits, resulting in the unexpected merger.

In the first six months of 2014, Alibaba-backed Kuaidi's subsidies amounted to 1 billion yuan (around $163 million), while Didi, supported by another Internet giant Tencent, subsidizes cost it 1.4 billion yuan.

Understandably, the firms gradually reduced their subsidies in the second half of the year.

Kuaidi CEO Lyu Chuanwei said the deal was partly influenced by the sustainability of subsidies.

The merger will allow the newly established company to accelerate expansion in other areas, Lyu said.

A business insider said that even an initial public offering (IPO) would be on the agenda soon; which was an unattainable goal last year.

"The battle escalated last year as both financial backers fought to attract more mobile payment users," iiMedia Research CEO Zhang Yi said.

There were 172 million taxi-hailing app users by Dec 2014, 99.8 percent of which used the two apps.

Liu Qing, president-to-be of the new company, is upbeat that the new company has a future beyond just taxis.

"When you open the app, it can tell you when the next bus is due or whether you should take the subway to avoid traffic or even help you order a car," she said outlining her vision for the next five years.