kuaidi and didi merger — a new moment in Chinese infrastructure

On saturday Kuaidi dache announced that they had agreed to merge with their biggest / bigger rival, Didi dache. Techinasia has a good write up about it, but I took issue with the suggestion that the merger has something to do with Uber.  I went on a twitter rampage about the deal, and Jon Russell told me to write it up (he already has a piece on techcrunch about the merger that has all the details).  I often confuse more words with a better argument, so I’ll just try to channel the twitter brevity but expand my point.  Here goes:

If we need an Uber comparison, it’s YiDao YongChe.  Private Car apps and services are fundamentally separate from Didi and Kuaidi dache.  Kuaidi Dache and Didi dache are solving real problems: taxi drivers make crap money, and taxi consumers are happy to pay for preferential treatment.

Municipal governments don’t see much / any revenue from the taxi apps or the private car apps.  National ministries have squeezed both the Taxi apps ecosystem and the private car system from time to time.  That’s not a comfortable place for $1b of venture funding.  A merger is a play for survival in a difficult regulatory / government environment.

Let’s understand the scale & role of taxi systems in modern China.  Only the biggest cities in China have public transport infrastructure beyond busses.  Mix in the sheer size of even 4th tier cities and the low personal vehicle ownership rates, and you have a large swath of the professional population commuting via taxi.

On the other hand, being a cabbie in China sucks.  There are worse jobs, sure, but I’ve met enough good natured and ill mannered cab drivers to understand that, well, they’re all aggrieved.  Anecdotally, cab drivers cite the financial dissonance between the fees charged by livery companies and the municipal regulations that maintain low “flag drop” fees.  Flag drop in Shanghai, one of the highest in China, is 14rmb ($2.25).  There have been taxi strikes.  Big ones. Recently.

The system breaks down all the time.  Heavy traffic moments across China are rife with “black” cabs trying to hustle some extra cash on the side, despite vicious penalties if caught and ongoing stories of horrific violence and crime inflicted on people who use black cabs. In 6 years of visiting Beijing, for example, I think I’ve been in a legal cab with the meter running maybe twice.  The aforementioned YiDao Yongche and (to a lesser extent) Uber are trying to create economies that capitalize on these breakdowns.  That’s fine, but, municipal governments have pretty straight forward interests in the existing system:

  1. Municipal tax revenues
  2. Livery company interests (let’s all just assume Livery company owners are well connected)
  3. Social order (no more driver strikes)

The taxi apps are poised to help solve these challenges without upsetting the existing system.

Chad suggested that some faction of the Chinese government would make a pitch to build a replacement “official” platform and cut Kuaidi / Didi out.  That is a possibility, however I think decision makers have learned from rather public failures of government driven digital projects, like China Railway’s online ticketing system.  I think they’ll endorse a new Kuaidi / Didi merged company as a government approved apparatus and possibly, if not probably take official or unofficial stakes in the new entity.  I expect the C-suite of the new company to be in the same meetings as Robin Li and Jack Ma.

that level of government relationship should also cascade down and help smooth out any bereaved Livery Company owners — which may come in the form of crackdowns on private-car services or other regulation changes that keep businesses happy.

So where does that leave us?  This merger is going to trigger a lot of changes in how people live their lives.  I’m not even getting into how the other major Chinese tech conglomerates are mixed into these two companies — chiefly Alibaba and Tencent, who are primed to do battle over mobile commerce transactions — so there are a lot of fireworks to come.