(Hint: It’s Not Just the Anti-Uber Alliance)

Uber’s decision in late July to sell its Chinese operations to long-time rival Didi Chuxing has been heralded by many as a ground-breaking and strategic move, allowing both companies to cease their costly price war in the world’s fastest growing consumer market. After years of competing for market share in China, the fight has finally ceased — leaving behind a merged entity that will be worth around $35 billion and that will control over 90% of the Chinese ride-hailing market. The deal no doubt signals a new era for ride-hailing in China, but just how beneficial is the merger for everyone else involved?

The merger admittedly makes strategic sense in many ways — Didi Chuxing will get to operate a near-monopoly in its domestic market (and beyond — plans to expand to other Asian countries have already emerged, with Didi Chuxing Technology Vietnam JSC seeking approval for a car-hailing app), and Uber will not only get a 20% stake in Didi, but also receive a whopping $1 billion in investment from the company. This way, Uber will be able to focus on gaining market share in other critical markets (including the US and India, where it faces fierce competition from companies like Lyft and Ola), further developing their commuter-ride system, and funding more research in autonomous cars.

The once-rivals are optimistic about their merger: “Uber has been a grand rival and we have had an epic battle . . . We raged an earth-shaking war, and when we join hands, our love will last until the end of time,” Didi CEO Cheng Wei and President Jean Liu wrote in an internal email following the announcement of the merger. That love might very well be familial love, given that Zhen Liu, the senior vice president and head of strategy of Uber China, is Jean Liu’s cousin. The two cousins seldom appear together in public, but they reportedly worked closely together to make the merger happen. Jean Liu is also the daughter of Chuanzhi Liu, famous Chinese businessman and “godfather of Lenovo”, the largest computer maker in the world. Especially in China where connections can make or break a business, family matters. With the Liu family at the helm of both companies, it looks like their love might last until the end of time after all.

The real loser: China

It’s not all sunshine and rainbows, however — the merger clearly spells trouble for the Anti-Uber alliance (a coalition comprising of Ola, Lyft, GrabTaxi) that Didi was once a part of. Didi now has a vested interest in Uber’s success, and Uber now has another $1 billion to ramp up its efforts against Ola, Lyft, and GrabTaxi in its other markets. Lyft, Uber’s main ride-hailing competitor in the US, has reportedly already tried to sell itself to Uber and several other companies for as much as $9 billion — but with little success, as Uber would not pay more than $2 billion for its competitor.

But perhaps even more significant is the possibility of a much bigger loser: China. Chinese consumers, Chinese drivers, and ultimately, the Chinese economy. In the immediate hype surrounding the merger, it seems ludicrous to even suggest that Didi’s win can be construed as being disadvantageous to China. However, now that Didi has a near-monopoly in the Chinese ride-hailing market (the next largest ride-hailing firm, Yidao, has 4 million active users, much less than Uber and Didi’s combined 60 million), they are at liberty to exploit their pricing power — this means higher prices for Chinese consumers, and even lower earnings for drivers. It is unlikely that the other small players in the market will be able to pose any significant competitive threat to Didi, especially since new regulatory rules basically prohibit any sort of price war (the predominant method by which smaller companies gain market share).

It is no coincidence, then, that Uber backed out of the Chinese market only two days after the Chinese government legalised ride-hailing companies in China and specified that companies must charge prices that do “not disturb the normal market order by operating at the prices below the cost of operations.” This simple clause effectively prohibited subsidies, upending Uber’s model in China. With Didi’s natural advantage of operating in its home-market, and with its greater integration with powerful internet companies in China — for example, Tencent’s popular mobile messaging app WeChat blocked Uber and added the function to hail and pay for Didi taxis — Uber China arguably had no choice but back a hasty retreat.

In the grander scheme of things, though, low driver earnings don’t even matter so much. After all, human drivers will be obsolete within the next few decades. I pointed out earlier this year that the ultimate aim of ride-sharing companies like Uber is to create a driverless-car service so economical and pervasive so as to render car ownership obsolete. Without the need to pay for drivers, this would theoretically drive down the cost of rides. However, if Didi remains the only dominating ride-hailing company in China and buys its own fleet of self-driving cars, it will still be at liberty to exploit their pricing power, translating into higher prices for its Chinese consumers. Given the interlinked network and data-driven nature of autonomous cars, it would be even harder for a smaller company to challenge Didi at that stage. Autonomous cars are racing in much faster than we can imagine — Uber is planning to launch a trial project in Pittsburgh allowing customers to summon self-driving cars through the Uber app. The world’s first self-driving taxis by nuTonomy have already debuted in Singapore.

Not so fast, the deal hasn’t been sealed

For the reasons listed above — namely that it would be dangerous to allow a Didi monopoly in China — there is still a small possibility that the Chinese government might prevent the deal from going through. The merger is subject to investigation by China’s antitrust watchdog, the Ministry of Commerce. A spokesman for the ministry, Shen Danyang, said that: “Based on the regulations in China, business operators need to file an application on their merger deal if their revenues reach a certain amount.” Should the merger be prevented by the Chinese government, Didi will find itself in hot water over its attempted tryst with Uber. The other ride-sharing companies in the Anti-Uber Alliance would be justifiably wary of Didi’s intentions now that it has struck a deal with the “enemy”.

Approval from the ministry’s Anti-monopoly Bureau is typically needed for companies with more than 400 million RMB in annual revenue each, and more than 2 billion RMB in combined sales — Didi and Uber technically do not meet that threshold because they only take a small percentage of the money that flows through its platform. That being said, the deal has drawn the attention of the Ministry of Commerce. However, it is unlikely that the Chinese government will prevent the merger, given that it is not in their immediate interests to thwart such a high-profile deal involving a bona-fide national champion. Furthermore, it is unlikely that Didi and Uber China would’ve ventured to cut a deal without first establishing a fair level of certainty that it would be approved.

Challenges ahead

In the likely event that the merger goes through, it poses a critical challenge: Didi will have to forge a business model and strategy that is acceptable to the business interests of its backers — which are, more often than not, conflicting. The unprecedented coming together of the powerful BAT trio (the three largest internet companies Baidu, Alibaba, and Tencent, that dominate China’s gargantuan and fast-growing Internet landscape together with Chinese internet company JD.com) entails complications, but at the same time raises optimism for future collaboration between the internet giants. This is the beauty of the merger — earlier this year, Alibaba and Tencent were brought together in the Didi Dache-Kuadi Dache merger (which later became Didi Kuaidi), and now Baidu has joined the merry party in the Didi Kuaidi-Uber merger. This could be as much a blessing as it is a challenge.

Many of China’s internet companies flourish on a large local user platform, and on integrated connectivity. If the three BAT companies work together, the Chinese giants will only become more powerful. This is the unique edge that Chinese internet companies (that are often accused of copying Western firms) have over their American counterparts — super interconnectivity. Tencent’s WeChat doesn’t only function as a Facebook or Whatsapp — it’s a platform on which you can order taxis, pay for groceries, split bills with friends for a meal, top up cellphone plans, pay for water and utilities, order tickets for events, check news, find the newest discounts, play games — the list goes on. If these Chinese companies can continue expanding their businesses globally, then they might even make a huge impact on the global market (for example, Tencent has become the №1 internet game company by revenue, and has acquired many of the best global game companies.)

The merger between Uber and Didi is one that is fraught with challenges and consequences that extend far beyond just the two companies themselves. To ensure that Chinese consumers are not disadvantaged, the Chinese government will have to closely monitor and regulate the Chinese ride-hailing industry. But if the merger can bring together China’s largest internet companies to build an even more powerful and integrated Chinese internet landscape, then it might not be such a bad thing for China after all — this may just be the start of a new era of Chinese internet dominance.

---

Ruru Hoong, a sophomore studying economics, is a staff writer at Stanford Political Journal.