Amid the recent insurgence of Uber, partnered with Baidu Inc., China’s two taxi-hailing applications for mobile phones are considering a merger. For Chinese companies, the two players are Kuaidi Dache, backed by Alibaba Group Holding Ltd., and Didi Dache, backed by Tencent Holdings Ltd.
Both 
of these Internet giants believe that merging would end their ongoing competition for clientele as well as form a true dominant taxi-haling application. This would provide plenty of cost-saving benefits for the two firms, as they have been locked into a heated battle for market share. Sources report that in the event of the merger, so long as neither company puts in any capital, this new alliance would be valued at $6 billion. It would be a rare case where two of the most commanding players in China’s Internet sector, Alibaba and Tencent, join forces.
While this deal may seem like a no-brainer at first glance, it does have some roadblocks to consider. Primarily, the two companies are concerned with which payment system to use: Kuaidi’s, which has more users, or Didi’s, which attracts more passengers. One possible resolution to this dilemma would be for the new application to accept both payment systems, which would provide a route to split revenue.
Source: http://www.wsj.com/articles/chinas-two-largest-taxi-hailing-app-companies-discussing-merger-1423744460
Photo: https://www-techinasia.netdna-ssl.com/wp-content/uploads/2013/04/Kuaidi-Dache-app.jpg
Such a merger draws attention in part because it could force Alibaba and Tencent – who are otherwise competitors – to form a sort of frenemy relationship. However, this possible merger merely reflects the already increasingly intertwined (borderline incestuous) status of Asia’s internet economy. Companies like Baidu, Tencent, Alibaba, Softbank, and even investment firms like Tiger Global have been investing in young Asian internet companies with breakneck pace and little consideration for a priori competitive relationships.
My above comment is actually somewhat incorrect or at least a bit of an overstatement. Even with their rampant investment in many young internet companies, Alibaba and Tencent have really maintained their divide up until this point. Softbank – which is of course Alibaba’s largest shareholder – has invested in some ventures that do compete with some of Alibaba’s. Still, for the most part, the two of them have remained on the same side.
Consolidation raises antitrust concerns: while a merger might enhance efficiency, it will give the new firm greater market power. With two firms, there’d be some price competition. With one …?! (Note that empirically the track record of mergers actually leading to higher efficiency is not good.)
However, many “network” goods inevitably lead to consolidation: there’s a tendency towards one standard becoming dominant. Apple for example has hung on in the computer market, partly I think because key software remains available. In cell phones, my sense is that the Google OS is now the standard — it dominates on phones in China, the world’s largest market, partly because the software and the hardware are not bundled (cf. Apple vs MSDos: to get the Apple OS you have to buy apple hardware, but you don’t with MS [now Windows] and so there are more hardware options, including cheaper machines with fewer features). We’ll see if the Chinese market thus comes to set the standards for global markets.