In taxi app merger, a surprising alliance between Alibaba and Tencent

In a shock move, China’s two biggest taxi-hailing apps, Kuaidi Dache and Didi Dache, earlier today announced their merger. It’s surprising not only because the new company will have an almost total monopoly on the market, but also because it’s a very rare instance of a partnership between Alibaba and Tencent, two of China’s three biggest web giants.

Alibaba first put money into Kuaidi Dache in 2013, the same year Tencent invested in Didi Dache. That turned the taxi apps into a new front in the battle between Alibaba and Tencent, which stretches across ecommerce, epayments, and social media. By the start of 2014, both Alibaba and Tencent ramped up the taxi-booking battle by incorporating the respective services in their own apps – Alibaba placing Kuaidi Dache inside the Alipay Wallet app, and Tencent injecting Didi Dache into messaging app WeChat.

Those moves sky-rocketed adoption of the taxi apps throughout 2014. Didi Dache revealed that its daily bookings grew ten-fold in the months after the service was made available to the hundreds of millions of people who use WeChat.

Giving up on the unwinnable war

But that was also the start of a very expensive and unwinnable conflict as the two tech titans threw money at the taxi apps in order to acquire more drivers and riders. The companies rewarded both cabbies and passengers for using the apps – rather than flagging down a taxi in the old-fashioned way – with cold, hard cash. The subsidies soon mounted up. Didi Dache spent US$225 million on its subsidies in the first three months of 2014. As the year wore on, the war of attrition was taking a toll and the cash giveaway was winding down.

The merger will put an end to the most bitter aspects of their rivalry, but there will still be some competition as the deal will keep both apps and brands alive. Part of the reason for the union is to save money by avoiding that kind of conflict and wastage.

Despite the logistical advantages, the partnership between Alibaba and Tencent by proxy of taxi apps still stands out as unusual. It might also prove to be detrimental to consumers, who now have only an illusion of choice. Behind the two brand names are one behemoth company, now with an effective 99 percent market share, that’s hard for a rival to disrupt. That sounds like bad news for commuters.

A lot remains unknown at this stage about the Kuaidi Dache and Didi Dache coupling. Today’s announcement stated that more details will be revealed after Chinese New Year.

See: Tencent versus Alibaba: a complete guide to an increasingly fierce rivalry

Peace in our time

The unifying force behind the deal looks to be Softbank. The Japanese telco is an astute investor, making the wise move of funding Alibaba way back in 2000, years before its seminal Taobao estore was launched and 14 years before the ecommerce company hit Wall Street with its record-breaking IPO. In January, Softbank joined Alibaba in putting funds into Kuaidi Dache – a sizable series D investment of US$600 million.

Softbank, with an eye on Asian and global markets, likely saw a China merger as a chance to call a truce and move forward with a global plan for the Chinese taxi apps. Piecing together an elaborate jigsaw, Softbank may also be thinking of its taxi app interests in other areas – like Southeast Asia’s GrabTaxi and India’s Ola, both recipients of the telco’s largesse. Its investments in Ola, GrabTaxi, and Kuaidi Dache are worth well over half a billion dollars.

Keeping all those apps running independently but taking advantage of economies of scales between the companies, these apps will have most of Asia covered, forming a formidable barrier to rivals such as the legally-challenged Uber and Rocket Internet’s struggling EasyTaxi.