Taxi app merger with Tencent to boost Alibaba
In October, I discussed how tech giants Alibaba and Tencent have invested heavily in rival taxi hailing apps, in order to increase spending volume over their respective payment systems. Alibaba, through its Ant Financial subsidiary, has invested in Kuaidi Dache and the Tencent has invested in Didi Dache, with both apps aggressively spending away in order to build market share, despite receiving no payments from customers and not even taking a percentage of the journey fee.
In fact, both apps have only recently begun to monetise through advertisements. Despite generating no revenue until recently, both firms had been subsidising both passengers and drivers to use their service over each other, which created an incredibly unsustainable business model. Therefore investors welcomed news of the merger, as the haemorrhaging of cash would slow down dramatically and the new entity would have a market share of around 95% of China’s taxi hailing industry.
Management and risk description
Alibaba’s ongoing issue with the State Administration for Industry and Commerce (SAIC), China’s main business regulator, has now seen the Securities and Exchange Commission request information about the firm regarding the SAIC report that suggested that Taobao has a high percentage of fake products on its platform.
Whilst this may seem ominous to some, I take the view that SEC involvement is nothing more than a formality. As both Alibaba’s management and myself have discussed, the report in question isn’t fair to the firm, and is far more subjective than objective. This issue may continue throughout the next few months, so there may be some volatility throughout the life of this trade. However, I don’t expect that there will be any major ramifications against Alibaba from either the SAIC or the SEC.