Indian competition regulator may not greenlight Ola-Uber merger if it is proposed

Sunny Sen June 27, 2018 6 min

The Competition Commission of India, or CCI, has indicated that it will not give its go-ahead if cab-hailing company Ola wants to merge with archrival Uber, or vice-versa. This comes as a blow to plans by Japanese conglomerate SoftBank, a common investor in both the companies, to orchestrate a merger between the two.

The plan, separately, has hit a roadblock with a boardroom battle at Ola between SoftBank and the cab-hailer’s co-founder and CEO Bhavish Aggarwal on opposing sides.

CCI made its intent clear on June 20 in response to a filing by Meru Cabs, a radio taxi company, against alleged collusion between Ola (owned by ANI Technologies Pvt Ltd) and Uber. Meru wanted CCI to look into the matter, stop deep discounting and driver incentives, and market cartelisation led by common investors.

The regulator turned down most of Meru’s allegations and contentions, but said: “The Commission will monitor whether safeguards/Chinese walls (are) put in place, and/or envisaged further by them, to ensure that competition is not compromised by the common investments.”

“Needless to mention, the Commission shall not hesitate to take action, suo-motu or otherwise, if concern arising out of horizontal shareholdings prima facie seem to exist at any point of time in future wherein the OPs are found to be competing less vigorously consequent to any interference by the common investors in the management decisions,” CCI added. OPs is short for opposing parties, which, in this case, are Ola and Uber.

A senior lawyer with Shardul Amarchand Mangaldas, a leading corporate law firm, said that CCI’s comments mean that it will not approve a merger between the cab-hailing companies in India. “At the same time, it will also keep a vigil if the two companies or its investors are violating regulations,” the lawyer added, requesting anonymity for this story.

A senior CCI official clarified the stand: “The internet-based cab aggregators cannot be compared to the unorganised taxi market, so if Ola and Uber merge it will create a monopoly. That shouldn’t be allowed.” The official, who asked his name not be taken in this story, compared a union between Ola and Uber to the coming together of ecommerce companies Amazon and Flipkart in India, which would allow a monopolistic player to take undue advantage of the market with control over supply and pricing.

To be sure, CCI is not the last word in anti-trust approval from Indian authorities. If it came to a merger proposal and the regulator turned it down, the companies can always appeal the decision before the National Company Law Appellate Tribunal and courts.

Ola, Uber, and Meru did not respond to questions sent to them for comment. A SoftBank spokesperson said on email, “We do not comment on speculation and/or anecdotal information.”

Between the two of them, Ola and Uber have close to one million taxis on their fleets in India.

The competition between Ola and Uber has given rise to a $6.4 billion taxi business in the country, expected to grow at 13.7% compound annual growth rate between 2016 and 2022. By then the industry is expected to be $14.3 billion.

The fight, where others lost

Cab companies such as Meru Cabs, Easy Cabs, Mega Cabs, Sky Cabs, Tab Cabs, among others, are the ones who have paid the price of an intensifying rivalry between deep-pocketed Ola and Uber. Not only have they ceded significant market share to the duo, some have even shut shop.

Rajiv Vij, managing director and CEO of Carzonrent, that owns Easy Cabs and Myles, told this reporter some months ago that Uber and Ola haven’t innovated. “Their prices are not predictive. They just give a lot of discounts and incentives to drivers… That is not a sustainable business model,” he had said.

Vij’s Easy Cabs was one of the early cab companies, which took taxi bookings on the internet. That was when there were no apps and just-in-time ride-hailing hadn’t reached India.

Things started changing in 2015 – first in the bigger, more urban cities (see chart: Ola-Uber Effect: In three years Meru has been reduced to an insignificant cab operator). Slowly, Uber expanded into 30 cities and Ola expanded into more than 110 cities.

“The private taxi business has been completely wiped off,” said Siddhartha Pahwa, former CEO of Meru Cabs. “Only some of the cab companies providing corporate fleet are left.”

The impact, Pahwa said is visible in the price of the taxi permits. In Mumbai, he said that permit value of the black-and-yellow cabs is down to Rs 25,000 from its peak of Rs 2.5 lakh. The same happened in New York, too, down to a tenth of a million dollars at its peak before thousands of Uber cabs hit the road.

In India, it is a duopoly, Pahwa insisted. “It is a network game and two companies will control the network of taxis,” he said. Together, Ola and Uber control more than 80% of the organised taxi business.

According to the case report before CCI, Meru alleged that the model of providing unrealistic incentives to drivers and discounts to customers in addition to low fares is aimed at gaining a high market share and a strategy that would weed out other cab providers from the market. “Ola’s scheme of Minimum Business Guarantee (MBG) induces the drivers to stay on its network and, thus, is an anti-competitive arrangement. It is further alleged that the OPs (Ola and Uber) have been able to spend such huge sums of money on discounts and incentives because of the huge funding received by them,” the case report said.

But at what cost? In 2016-17, Ola reported a loss of Rs 2,314 crore on a revenue base that was less than a third of its losses: Rs 758 crore. Uber, too, is deep in losses here but does not disclose India specific numbers.

That is the reason why investors continue to worry: a steep rivalry between Ola and Uber gives little scope to recover losses.

So far, so good

Uber and Ola have at least four common investors: SoftBank, Tiger LLC, Sequoia Capital and Didi Chuxing. Softbank is the largest investor in Ola holding about 25% share in the cab-hailing company and a reported 20% in Uber’s global parent company. Softbank can have two board seats, both in Ola and Uber.

CCI sees that as a bone of contention. “Undoubtedly, there are apprehensions that common ownership may give rise to the possibility of efforts by or through the common investors to coordinate the decisions of competing entities to lower their risk and in doing so, dampen competition,” it said.

The regulator also agreed that common ownership gives rise to the risk of exchange of sensitive information resulting in price-collusion or restrained capacity and volumes. “An institutional investor, despite ‘passive investments, may affect the competitive dynamics of the market,” it elaborated.

However, CCI refrained from taking any action as there is no proof that Ola and Uber are colluding to kill competition. “There is no evidence furnished which could suggest that OPs (Ola and Uber) have any role in the decision for common investment in these two companies,” it commented.

The Commission wrote that it is aware of the degree of competition between Ola and Uber and that they are the only two effective competitors in the radio taxi service industry. “The radio taxi industry may undergo a significant change, especially if the common investors try to control the destiny of the companies in ways that may at times conflict with the interest of the firm or competition in the market,” CCI wrote.

But industry veterans like Pahwa are sceptical. “What stops them (Ola and Uber) from using the same taxi network and the same dynamic pricing algorithm in the backend,” he asked.

Well, CCI has indicated it will be watching.


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