A few months ago I wrote about two emerging leaders in the fast growing sector for taxi apps, and now we're hearing word that those companies, Didi Dache and Kuaidi Dache, may be in talks for an equity tie-up. The reports are a bit vague, which leads me to question their accuracy; but they highlight the fact that this interesting and fast-growing sector is in need of consolidation.
Taxi apps allow people to order cabs over the Internet and are part of a broader group of location-based services (LBS) that take advantage of global positioning technology. These taxi apps are particularly well suited to big Chinese cities like Beijing and Shanghai, where it's often difficult to find a cab - especially during peak hours and bad weather.
But like many emerging sectors in China, taxi apps have suddenly drawn a huge amount of "me-too" operators who have set up a wide range of companies. The result has been an unruly marketplace, where larger companies like Didi and Kuaidi compete with smaller players for a relatively small customer base.
The overheated competition has affected the quality of services at many smaller companies, with the result that Beijing, Shanghai and other major cities have all launched crackdowns over the last few months in an effort to bring order to the market. I wrote about one such crackdown last month , when Shanghai stopped taxi app developers from using their services to charge consumers higher fares than normally allowed. Some taxi drivers were also openly embracing the technology by subscribing to a wide range of services, creating safety hazards when they would check multiple apps while driving.
All of these issues pointed to the need for not only stronger regulation, but also consolidation to create a few larger players with the necessary scale and resources to create reliable, easy-to-use services. Thus the latest rumors of an equity tie-up between Didi and Kuaidi  look particularly interesting, as such a pairing could potentially create China's first major taxi app operator.
The latest reports are quite brief, saying only that the two companies are negotiating an equity tie-up. What's more, they only cite other media reports as their sources, creating the impression that the media may simply be reporting on each others' rumours without any clear indication of the source of those original rumours.
From my perspective, this kind of tie-up looks quite logical for a number of reasons. Geographically these two companies would be quite complementary. Didi, which is run by Xiaoju Technology, is based in Beijing; and Kuaidi, which is run by Kuaizhi Technology, is based in Hangzhou but counts Shanghai as one of its largest markets. Thus a tie-up between the pair would instantly create an entity with a strong presence in China's two largest markets, which are each home to thousands of taxis.
Each of the companies also has strong backers, with Kuaidi reportedly receiving a recent investment from e-commerce giant Alibaba, which is also based in Hangzhou. Didi, meantime, recently formed its own tie-up with Internet search leader Baidu (Nasdaq: BIDU), which has reportedly incorporated Didi software into one of its latest mapping apps.
These kinds of taxi apps are sorely needed in China due to the growing difficulty of finding cabs in many cities. What's needed now is the emergence of a few major players that can create some reliable services for consumers. Based on the weak sourcing of these latest reports, I would say the chances that we'll see a tie-up between Didi and Kuadi are relatively small, perhaps less than 40 per cent. But I do think we'll see some consolidation over the next year, producing two or there major players with good growth potential.
Bottom line: Rumours of an equity tie-up between Didi and Kuaidi may be unfounded, but point to the need for consolidation among taxi app operators.
To read more commentaries from Doug Young, visit youngchinabiz.com