Competition Law and the Grab-Uber Merger (I): The Shortcomings of Singapore’s Merger Control System

Mark Brandstaetter

Introduction

 

Background

Whether one is coming back from a night out or is in a rush to get to work, the use of ride-hailing companies such as Uber has been growing in popularity. The ease of such ride-hailing services – a driver just a few clicks away – has drawn a lot of consumer demand. However, this phenomenon is not localised to one geographical region, with ride-hailing services spreading globally and entrenching itself as a norm in Southeast Asia (SEA) as in the Western hemisphere. Although this type of market is relatively new in economic thought, policymakers fundamentally treat it much like other markets to protect competition and prevent consumer exploitation.

 

The importance of competition in a free market is not to be understated as it drives prices and costs down and moves society towards allocative and productive efficiency, thereby moving the market to the socially optimal level of output. In the absence of competition, increased market dominance by one firm can enable it to earn supernormal profits by restricting output and raising prices, much to the detriment of the consumer. Thus, Competition Law functions in each economy to primarily protect the consumer from unfair business practices. Such laws were used to promote, for several years, the existing competition between two of the largest private hire companies in SEA, namely the Singapore-based company Grab, and the internationally renowned Uber.

 

Our analysis focuses on Singapore, where in 2018, the two behemoths of ride-hailing services merged, with Grab taking over operations from Uber in return for a 27.5% stake.[1] As a result, effective prices of Grab rose by 10%,[2] which led to the competition authority – the Competition and Consumer Commission ofSingapore (CCCS) – finding the companies to have contravened Section 54 of theCompetition Act 2006 (chapter 50B).[3] This section prescribes that a merger is prohibited where it has resulted, or it is reasonably foreseeable to result, in a “substantial lessening of competition within any market in Singapore for goods or services”.[4] Such a substantial lessening of competition (SLC) was found to be the case ofGrab-Uber who were subsequently fined S$13 million (Uber’s appeal of the fine being upheld in 2021),[5] and several restrictions were placed on Grab pursuant to Section 69(1)(d) of the Competition Act 2006. These included:

 

“1.No exclusivities with drivers, vehicles or rental companies

2. Maintenance of pre-merger pricing algorithm

3. Divestment of vehicles at reasonable price

4. Triggers and application mechanisms for lifting directions.”[6]

 

The Merger Control System

The framework that functions as the CCCS’s primary weapon in protecting competition is an effective Merger Control System (MCS) that acts as the regulatory oversight for companies merging.[7] This is what established the rules and gave the CCCS the authority to impose the above remedies. Such an MCS dictates the actions that companies must take, such as notifying the authority of the merger and receiving permission to go ahead.[8] It also sets out the remedies that the authority can take when they find that the merger contravenes legislation that seeks to promote competition, which in Singapore is Section 69 of the Competition Act 2006.[9]

 

A key feature of the Singapore MCS is that of a voluntary post-merger notification.[10] In essence, this means that parties are able to proceed with their merger without notifying the CCCS of the transaction either pre- or post-merger. The only caveat is that parties are encouraged to voluntarily notify the CCCS of mergers that may result in a SLC,[11] since there are penalties for failing to do so that are explored below.[12]

 

Thesis

In this two-part series, I will be analysing the decision of the CCCS, commenting on how the MCS operated bySingapore has led to an ineffective remedy for the increased market dominance of Grab and how this will be improved. In this first blog, I will show how the CCCS is limited in its capacity and thus why it’s decisions in Grab-Uber may not be effective: these being the limitations of the voluntary notification system in ride-hailing market mergers, the limitation of behavioural remedies, and the limitation of corporate fines limited to local earnings.

 

Limitations of the voluntary notification system in ride-hailing market mergers

When the news broke that theGrab-Uber merger had gone ahead, it may be argued that it was already too late for the CCCS. Grab already took over the Uber headquarters, and many of their employees were no longer working in these offices.[13] With its main competitor out of the picture, the result was that, as was noted above, the effective prices of Grab since the merger rose by 10%,[14] much to the dismay of Grab users.

 

From here, one can detect some limitations of the voluntary notification system. The first being that the absolute prevention of mergers resulting in a SLC becomes substantially more difficult. Much like the case of Alanod and Ano-Coil in the UK,[15] a country which also hosts a voluntary notification system. Such a completed merger means flexing the full force of the CCCS: an unwinding of the merger and divestment becomes infeasible.[16]This is because Uber had already left the market and was no longer operational, meaning there was nothing left to divest. It may also be noted that forcing a withdrawn Uber to reopen business operations may be interpreted as vastly authoritarian. From this one can see that, in effect, a merger resulting in a SLC was allowed to go through and there was no structural ability to remedy the loss of competition by, for example, forcing a breakup or changing the structure of the company. As a result, the voluntary notification system can be seen as ineffective in preventing substantial mergers that can have a significant impact on the competition within a market.

 

As a result of this increased difficulty in imposing structural remedies, among other things, there is an increased reliance on behavioural remedies and fines. Restrictions 1, 2 and 4 noted in the introduction all adhere to behavioural remedy norms, and by the sheer number, one can see that the CCCS has increased its dependence on such types of remedies. This contrasts with its established preference for structural remedies given their lack of enforcement costs and direct address.[17] This is again in part due to the limitations associated with the voluntary notification system as it allows for large-scale mergers to take place and shift the market before it comes to the attention of the regulatory agency.  

 

Limitations of behavioural remedies

 

In essence, the behavioural remedies imposed on Grab do not directly address the SLC. Instead, it focuses on providing some compensation to the consumer to protect them from exploitation. Whilst behavioural remedies are in themselves not inept, its limitations are its enforcement costs and the need to specify the duration and extent of the remedy, all of which are in addition to the aforementioned lack of direct intervention to repair the competitive nature of a market.

 

First, the imposition of behavioural remedies means that the CCCS will bear additional costs that stem from ensuring that Grab complies with the remedies imposed on them. Such additional costs include devoting resources to check that Grab is maintaining its pre-merger pricing algorithm and imposing fines for any breaches. Growing demand for Grab’s services (including its expansion into the food industries with Grab food), means that the monitoring costs will likely increase in the future as more departments will have to be audited. However, the resources that the CCCS must devote to such monitoring of Grab could have been directed to other, more productive means of regulating competition in the market and protecting consumers from unfair practices.  

 

Secondly, there is a limitation to the specification of the behaviour remedies imposed, especially in relation to the second remedy: “Maintenance of pre-merger pricing algorithm”.[18] The interference of the CCCS with the pricing decisions may undermine the essence of a market economy in which prices are determined by the forces of demand and supply.[19] Whilst it is an admirable goal of the CCCS to prevent higher market prices set by Grab, it becomes difficult to determine when Grab is trying to abuse its market position and when it is responding to genuine changes in demand. If the CCCS were to put themselves in a position where they make such judgement calls, this may again be another source of strain on limited resources; however, even more crucially, it may be interpreted as too strong a governmental interference in the free market. Thus, the specification of behavioural remedies can lead to more challenging questions that the CCCS will have to ask itself in the future, namely when Grab is judged to change price to genuinely meet market demands and when it is raising supernatural profits.

 

Limitations of corporate fines that are limited to local earnings

As was noted above, in addition to the behavioural remedies imposed on Grab following the merger in 2018, it was also subjected to a corporate fine of SGD$6.4 million for breaching Section 54 of the Competition Act.[20] This fine was levied with the principle that “The CCCS can levy financial penalties of up to 10%. of the undertakings' turnover in Singapore for each year of infringement, up to a maximum of three years”.[21] A vital feature of this statutory limit is the phrase “of the undertakings’ turnover in Singapore.” It may be argued that this dampens the deterrent effect of the fine as it will only have a small impact on an international scale. This is because, according to Statista, Grab’s net revenue in 2018 was USD$1.1Billion[22] (or SGD$1.58 billion, rounded to 3 s.f. and taken from the average monthly exchange rate for September 2018[23]). From this, we can calculate that the fine imposed by the CCCS was 0.405% (3s.f.) of Grab’s net revenue. However, it must be noted that for small to medium-sized firms that are locally based in Singapore, such a 10% turnover fine may be a significant part of their finances and capital. In such a case, the fines can be seen as effective since companies merging may not be able to afford such a penalty easily, encouraging them to abide by the Competition Act more closely. Nevertheless, large multinational companies such as Grab and Uber may be less disinclined to infringe the Competition Act and thus it may also be seen as an ineffective way of protecting competition in a market by deterrence.

 

 

Concluding remarks

 

As the modern economy changes and adapts to varying consumer tastes and fashions, policymakers will close in from behind, aiming to give everyday consumers fair prices and to protect them from exploitation at the hands of vast multinational corporations. Such is the case with the Grab-Uber merger and the ride-hailing economy. With ever-popular demand for such services, it is often the role of the authority to protect consumers in the market. Nonetheless, it is with great dismay that the rules set out to protect the consumers are occasionally circumvented. Such can be the case here, where the MCS operated by Singapore has meant that the CCCS’s remedies to consumers are proved ineffective. This is a consequence of the nature of the voluntary notification system set out above, the limitations of behavioural remedies that are forced as the only tool for policymakers, and corporate fines that leave firms unafraid.

_________________

[1] Kok Yufeng, “Uber’s appeal overanti-competitive Grab merger dismissed, $6.58m fine upheld”, The Straits Times,January 13, 2021, available at:“https://www.straitstimes.com/singapore/grab-uber-fined-a-combined-13-million-by-competition-watchdog-for-march-merger, accessed September 20, 2021.

[2] Zhaki Abdullah and Ng Huiwen, “Grab,Uber fined a combined $13 million by competition watchdog for March merger”,Sep 24, 2018, updated Sep 8, 2020, available at: https://www.straitstimes.com/singapore/transport/uber-to-pay-658m-fine-after-losing-appeal-over-merger-with-grab-deemed-anti, accessed September 20, 2021.

[3] Yufeng (n 1).

[4] Competition Act 2006 Section 54(1).

[5] Abdullah and Huiwen (n 2).

[6] Herbert Fung, “Singapore MergerRegime and Case Study”, available at: https://www.jftc.go.jp/cprc/koukai/sympo/2018notice_images/181109sympo4.pdf, accessed Sep 23, 2021.

[7] Ashurst, “UK Merger Control”,Quickquides, Jan 28, 2021, available at: https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide---uk-merger-control/, accessed Oct 1, 2021; Daren Shiau, Elsa Chen and ScottClements, Allen & Gledhill LLP, “Merger control in Singapore: overview,Practical Law Country Q&A”, Thomson Reuters Practical Law, Jan 1, 2021,available at: https://uk.practicallaw.thomsonreuters.com/w-006-5648?transitionType=Default&contextData=(sc.Default)&firstPage=true, accessed Oct 3, 2021.

[8] Shiau et al. (n 7).

[9] ibid.

[10] ibid; Yungshin Jang & Gu Sang Kang, “Merger Review Regimes inthe ASEAN Region and Case Analysis of Grab-Uber Merger”, Sep 3, 2021, availableat: World Economy Brief, Vol. 11 No. 39 ISSN 2233-9140. Accessed Sep 25, 2021.

[11] Jang & Kang (n 10).

[12] Shiau et al. (n 7).

[13] Zhaki Abdullah, “Uber staff on paidleave following acquisition, Grab says it will try to rehire them”, The StraitsTimes, Mar 26, 2018, available at: https://www.straitstimes.com/singapore/uber-staff-on-paid-leave-following-acquisition-by-grab-which-says-it-will-try-to-re-hire, accessed 2 Oct, 2021.

[14] Abdullah and Huiwen (n 2).

[15] Alanod Aluminium-Veredlung GmbH andCo/MEtalloxyd Ano-Coil Ltd, Cm. 4545 (January 2000), para. 4.52 as quoted in Parr,Finbow & Hughes, “UK Merger Control: Law and Practice”, Sweet & Maxwell(2nd ed, 2015) p 301.

[16] Competition and Markets Authority,“Understanding past merger remedies: Report on case study research”, Apr 2017.

[17] Competition and Consumer CommissionSingapore, “CCCS Guidelines on Merger Procedures 2012”, July 2012, at paras 6.6and 6.25.

[18] Fung (n 6).

[19] Richard Whish, “Abuse of a DominantPosition” in Cavinder Bull and Lim Chong Kin (eds), Competition Law and Policyin Singapore (Academy Publishing, 2nd Ed, 2015) p 172.

[20] Kok Yufeng, “Uber’s appeal overanti-competitive Grab merger dismissed, $6.58m fine upheld”, The Straits Times,January 13, 2021, available at:“https://www.straitstimes.com/singapore/grab-uber-fined-a-combined-13-million-by-competition-watchdog-for-march-merger, accessed September 20, 2021.

[21] Competition Act, Section 69(4),23/2007 wef 01/07/2007.

[22] Statista Research Deparment, “Netrevenue for GrabTaxi Holdings Pte. Ltd. from 2017 to 2019”, Statista, May 2019,available at: https://www.statista.com/statistics/1003625/grabtaxi-holdings-net-revenue/, accessed Oct 3, 2021.

[23] Ofx, “Yearly Exchange Rate,available at: https://www.ofx.com/en-gb/forex-news/historical-exchange-rates/yearly-average-rates/, accessed Oct 3, 2021.