With the recent expansion of 4G networks and the growing number of smart phone users, China’s mobile app markets have become a hotbed for innovation. Although the range of apps currently in development is very broad, this post will focus on the taxi apps, specifically concerning Uber’s emergence in the Chinese market.
Before Uber came to China in November of 2013, Chinese natives had already identified a need and thus a market for better taxi services. If you have ever been to Beijing you have certainly paid witness to this issue. The local governments control both the base fare that all taxis can charge, as well as the number of licensed taxi drivers in the area. Naturally, the government required low rates and limit placed on drivers limit the supply of cabs, and many customers find themselves waiting anywhere from 30 minutes to an hour for a vacant cab.
Chinese apps like Didi Dache, Kuaidi Dache, Yongche, Da Huangfeng Dache, and Yaoyao Zhaoche have set out to help solve this issue using market economy techniques. These techniques typically include having customers book rides in advance, with the promise of a tip (up to a certain maximum, usually 20 RMB, which is about twice the normal base fare) for picking them up. Unfortunately, the Chinese government has not taken too kindly to these apps, and fear that their tip-based system will destabilize the taxi system and could upset customers who are either unwilling to pay the needed tip, or do not have a smart phone.
Although all of these apps are home grown, and use other Chinese technology, including Alibaba’s Alipay (Kuaidi Dache and Da Huangfeng Dache) and Tencent’s Wechat (Didi Dache), local governments are still taking offense, some even to the point of creating a ban on the apps. Recently, Shenzhen has banned these apps that require tips, and Shanghai’s Transportation Bureau has made a public announcement condemning the practice.
This sets the stage for Uber, an app from San Francisco that thus far has differentiated itself within the Chinese marketplace thanks to its use of high class automobiles such as Audi A6’s, Mercedes Benz S350’s, and BMW’s. While these cars guarantee Uber a soft place in the hearts of the growing middle class looking to protect their image, the cost (one user reported an RMB 88 Uber ride that cost RMB 30 in a normal cab) is prohibitive to most consumers.
Additionally, Uber faces challenges in securing the loyalty of the cab drivers they hire. One of the biggest issues within the taxi app market is locking down drivers. In order to do so, many apps are offering subsidies. Kuaidi Dache offers cab drivers who use the app for at least five rides per month 10 RMB per month. While this seems a small fee, when multiplied by the taxi base that Kuaidi Dache supports in just Huangzhou, it comes out to about RMB 210,000 per month. Multiplied over multiple cities, this is an unfathomable amount of money for merely securing taxi drivers’ loyalties.
While the tip system was in effect, most apps allowed the cab drivers to keep the tips in exchange for their loyalty. Now that that system is largely banned or condemned, these app companies are forced to pay out of pocket. Where does the money come from? Most taxi hailing apps in China are making money solely from in-app advertisements. Subtract the amounts they are offering cab drivers as subsidies and very few are turning a big profit, if they are even making a profit at all.
According to some critics, this is the biggest threat facing the industry. Cut-throat competition is not only leading these companies to offering subsidies and accepting minimal profits, but also leading smear campaigns targeting the other taxi apps. One of Didi Dache’s drivers reported that the company sent mass texts to its drivers warning them of smaller companies that “offered huge incentives then disappear after a month and give personal contact information to advertisers.”
It seems Uber has managed to avoid government snares that have largely caught its competition; however, whether they can continue to thrive in a system that more and more rewards local firms remains to be seen. Regardless, it is “fare” to say that customers and taxi drivers both are benefitting from these technological advances and will most likely continue to do so for the foreseeable future.