Technology advancements and the adoption of smartphones have given rise to new solutions in shared mobility. In Silicon Valley, there has been a surge of investments in the ridesharing or taxi start-ups such as Uber, SideCar and Lyft; while in China the rise of taxi-hailing apps is causing a big stir. The Chinese boom has brought panic among industry incumbents and regulators — just as swift as its rise, these apps were quickly banned or regulated in several Chinese cities.
Compared with their peers in the U.S., taxi apps in China do not have billing functions which eliminates the handling of cash or bankcards. But they do have some unique features: the “push-to-talk” function allows people looking for a cab to send instant voice message to nearby available taxis; the “Bid-to-Win” feature allows users to offer tips upfront in order to win a cab in peak hours; some also provide the option for passengers to coordinate a shared ride with others. In Chinese cities, where the road conditions can be very complicated, both passengers and drivers benefit from a more streamlined method for connecting customers with their taxis.
With so much to offer, taxi apps quickly gained popularity in China. As of July 2013, there are about 30 taxi-hailing apps in China, among which the most popular ones are Didi-Dache (嘀嘀打车) and Kuaidi-Dache (快的打车). Didi-Dache, which was just released in September 2012 and is very popular in Beijing and Guangzhou, has been downloaded five million times. Kuaidi-Dache, another popular app in Shanghai and Hangzhou, has been downloaded about three million times and facilitates 100,000 trips every day.
The popularity of taxi-hailing apps has quickly attracted sizeable investments from leading venture capital and Internet giants. In April 2013, Didi-Dache raised US$25 million from Tencent, the largest internet service portal in the country, while in May 2013 Kuaidi-Dache received an undisclosed investment of several million US dollars from Alibaba, the largest e-commerce network in China.
However, shortly after these companies started another round of aggressive expansion, the Chinese government began to ban the apps. In May 2013, the city of Shenzhen asked all taxi drivers to remove the apps; In July, the Beijing Transit Authority mandated that all taxi apps stop using the Bid-to-Win feature and integrate with a public dispatching platform under regulated booking prices. Shanghai also plans to regulate the apps similarly this August.
Based on government officials’ comments, the taxi apps are banned because the Bid-to-Win feature violates existing price regulations and causes market instability. Since taxis are regarded as part of the public transport system in China, the government feels compelled to ensure that apps do not increase transportation costs for ordinary citizens.
Other reasons might also contribute to government intervention. Taxi apps not only mobilize registered taxis but also help unregistered “black taxis” to garner business. In Beijing, the number of licensed taxis has been limited to 66,000 over the past decade, even as the city’s population has increased by 50%. The city’s ubiquitous “black taxis” are estimated to be almost equal in number to the licensed ones. With taxi apps, these unregistered drivers can pick up passengers with less risk of being caught by police.
The last but perhaps most important reason lies in the disruption apps have caused to the existing ecosystem. By mobilizing private vehicles as taxis, apps threaten the long-time monopoly by incumbent taxi companies, which often have close ties with the regulators. In addition, their operations challenge the government’s authority, including disrupting official plans to build a public taxi-calling center.
Unlike their US peers, who often fight for rights in court, Chinese app-makers quickly changed their strategy and agreed to collaborate with the government. They strengthened the verification process for taxi drivers on their app and shared their back-end traffic data with the public taxi calling center.
For most businesses in China, cooperating with powerful regulators seems to be the only option. The regulations not only increase the complexity and cost of operations, but also make it harder for apps to differentiate themselves. The increasingly fierce competition has made it more expensive for these apps to attract drivers and users. Yaoyao-Zhaoche (摇摇招车), one of the bigger taxi apps, is said to be on the verge of bankruptcy. Some smaller apps have also slowed or stopped expansion. The future of this fledgling industry is uncertain: Will these taxi apps survive and finally find a working business model? Or is the boom ephemeral?
Weixing Chen, CEO of Kuaidi-Dache, published an article in Forbes China this July titled Why are we doing business that loses money. He reminded readers that new innovations, like taxi apps, often take time. “Only the ones with passion and faith can survive till the last day,” Chen wrote. He argued that the entrepreneurs who created these apps aren’t in it to make quick money—they are motivated by a vision to improve China’s transportation system.
The industry continued to evolve and adapt to the new situation with leading companies collaborating with other partners and funders for more resources. Didi-Dache recently announced the in-app hailing service for WeChat, the popular mobile messenger with over 300 million users. Baidu, the biggest search engine in China, also released their latest map app with taxi-hailing feature backed by Didi-Dache. Back in the U.S., Uber recently claimed its victory in court against the Boston city government, and is looking to raise another big round of funding from TPG at a $3.5 billion valuation. It is expanding aggressively outside of the U.S. and plans to launch in China later this year.
It is still too early to conclude the future of taxi-hailing apps in China. We can only hope that entrepreneurs will continue to innovate, and that the government will be open to new solutions. Together, these two parties have the ability to provide better mobility for China’s cities.
This article was co-authored by Heshuang Zeng and Yili Lin. Yili Lin is a recent MBA graduate from Harvard Business School. He previously worked for Volkswagen as Product Manager and for Barclays Capital as M&A Associate.