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In China, Local Governments Play Whac-a-Mole With Taxi Apps

BY Rebecca Chao | Friday, August 29 2014

Beijing yellow cabs from the 1980s (credit: This is Beijing!)

Car-hailing apps often trigger growing pains for the cities that embrace them. In New York, for example, the car sharing start-up Lyft has ignored labor and safety insurance laws, leading to a restraining order. In China, the situation is no different except in two key regards: taxi hailing apps in China are proliferating at a faster rate than in the U.S. and the system for regulating taxis is very much in its infancy. As a result, local Chinese governments are struggling to control new apps that flout the law.

While New York’s taxi system has existed since the 1900s, China’s original yellow box-like mini vans only began to appear in Beijing in the 1980s, and state regulators have done a terrible job of managing the demand for their services. The country's lack of experience with private taxi services has in some ways actually fueled the explosion of the newer car-hailing apps, which emerged in China in 2012 and now claim tens of millions of users across the country. In Beijing, for example, the government’s says the apps violate laws on price caps, but their efforts to crack down on them are like a game of whac-a-mole.

The demand for car services is so high that there are around 30 apps now booking tens of millions of rides a day across the country. And when the first few mobile taxi apps appeared, like Didi Dache ("Beep Beep Hail a Cab") and Kuaidi Dache ("Quickly Hail a Cab"), riders had to rigorously bid for the taxi driver’s service by submitting a suggested tip beforehand – taxi drivers would then choose among the highest tipper.

The demand for unofficial taxi drivers using the new transportation apps is due in part to the government’s restriction of official taxi licenses. Between 1994 and 2011, Beijing’s population grew from 11 to 20 million but the government only permitted an additional 6,000 licenses to be issued, for a total of 66,000. Car ownership is still a luxury in China and a license plate costs an additional $14,500 in metropolises like Shanghai and Beijing. In an effort to fight choking pollution in its cities and alleviate congestion on its roads, which if not controlled could lead to complete gridlock, the Chinese government set up in 2011 a lottery system for license plates, which the Chinese joke is harder to win than a regular lottery.

The supply of taxi drivers is also limited by the government's price controls on taxi fares, which remain remarkably low and do not help attract drivers to the business. Often times, cab drivers say that it makes little sense for them to pick up customers because cab fares have not grown proportionately to increasing gas and maintenance costs – drivers might even operate at a loss when stuck in idle traffic during rush hour.

In August 2011 when taxi drivers went on strike in Hangzhou, a large city located just out of Shanghai, one driver who goes by the name Liu told the Financial Times that the government had promised to raise fares for years but did not. The starting fare at the time was still at 10 renminbi (US$1.60) and had been over the last eight years. Just last year, however, Beijing finally raised fares by 30 percent after complaints that cab hailing was becoming very difficult.

But now with the proliferation of unofficial car-hailing apps, drivers can get paid closer to market value and plan their routes more efficiently. It seemed like good news for both taxi drivers and riders willing to pay an extra 1 to 5 renminbi per trip (US$.16 to $.81). That is, until the government came in swiftly to crack down on the extra fares, which it said would create an imbalance in the market, possibly favoring not only those with mobile phones but who could pay.

Taxi apps go social

Local governments in China have responded to growth of taxi-hailing apps by restricting their use. The 15 million person city of Shenzhen was the first, outlawing these apps entirely unless were brought in line with government laws on fare caps. Beijing came next, forcing these apps to link to officially-sanctioned call platforms; further, app companies have to apply for approval from the city's transportation authority in order to access the call platforms. In Shanghai, taxi drivers are prohibited from using taxi apps during rush hour. Private drivers are prohibited from offering rides using them. These kinds of bans affect services like Uber, which in China is marketing itself as private luxury car service.

“Laws are one thing,” Andreas Maennel says to techPresident. “Enforcement is another.” Maennel is a principle at Roland Berger Strategy Consultants in Shanghai where his company recently conducted a comprehensive study on car sharing in China.

Despite government regulations, car-hailing services are only growing in popularity. DiDi Dache is now available through China’s most popular messaging service, WeChat. Its registered user base hasrise to 40 million from 20 million in just the last year.

A black market and a green one

Whenever the government makes it harder for taxi drivers to do their job, it encourages a rich black market for unlicensed drivers. The new technology makes it even easier for riders to find these illegal car services.

There is also a black market for the license plate lottery: people can either rent plates from car dealerships or Beijingers who nabbed one before the city restricted licenses in 2011, which is illegal, or they can buy them from other black market sources for prices of around US$33,000 –- as much or more than the price of a car.

The two markets -- private ownership of cars and private taxi services -- recently merged. As noted and translated in Quartz, a blog post that explains how to work around the license plate lottery and also make a profit went viral on Chinese social media:

I met this ‘taxi driver’ this morning. He’s a Beijing native and a white-collar worker. He plans to buy a car, but has never won the goddamn license plate lottery. So he came up with this genius strategy: pay a taxicab company a monthly deposit of 4700 yuan [$800] so that he gets a cab to drive. Besides, he picks up a couple of patrons on his way to office, which earns him an extra 120 yuan per day. Isn’t that awesome?

The government quickly responded, slamming the blog post as fake because the government claims it is not easy to obtain a taxi license – it requires various levels of exams and certifications. Even if the example above is not authentic, it looks very much like a model for car sharing and it probably exists on some level in the Chinese black market.

Roland Berger's Maennel says while ride sharing may possibly become popular in the future among China's open-minded and mobile-savvy youths, car sharing is less likely. “The vehicle is too much of a status symbol,” he says. People who have cars don’t want to lend them to others. On the other hand, he explains, “[The cost of ownership] is only going to go up over the years.” Indeed, Beijing further tightened restrictions on license plates this year. While it once allowed one in ten to win the license plate lottery, those odds have now been reduced to one in 150,000.

But where a black market exists in China so does a green one, perhaps. “Combining a car sharing fleet with low fuel consumption or with electric vehicles might make a business model that is more interesting to local authorities,” says Maennel.

But green incentives, however compelling in theory to local governments, don’t address the underlying malfunction in China’s local transportation system: its inability to manage the supply of its taxi drivers and the suppression of a taxi union in China to allow grievances and market inefficiencies to be made known. China’s official union, the All-China Federation of Trade Unions, is often considered nothing more than a government mouthpiece.

Among their many complaints, taxi drivers in China say that the proliferation of unlicensed drivers makes it even harder for them to operate on their already low profit margin. It is a negative cycle: governments limit the number of taxis on the road and then enforce low fares that further reduce drivers's incentives to work, inadvertently encouraging the growth of a black market to meet the rapidly growing demand for cabs.

Notably, Uber’s model is remarkably similar, with drivers operating on a contract-basis and dumping many of the risks onto the driver. Denise Cheng, a researcher at MIT who studies peer economies, tells techPresident that as more sharing economy platforms push workers into an independent worker model, they are able to skirt laws that protect full time workers but leave independent contractors floundering on their own.

“Uber makes it hard for [drivers] to find each other. There are no communication channels,” explains Cheng. She calls Uber and other similar models “system[s] of exploitation.”

In the meantime, China is dealing with the proliferation of car apps in its own characteristically heavy-handed way: many local governments are building their own car-hailing apps. The project in Shanghai is currently well underway. Given the government's track record for building shoddy imitations of apps from the private sector, it doesn't sound like a good idea.

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