Want a Taxi in China? Don’t Call Uber; Call the State

Originally published on Forbes.com


Wednesday, the Beijing municipality unveiled Shouqiyueche, its car-hailing app. The city is starting the business with 500 converted cabs. By the end of the year, there will be 1,800 of its vehicles on the streets.

Shouqiyueche’s formation followed the inauguration of Feidi, Beijing’s first officially sanctioned taxi app, which went active in the middle of August with 15,000 drivers. Wang Runnan of Beijing Qihua Smart Transportation Co., the app’s developer, is hoping Feidi will soon be used by 60,000 cabs.

The Chinese state is now in direct competition with San Francisco-based Uber and China’s market leader, Didi Kuaidi, which was formed by a merger announced in February. But should anyone care that the state has now gone into business?

There are many reasons not to. For one thing, China is the “world’s largest transport market” with more than 150 million people using smartphone apps to hail taxis. And 500 cars is hardly significant in a city with 66,600 licensed cabs at the beginning of this year.

Moreover, the Beijing municipality already operates fleets of taxis. The hailing app is just an extension of its business.

And in the marketplace, one more competitor is always welcome. It’s unlikely that any Beijinger in the rain is going to complain about Shouqiyueche offering rides.

On the other hand, Shouqiyueche sets two especially bad precedents. First, Beijing is not just another competitor; it is a jealous participant that will use its regulatory power to distort the market. And this is not just a theoretical concern. “The city has been pretty resolute in its battle against private or rented cars offering similar services,” wrote the official China Daily last week on the announcement of Beijing’s app. “Market players from home and abroad, including Didi Kuaidi and Uber, have faced investigation multiple times.” Among other things, the Beijing municipal authorities in early June pronounced Didi Kuaidi’s premium-car and express-car operations illegal.

Beijing is not the only city to have harassed app-based car services. Last year, Shanghai prohibited the use of apps by taxi drivers during rush hours, the two time periods when they are needed most. A host of municipal authorities raided Uber’s offices in Guangzhou in late April, seizing equipment and charging the American company with operating an “illegal” transport service. Shenzhen made car-service apps illegal. And add Chengdu, Luoyang, Qingdao, Nanjing, Dalian, Shenyang, and Hangzhou to the list of cities where app services have run into difficulties with officials.

Second, Beijing’s Shouqiyueche is an expansion of a state business into a new field, which is always unwelcome, and, unfortunately, it is not occurring in isolation. It is taking place while the central government is re-nationalizing the economy through various techniques and generally closing off opportunities for foreign companies.

China’s old economy, its manufacturing sector, is now contracting, so the country needs new businesses, especially in the services sector, to grow fast. The official National Bureau of Statistics reports that the services sector, which accounted for 49.5% of the Chinese economy in the second calendar quarter of this year, grew 8.4% in this year’s first half.

Yet services are unlikely to match that growth in the second half. Why? The financial services industry has been hit hard by the plunge in the stock market. The Chinese central government, to keep share prices from collapsing, has taken steps that have led to dramatic declines in activity. For instance, the volume in the stock-index futures market, once the world’s largest, slumped 99% in the June-to-September period. Similarly, volume in the equity exchanges has plummeted as well.

This means, among other things, that China needs Uber, Didi Kuaidi, and every other app-based car service to do extremely well to make up the shortfall in gross domestic product from financial services.

Left on their own, app-based services would grow at great speed. Uber, which started in China in August 2013, is now in 15 Chinese cities. The company said there were 200,000 users in January and 4.6 million in June. Five of Uber’s top 10 cities are in China, including the top three, Guangzhou, Hangzhou, and Chengdu.

Uber chief Travis Kalanick claims his company in China has almost a 50% share in the non-taxi ride market, but Uber is well behind rival Didi Kuaidi, which is backed by internet giants Alibaba Group and Tencent Holdings . Uber had a 10.9% share at the end of 2014. In comparison, Didi Kuaidi is thought to have a 60% to 82% share of the app-ride market, depending on how that segment is defined. The company operates in more than 300 cities, up from zero in 2012.

While Uber, with its new shareholder and partner Baidu , and Didi Kuaidi slug it out, the market for rides booked by apps is “growing rapidly,” according to Caixin, the Chinese financial publication. The one thing—perhaps the only thing—that can derail growth in the segment is government intervention.

In China, the state always seems to find a way to insinuate itself into the private sector. China Investment Corp., China’s sovereign wealth fund, has done that by taking a stake in Didi Kuaidi. And as we have seen, the Beijing municipality has resorted to protectionism. Yet enforcement actions against Uber and Didi Kuaidi have only slowed them down, not stopped them altogether.

Now, Beijing’s government is attempting a more direct method, actively competing in a market it itself administers. Nothing good ever occurs when state officials do that.

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