5 Oct 2016
Mainland Online Ride Booking Sector Faces New Three-way Battle
Despite two rounds of mergers and fresh legislation, the mainland online ride booking sector remains in something of a real state of flux, with new entrants already eying the supremacy of the combined Uber China and Didi operation.
While the exact legality of Uber's Hong Kong operation remains under debate, online ride-booking services have already become an everyday fact of life on the mainland. As this type of non-professional taxi service has become the first choice for many travellers, an increasing number of people have opted to become full-time drivers for such services.
In the case of Hong Kong, many residents are already familiar with taxi-booking apps, with Uber already well-established in the city. In order to access the services, users simply install the app on their smartphone, enter a pick-up and drop-off point and then wait for their assigned car to arrive. Fares do not need to be paid in cash, with the cost of the journey automatically deducted from the passenger's electronic wallet.
In China, though, it is a different proposition. Given the vast size of the country and the comparative paucity of public transport services, there is huge potential for price-competitive, reliable, door-to-door taxi services, with apps offering the ideal platform to match available drivers with those imminently travelling.
Demand for such services has been further increased by the problems facing the traditional cab business in many mainland cities. Notably, there has been a reluctance on the part of the government to increase the number of licensed taxis and drivers. The problem has been compounded by growing dissatisfaction with conventional taxi services, with passengers often complaining of rude and unhelpful drivers, of not being allowed to smoke or of being dropped off far from their desired destination.
At the same time, there has been a drastic increase in the number of drivers working for online booking services. It has been suggested that such drivers can earn up to RMB10,000 (US$1,500) a month, a substantial income in mainland terms.
The online ride-booking system, though, has encountered many of the same problems on the mainland as it has in Hong Kong. Aside from such issues as legality and passenger safety, major objections have come from established car hire operators, with many of them resenting the impact online booking has had on their own businesses. All too frequently, this has resulted in strikes by licensed taxi drivers, protest marches and even assaults on drivers working for Uber or other hailing services.
In July this year, in order to tackle these problems head on, the State Council published its Opinions on Promoting the Sound Development of the Hire Car Industry through In-depth Reforms (http://www.gov.cn/zhengce/content/2016-07/28/content_5095567.htm). While this legalised online ride-hailing services, it also sought to strike a balance between the need for convenient transport and the need for taxi drivers to make a living.
The new policy set out to regulate the online ride-booking business, while promoting the transformation and upgrading of the hire car industry. Over the long-term, it also looks to merge the two modes of business. In terms of short-term changes, private car owners now need to change their car registration to the 'ride-booking service' category and obtain a hire car permit and driver's licence in order to be able to accommodate online bookings.
The policy also enacts localised administration, allowing local city governments to introduce their own rules to manage online ride booking. It is anticipated that this will lead to the general adoption of three particular principles:
1. Supply will be controlled by limiting the number of online hire car licences.
2. Local hire car businesses will be protected by restricting the participation of vehicles from other provinces.
3. Online ride-booking services will be obliged to charge higher fares. This will limit demand and allow both sectors to prosper.
Despite these new regulations and the new legalised status of the sector, the future of online ride-booking services still faces a number of challenges. Most notably, while operators were preciously free to offer their services anywhere on the mainland, they are now obliged to conform to a variety of local laws and requirements.
Overall, though, the majority of the online ride-booking services were quick to show their support for the new policy. In August, Uber China and Didi Chuxing (Didi) – the two giants of the sector – announced they were to merge.
Uber China has now secured a 20% stake in the merged entity, while Didi will invest US$1 billion to obtain a 1.47% stake in Uber's global business. The founders of the two companies will also join each other's boards. Overall, the merged operation is estimated to be worth around US$35 billion.
Of particular note is the 20% stake held by Uber China, which now accounts for about 17.7% of Uber's global business, with other shareholders holding a further 2.3%. Although Uber has become the largest shareholder by taking a 17.7% stake in the merged entity, it only holds 5.8% of the voting rights under an agreed weighted voting rights system. Significantly, this leaves Didi in overall control. In the short-term, the two businesses will continue to operate their own ride-booking platforms.
The merger may well be in the best interest of both parties, with each having invested huge sums in the Chinese market while failing to make a profit. Now Didi has effectively eliminated its major competitor by giving it a 20% stake, while Uber has wiped out its biggest potential global competitor by ending its own bid to dominate the mainland market.
Ultimately, the deal is a win-win scenario for both sides. It allows them to share the profits emerging from the mainland market rather than engaging in a cut-throat price war for passengers.
Given that the Uber-Didi merger has created an entity with an 80% share of the Chinese market, it has generally been seen as marking the end of competition in the sector. Despite this, recent statistics have shown that the monthly number of Uber China active users dropped by 740,000 – nearly 5% – in the month following the merge. Didi fared even worse, losing 2.71 million active users in a month, close to 6%. Contrary to all expectations, other, smaller online ride-booking operators showed growth over the same period.
A possible explanation is that both Uber China and Didi have cut or abolished subsidies for drivers, a consequence of both liquidity pressures and their assumption of market dominance. This has seen a number of drivers quitting the two platforms, resulting in extended wait times for passengers. Additionally, the two both raised their fares in many cities, reducing their price advantage compared to conventional taxis. As a result, many passengers have been prompted to look for cheaper alternatives or to return to traditional means of transport.
Clearly, although Didi has become the dominant player, there is still room for other contenders in the sector. Significantly, these smaller players are now looking to undercut the market leader in terms of price, while also promising a more efficient service.
Prior to the present situation, the early days of online ride-booking on the mainland were dominated by three substantial players – Alibaba-backed Kuaidi Dache (Kuaidi), Tencent-backed Didi Dache and Baidu-backed Uber China.
Eventually, Kuaidi and Didi Dache merged to form Didi Chuxing, then a serious rival to Uber China. One of the smaller players – Zuche – then took advantage of a gap in market share created by the merger. It secured its own niche with a guarantee of safer and better services, a development particularly welcomed by women and business customers. It was then able to undermine the dominance of Didi, ultimately resulting in a second-generation three-way split – Didi, Uber China and Zuche.
Zuche also had formidable backers. One of its shareholders was Liu Chuanzhi, Chairman of the Lenovo Group. Perhaps significantly, Uber China's Director of Strategy is Liu Chuanzhi's niece, Liu Zhen, while Didi's President, Liu Qing, is Liu Chuanzhi's daughter.
Although coming from the same family, Liu Zhen and Liu Qing seemed to have very different ideas as to how to run their businesses. Didi took a more incremental approach, with Liu Qing hoping to establish the company as an international concern. By contrast, Liu Zhen looked to increasingly localise Uber China as a means of gaining mainland dominance.
In some ways, the merger can be taken as capitalising on both approaches. It could also be seen, however, as Didi winning the battle for China, but failing in its global ambitions. Similarly, Uber could be said to have lost the China market, while retaining its global market share.
History would seem to be repeating itself, though, with Didi and Zuche now squaring up to one another. With little fanfare, it could be said that another three-way battle for China's online ride-booking market is already quietly underway. A new contender has now presented itself in the form of Yidao Yongche (Yongche). This latest would-be competitor is backed by LETV, a producer of TV programmes and films, as well as a mobile phone manufacturers and an e-commerce pioneer.
Although Yongche's market share clearly cannot be compare with Didi at this stage, its inter-city carpooling, car booking and high level of passenger services are proving hugely popular with its customers. With a range of high-end services designed to keep its affluent users on-board and backing from LETV's rich and diversified resources, its uptake is gradually growing. Inevitably, a number of customers who exited the combined Uber China and Didi operation have turned to Yongche.
Inevitably, then China's online ride-booking sector now faces a new three-way battle, with Didi, Zuche and Yongche all eying each other up. This can be seen as a clear sign of the market's continuing potential, while illustrating the opportunities open to innovative newcomers to the sector, particularly at the higher end of the market.
Wayne Chung, Guangzhou Office