Uber’s got big trouble in little China.
The new-age taxi company has stated that China represents its biggest market outside of the United States – and is spending millions to fund its expansion efforts into 100 new cities there over the next year.
Hardly surprising when you consider that China is the world’s largest transport market and over 150 million citizens use their smartphones to hail taxis.
But when entrepreneurship meets government regulation, you’ve got a recipe for growth getting squashed. And right now, Uber faces a head-on collision with the Chinese government.
Last weekend, China’s Ministry of Transport published draft legislation that would slam the brakes on Uber’s proposed expansion plans.
Bring On the Bureaucrats
Specifically, the measures state that:
- Disruptive ride-hailing companies must absorb much of the costs of traditional taxi firms. (Funny… I always thought entrepreneurship and competition were a good thing, not something to be punished.)
- Uber must register its cars as taxis, not private vehicles. Uber has challenged this issue before, arguing that because it doesn’t own a fleet of vehicles itself, it isn’t a taxi company, but more of an internet-based service provider. China’s bill also states that such companies must also have insurance in place to cover the cars and passengers.
- It must have formal employment contracts with its drivers. Drivers must also have three years of experience and have an exclusivity arrangement in place that restricts them to working for just one ride-hailing company.
- Uber must house and maintain servers in China and share data with transportation authorities. To this end, The Wall Street Journal says Uber has already started this process, in order to acquire an “internet service company” license in China.
- The government will have greater oversight in approving which cities these companies can operate in. Not only that, authorities can dictate how many cars can operate at a given time, as well as where they operate, and what fees they can charge. (Yes… this sounds completely stifling and backwards to me, too. “Big Government” at its worst.)
But lest you think this is more anti-American haranguing from China, these proposals don’t just affect Uber. Its big Chinese-based rival, Didi Kuaidi, which uses the same business model, must also adhere to the new rules.
The Battle for China’s Taxi-Takers
Formed in February through the $6-billion merger of ride-sharing apps, Didi Dache and Kuaidi Dache, Didi Kuaidi poses a major threat to Uber.
Before the merger, Didi held around 55% of the Chinese market, while Kuaidi owned the rest, according to Analysis International. The new firm currently books around seven million rides per day in 300 Chinese towns and cities.
And not only does the newly formed firm boast home-field advantage over Uber, it’s also received major backing from internet giants Alibaba Group (BABA) and Tencent Holdings (TCEHY), as well as private equity firms like DST, Softbank, and Tiger Global.
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For its part, Uber has won backing from Chinese search engine firm Baidu (BIDU), as the battle for supremacy in this lucrative area heats up.
To date, TechCrunch says Didi Kuaidi has pocketed $4.4 billion, while Uber has raised $1 billion, in order to further their expansion efforts in China.
But the government’s proposed regulations threaten both companies’ ambitions – particularly since they’re coming from the national federal level.
Government Throws Up a “Zhuanche” Roadblock
Notably, Quartz points out that the draft doesn’t mention “zhuanche” – the Chinese term for private car hire. Nor does it specifically mention Didi Kuaidi or Uber.
Instead, it addresses the industry more broadly, referring to the gray zone of “online, pre-booked taxis.” This indicates that the government isn’t picking favorites. Rather, it wants to lasso the entire ride-hailing industry and make those within it operate more like conventional cab companies.
Needless to say, that would force a pretty dramatic shift in these firms’ business models.
The proposed legislation is open to feedback and debate for the next month.
Uber responded by saying it’s in “close communication with local regulators and will proactively fit in the new norm of industry development, follow the spirit of the draft regulation, comply with all requirement, and partner with local governments in implementing the new set of rules.”
A surprising lack of resistance, or mere lip service?
Didi Kuaidi also vowed to cooperate, but was a tad more guarded, noting that the draft is exactly that at this point – a draft: “It’s still at the stage of public consultation. We will give responsible feedback and recommendations to the authorities, after studying opinions and responses from experts, industry players, and most importantly passenger and driver communities.”
Indeed, the proposals could well change before being enacted or give local authorities some leeway in applying the law to its own jurisdictions. In that regard, Shanghai just granted Didi Kuaidi a license to operate its private car hire service in the city. Uber is awaiting similar approval.
There’s also no schedule for putting the national bill into law, so for now, the mission for Uber and Didi Kuaidi is clear: Make hay before the government spoils the party!