Uber and Local Rivals Will Boost Car Sales in China

Chinese Cities Will Have to Loosen Control Over Local Taxi Markets

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Fast-expanding Internet-based taxi companies -- such as Uber and its Chinese rival, Didi Kuaidi -- are forcing China's municipalities to loosen their control of local taxi markets.

And that, in turn, could expand a much-needed market for automakers as these services buy fleets of cars. For a long time, urban taxi markets have been monopolized by taxi companies affiliated with local governments. Private businesses are not allowed to provide such services. Meanwhile, the government-backed taxi companies tightly limit the size of their fleets to ensure their profitability.

Yet the drivers, who must rent their vehicles from the companies, often struggle to make a living. The drivers must pay a hefty fee to the companies each month, whether they make any money or not.

Credit: Doug Kanter/Bloomberg

In the northwest city of Xi'an, for example, a taxi driver is required to pay a monthly fee of 5,400 yuan ($703) to his company. After paying that fee, the average driver makes only 4,500 yuan per month even when business is good, according to local media. To make enough money to support their families, taxi drivers in China normally have to work more than 10 hours a day. For years, drivers in many cities have protested their unfair treatment by their employers, to no avail.

Worse yet, the municipalities make sure their taxi fleets are purchased from local state-owned automakers.

This explains why most cabs on the streets of Chongqing are produced by Changan Automobile Co., which is headquartered in that city. Likewise, nearly all the cabs in Shanghai are built by Shanghai Volkswagen, a partnership between Volkswagen AG and state-owned SAIC Motor Corp.

Meanwhile, private Chinese carmakers have been shut out of these taxi markets, and some companies are losing their patience. Over the past three years, Li Shufu, chairman of privately held Zhejiang Geely Holding Group Co., has repeatedly appealed to Beijing to break the municipalities' monopoly on local taxi markets. But Li and other reformers had little success until last year, when Internet-based taxi services began operating.

Unlike their traditional rivals -- whose cabs must be hailed on the street or by phone -- Uber and Didi Kuaidi are easily reachable via the Internet.

Lush with venture capital, these new taxi operators offer generous cash incentives to customers. They also have enlisted large teams of taxi drivers by freeing them of monthly fee payments. Now, the new taxi companies are grabbing market share. Caught between angry drivers from municipal taxi companies and fierce competition from new rivals, cities are moving to deregulate their taxi markets. (In another move, Didi Kuaidi and San Francisco startup Lyft this week announced they have formed an alliance and will let users of each app hail rides from drivers of the other app while they are traveling to the other country. In addition, Didi is investing $100 million in Lyf).t.

The northwest China city of Xi'an this year approved the first private taxi company in China. This week, the east China city of Hangzhou released a tentative plan to allow drivers to quit government-affiliated taxi companies and provide taxi services on their own.

Car ownership in China is still low, with fewer than 100 cars per 1,000 Chinese residents. But China is undergoing rapid urbanization, and this has created a huge demand for taxi services. But due to strict government control, the taxi market in China is underdeveloped. In 2014, the size of the taxi fleets across China rose only 3% to 1.4 million vehicles. As China's taxi market deregulates, more private businesses will enter the market to establish taxi fleets. Thanks to a stagnating economy and the stock market rout, China's light-vehicle sales declined for the third consecutive month in August, dropping 3.4% year on year to 1.42 million vehicles.

For automakers, nothing would be more delightful than a new group of fleet buyers.

--Automotive News China--

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