China taxi-booking apps: Road war

Venture capital investors compare the current battle in China's mobile taxi-booking space to a skirmish in the 1950-1953 Korean War. There was a conflict between the north and south - see Alibaba Group and Tencent Holdings - with other foreign powers lining up in support of the two combatants. The likes of Japan's SoftBank Corp. and Singapore's Temasek Holdings are playing the US and Soviet Union roles.

Kuaidi Dache, a taxi-booking app backed by Alibaba, strengthened its flank last week with a $600 million investment led by Softbank and also featuring existing backer Tiger Global Management. This followed a $700 million round completed in December for Tencent-backed Didi Dache, which won support from Temasek, DST Global, GGV Capital and other investors.

A third giant, search engine operator Baidu, jumped into the market last month by investing in US-based car-sharing platform Uber and agreeing to help the firm expand in China.

While Uber's traditional target market is high-end customers who request private cars, Didi and Kuaidi are primarily digital intermediaries for taxi companies. However, these delineations are becoming blurred as companies make a play for one another's turf.

"Alibaba, Tencent and Baidu aren't competing for profits generated by taxi-booking apps. The apps are meaningful in terms of the expansion of their payment systems and mapping technology used by the vehicles," says Hurst Lin, co-founder of DCM China. "The taxi app industry is a mess now because the original business model has been nixed. I doubt the demand for the taxi-booking apps is as high as we are seeing."

As a result of Kuaidi's alliance with Alibaba, passengers can make payments through Alipay. The Didi-Tencent connection allows users to book taxies within instant-messaging app WeChat and pay through Tenpay. The capital flooding into the space is being used to provide subsidies - all part of the wider struggle for market share. Passengers like low-cost rides but it remains to be seen whether or not the business is sustainable once the subsidies come to an end.

Differentiating factors

According to a consultancy Analysys International, 154 million people in China used a taxi-booking app in the third quarter this year, with the vast majority of orders going to Kuaidi and Didi. The companies focus on regulated and licensed cabs, but because taxi fees are charged by the meter, there isn't much room for the apps to earn commissions.

Later last year, Kuaidi and Didi introduced private car booking services - Yi Hao Zhuan Che and Didi Black - that offer rides in Audi and Mercedes-Benz vehicles to high-end customers. It puts them in direct competition with Uber and local incumbent Yongche.

"The idea of ride-hailing app is to use mobile internet as an intermediary to connect all drivers, a function traditionally performed by car leasing firms," says Jixun Foo, a partner at GGV Capital. "With the new technology, anyone can provide services without the trouble of going through a car leasing firm. That is why ride-hailing platforms are so powerful - they optimize supply and empower demand."

In this context, online platforms could differentiate themselves by working to earn customers' trust. While ride-hailing apps make transportation systems more efficient, they also raise safety issues seen in other developing countries. Two weeks ago, the Ministry of Transport issued a ban on private cars from participating in ride-hailing apps in order to protect users. Only licensed taxies are able to use this technology to connect with customers.

This ruling has apparently proved problematic for Didi, Kuaidi, Uber and Yongche. They all operate under a zero-fleet model and in order to provide premium services, they usually form partnerships with asset-heavy car rental services. It is unclear how many drivers employed by these companies are operating without licenses.

"The regulator has taken a strong position against these services in part because of pressure coming from the established taxi industry. They have to protect the licensees," says Raymond Wang, managing partner at Beijing-based law firm Anli Partners. "The taxi business is quite a monopolized market. When there are too many private cars on the streets taking their business, of course they are unhappy."

Venture capital investors offer the same view, noting that the local governments will be biased towards taxi-leasing companies, which usually are state-owned enterprises (SOEs). In the long term, however, the balance is likely to change.

"The Chinese government will embrace the changes facilitated by online technology. It will be a similar process to online video sites, which emerged in 2008 to 2009. Now online video channels are been properly regulated and many of them are licensed," GGV's Foo says.

Local needs

On the other hand, the ruling may encourage ride-hailing apps to cooperate with large fleet rental operators, such as eHi Car Services and China Auto Services. EHi has already invested $25 million in Kuaidi and has formed a cooperative agreement with the company whereby its premium car services will be made available through the Kuadi platform.

"The ruling is very favorable for car-rental companies like eHi. When Didi or Kuaidi needs to use licensed rental cars to provide premium services, eHi is the largest player in it," says J.P. Gan, managing partner at Qiming Venture Partners, which is an investor at eHi.

At the same time, he does not expect mobile ride-hailing apps to expand their business by forming their own fleets because this would mean abandoning the asset-light model. Rather, expansion will take the form of similar services in related segments. Ultimately, these companies want to become online transportation platforms that carry not only people but packages as well. It is difficult to pick a long-term winner on this basis, although several industry participants predict Uber's eventual demise in China.

"I don't think Uber has any chance in China," says one VC investor, who asked not to be named. "You need to understand local transportation needs. Payment systems are one example. Penetration of credit cards - usually adopted by Uber - is very low in China. They start from high-end service and it's very difficult to expand into the already competitive mass market and create a network effect."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Technology
• Greater China
• Venture
• Expansion
• Growth capital
• Venture
• China
• TMT
• Transportation
• Alibaba Group
• Tencent
• GGV Capital
• Qiming Venture Partners
• DCM-Doll Capital Management
• Baidu