Uber Accelerates In China, Challenges Kuaidi, Didi

Uber accelerates in China

I wrote about taxi apps a few times last year when they first became a hot topic, but haven’t written much since then despite frequent appearances in the headlines about their aggressive business practices. At the end of the day the news didn’t seem too interesting, and companies like Didi and Kuaidi seemed destined to remain relatively small in a sector with limited growth potential. But a new war pitting US giant Uber against the Chinese start-ups seems worth writing about, as it has bigger potential to shake up the market and also to draw attention from Chinese regulators.

Unlike traditional taxi app operators, Uber often relies on privately owned cars to pick up passengers who use its service. Such a business model sometimes raises the ire of licensed taxi drivers, who lose business to Uber cars. It could also be a sensitive issue in China, where unlicensed, privately owned taxis, often called “black vehicles”, are clearly illegal.

Uber has recently entered a number of Asian markets, including China, and now media are reporting the company is embarking on an aggressive expansion to move beyond the big cities like Beijing and Shanghai and into second-tier markets. (English article) At the same time, separate reports say that Kuaidi, which is backed by e-commerce giant Alibaba, is preparing to fight back by offering its own pick-up service using privately owned luxury cars . (Chinese article)

Let’s start with a look at Uber itself, which entered China last year and currently has operations in Beijing, Shanghai, Guangzhou and Shenzhen. According to the latest reports, the company has posted advertisements on social networking site LinkedIn seeking to build new teams in 12 more cities, including Chengdu, Nanjing, Hangzhou and Tianjin.

There’s not any detail beyond the recruitment announcement, but the rapid expansion into these other cities is certainly putting Uber on a collision course with Kuaidi, as well as Didi, which is backed by Internet giant Tencent (HKEx: 700). The move is almost certain to also draw the attention of local officials in each of these cities who might be worried about Uber stealing business from their traditional taxi fleet operators.

Responding to the Uber challenge, Kuaidi is preparing to launch a luxury car pick-up service in Beijing, Shanghai, Guangzhou and Hangzhou. Kuaidi is working with car leasing companies to provide the service, which will include both BMW and Audi-brand cars. Kuaidi’s CEO said his company is taking steps to offer services that are more similar to Uber’s, which means we’re likely to see a quick build-up in this area that relies on private vehicles and drivers to complement licensed taxi cabs.

So, where is all of this going? As with everything in China, Uber’s aggressive steps are almost certain to be followed by similar copycat moves by other players, resulting in fierce new competition and a degree of chaos in the market. Major cities like Beijing and Shanghai both took steps to control the market when competition between Kuaidi and Did was getting out of control last year. In one case, Shanghai forbid taxi drivers from using the apps to pick up passengers during peak hours, after consumers complained they couldn’t hail a cab in the traditional way during those times.

In this particular case, I do think that local officials are likely to get worried after local taxi companies start to complain about the new competition. We could even see an attempted crackdown or two in some cities, which may try to ban these services that use private drivers. But at the end of the day, Uber’s aggressive expansion and innovative business model look set to shake up China’s rapidly changing market for hired cars, which could help to drive some consolidation and should benefit consumers.

Bottom line: Uber’s aggressive move into China is likely to result in a new round of heated competition and could draw some government backlash, but will ultimately benefit consumers.

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