What’s The Future For Taxi Apps In China?

On Valentine's Day, two of China's taxi-hailing apps agreed to merge. But is this a good business decision and does it benefit consumers in China?

China's two leading taxi-hailing apps Didi Dache and Kuaidi Dache jointly announced on February 14, 2015, that the two companies will realize a strategic integration and they will hold an official press conference after the Chinese New Year.

After the integration, the new company will adopt the co-CEO system. Didi Dache's CEO Cheng Wei and Kuaidi Dache's CEO Lv Chuanwei will be co-CEO of the new company. At the same time, Liu Qing, president of Didi Dache, will become president of the new company. The personnel structure of the two companies will not be changed and they will maintain their respective brands and business.

After a long price war, the executives of the two companies reportedly implemented repeated communications and finally reached an agreement for the strategic integration. Neither of the two parties revealed their stake ratio or the valuation of the new company. However, previous media reports said that the combined entity would be valued at about USD6 billion.

According to Liu, the integration was internally coded as "Valentine's Day Project". The two parties started contact on January 22, 2015, and reached the agreement in only 22 days.

The latest report published by Analysys International showed that by the end of 2014, China's taxi app accounts reached 172 million, of which Kuaidi Dache accounted for 56.5% and Didi Dache accounted for 43.3%.

However, will this merger really benefit the investors in the companies, the taxi drivers, and the Chinese passengers?

The legal landscape for these types of services is still vague and history has shown the government able to shutdown similar services. In 2003, during the height of SARS, ride-share and "black" taxi websites in Beijing and Shanghai were ordered to close. And rumors have swirled that many local governments are investors in some taxi dispatch services, which could muddy the waters for hailing apps that need to entice these companies and governments into working with them.

And then for the business model, there seems to be just no clear idea what the future holds for these services. Unlike in other countries, taxi apps can only work with licensed taxi drivers who have meters embedded in their cars in Chinese cities. So taxi apps are rewarding taxi drivers with money for picking up passengers. A passenger hails a taxi via a smartphone app; the driver is alerted and will often phone the passenger to confirm pickup location; the driver picks up the passenger and delivers him to the destination; the passenger pays the metered fare; and then the taxi app company will pay the taxi driver money on top of what the fare shows. The rewards to drivers are often based on a combination of time and demand. So different times of the day provide drivers with more or less incentive to deliver a passenger who uses the app.

This all usually works fine for the passenger who uses the app, but in many busy cities like Shanghai or Shenzhen, passengers who do not use apps may find it difficult to find a taxi during peak hours when drivers gain more incentives from only driving passengers who use the apps. So then a consumer issue arises, and local governments may ban the "inequality" of the business model from operating within their borders.

So when you hear that a taxi-hailing app in China closes a round of financing, you can bet that taxi driver incentives is one of the largest buckets in which the new cash will be placed. But is this sustainable? What will happen if there is a "last man standing" app that kills all competitors? Economics dictates it will reduce incentives to drivers, which then re-opens the market to rivals. So it is a potentially never-ending cycle of investment to just maintain a status quo in a business model that has no profitability. And there are just so many variables at play in China with taxi company ownership, local government policies, corruption issues, and consumer issues that even the best sector analyst probably cannot justify a clear forecast for this business model.

So now Didi Dache and Kuaidi Dache are one company. More mergers will happen within these Chinese sector and foreigners like Uber will continue to try to enter the market, but ultimately the future is hazy on how or when or if this business model will stabilize in China.