SUBSIDY WARS

China finally made ride-hailing legal, in a way that could destroy Uber’s business model

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Ride-hailing companies like Uber have finally become legal in China after attracting billions of dollars in investments and staging a battle to dominate the Chinese market.

The Chinese government on Thursday (July 28) released a set of new rules (link in Chinese) legalizing ride-hailing services like Uber and its homegrown rival, Didi Chuxing, nationwide. Previously these services operated in China in a legal gray area, with drivers facing arrests in some areas. The new law, which takes effect on Nov. 1, requires drivers to have three years of driving experience and no criminal record, and to be licensed by a local taxi authority.

In general, the new regulations signal the Chinese government’s more open attitude toward the ride-hailing sector, and are much looser than expected. The regulations’ first draft, issued last October, stipulated that private car owners would have to sign a full-time employment contract with a ride-hailing company to drive, and their vehicles would have to be decommissioned, like taxis, after eight years’ service.

The new rules say companies can sign whatever contracts they want with drivers, although they do say that vehicles for ride-hailing must be less than eight years old, and have no more than 600,000 km (372,000 miles) on the odometer.

But they also include a stern message to the sector that could make ride-hailing a lot less attractive in China. The Chinese authorities are apparently determined to root out the “unfair” competition these companies present. Article 21 of the new law states:

Online ride-booking companies must not have unfair or illegal pricing behavior that disrupts market orders, or damages state interests or other operators’ legal rights. They must not set prices below cost to push out competitors or dominate the market.

In addition, Article 3 states that ride-hailing companies are allowed to adjust their ride prices in response to the market, but local authorities reserve the right to give out a “government guidance price” when necessary.

That could mean subsidized rides are on their way out, which could deal an especially devastating blow to Uber—unnaturally cheap rides are key to getting people to try the service for the first time.

Introducing ride-hailing to new markets has always been a money-burning game. Uber CEO Travis Kalanick said in February the company is losing over $1 billion a year in China, although it’s already profitable in the US. That’s because huge subsidies are paid directly to drivers in China, to keep them driving while offering riders super-cheap fares.

These low prices helped ride-hailing become popular, even in towns that already have taxis and other public transport. (Uber rides in my hometown of Shanghai, for example, can be 30% cheaper than taxis on the same route.)

Uber is spending so much in China to compete with the dominant player, Didi, which recently received a $1 billion investment from Apple. Although both Uber and Didi have substantially cut the incentives (paywall) they pay to lure drivers and passengers, Didi appears to be one step ahead. Last month, Didi claimed it turned a profit in more than 200 of the 400 cities (paywall) in which it operates in China. Uber currently operates in 60 cities in China and plans to reach 100 by the end of this year.

Uber said in a statement that the company welcomes the new law, and looks forward to “working with policymakers around the country to put these regulations into practice.” Chinese rivals including Didi released similar statements.

“We have consistently noted that the Chinese ride-sharing market is unique in its addiction to subsidies, driven by our peer’s unsustainable spending,” Huang Xue, a spokeswoman for Uber China, said in an email to Quartz. Huang said Uber China applauds the government’s efforts to “encourage ride-sharing platforms to move towards more sustainable, market-based pricing.”

Some Uber drivers are already worried about what lower subsidies in the future could mean. Jasper Fu, 33, a loyal Uber driver who works in Beijing and Shanghai, said he now receives about 2,000 yuan ($300) in subsidies each week. Two years ago, he got five times that amount, while conducting roughly the same number of trips. “The subsidy is already too low,” Fu said. “No one will keep on driving if it will be lower.”

A 24-year-old commuter, who asked to be identified only by her surname, Zhang, said she recently switched from Didi to Uber after Uber’s launch in her home city Xiamen.

Over the past two weeks, Uber has been offering an eight-yuan discount for a passenger’s first two trips of the day, so “it is as cheap as taking a bus to work,” Zhang said. But, she added, she has not developed loyalty to either service, and she will simply use the one that charges the lower fee.

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