Usman W. Chohan (楚浩云) is an MBA candidate at Desautels with a Concentration in Strategy and Leadership. He is currently on an MBA exchange in Beijing, at a joint program between Tsinghua School of Economics (SEM) and MIT. The following piece is based on his work on financial innovation in China, in collaboration with Professor Alexander White of the Tsinghua University School of Economics and Management.
One of the most harrowing experiences that Beijingers must routinely undergo is hailing a taxi, or failing in the attempt, as they try to navigate the vast expanse of the city. The jammed thoroughfares of Beijing notwithstanding, getting a hold of a cab among the teeming hordes is a jarringly gruelling aspect of urban life: in this city of 20 million people, there are less than 70,000 taxicabs roaming the streets.
Such a glaring shortage of taxis has led to frequent reports of violent outbursts by both passengers and taxi drivers, and can be explained by market imperfections arising from the heavy interference of government authorities in controlling the market. Cabbies do not have discretion in choosing their customers or adjusting the prices of their service, which is why their base fare of RMB10 ($1.60) has remained stagnant for nearly a decade. This is despite inflation and despite the fact that real wages have steadily and continually grown over this period: an analysis by the investment bank Macquarie indicates that the cost of taxi rides relative to real average income has halved since 2003.
Furthermore, the number of licenses issued is restricted by the government, therein creating a staunch barrier to taxi supply. This is why a “grey market” has emerged whereby ordinary vehicle owners double as ‘taxis’ and charge higher fees for transporting people around in unlicensed automobiles. Therefore, cabbies scrape out a living at such low profitability, and new drivers are discouraged by the gruelling hours and trivial recompense for it. In short, the regulation of taxi fares and licenses creates an artificial but significant shortfall in taxi supply, which torments commuters in the big cities as they search in vain for cabs during difficult commutes at peak traffic rush hours.
In light of this situation, any measure to mitigate the search costs of finding a taxi more quickly are duly welcome; and a service by Tencent (700 HK) known as “Dididache” - 嘀嘀打车 - is a noteworthy example in this regard. Dididache, which in Mandarin means “Honk Honk, Catch a Cab”, is a smartphone application which efficiently matches passengers and taxi drivers who are situated in close proximity. For passengers, a list of nearby taxicabs is created via GPS, and a signal is sent out indicating an expression of interest. Conversely, for taxi drivers the GPS system quickly lists and localizes nearby potential clients; and once a match is created, the taxi can efficiently pick up awaiting passengers.
The user experience of Dididache has been highly accessible, convenient, and friendly. According to a poll conducted by Sina Weibo, 47% of respondents “strongly approve” the app. Initial subscription to the service requires a phone number verification and a confirmation of immediate or postponed taxi requirement. In the case of immediate demand, the user is asked about (1) willingness to wait (in minutes), and (2) willingness to pay - in terms of the amount of "tip" expendable in increments of RMB 5, 10, and 20 (CAD $1-3). If a taxi is located, the app then divulges the driver's details such as as license plate, driver's last name, affiliated taxi company, and driver ratings. The latter parameter is of curious import, because Dididache keeps a record of the cumulative ratings of individual drivers, which incentivizes them, by their own admission, towards greater courtesy and efficiency. The phone number of the driver can also be directly reached through the app.
To imagine the success of this service, consider the following: Dididache in 2014 has 40 million registered users, a doubling from 2013's user base; and every month, more than 21 million cab rides are booked through the service, or 700,000 bookings per day. Additionally, from the taxicab perspective, Dididache already has an extensive user base of taxi drivers of more than 350,000 vehicles across China.
Given the user rapid growth in Dididache, it is not surprising that major competitors have subsequently entered the space, and the most significant among these is Kuaidi Dache (快的打车 – “fast taxis”), an initiative by internet giant Alibaba (1688 HK). Dididache's patron Tencent has been a traditional rival of Alibaba in just about every business segment where they have made forays, and both are recognized as innovators in the Chinese cyberspace (For an example of Alibaba's innovative success, please refer to my article on Yuebao). However, it is Tencent's Dididache that is the dominant player in China's taxi-hailing arena, with a market share exceeding 60% and service extending to 32 cities including the Tier-1 conurbations of Beijing, Shanghai, Guangzhou, and Shenzhen.
From an economic perspective, Dididache is even more interesting because it is in fact a loss-making initiative that has yet to turn a profit. A peculiar cost in this regard is the two-way “subsidization” by Dididache, both of passengers and cab drivers. To date, it has dished out more than RMB 400 million (US$65.6 million) in ‘bonuses’ to those who paid for the fare via WeChat Payments, Tencent’s online pay platform. This is because the service incentivized both cab drivers and passengers with a monetary reward, RMB 10 for the driver and RMB 5 for the passenger, which when aggregated across the entirety of the service base amounts to very large numbers. However, the subsidization has its limits, and the “bonuses” for drivers are capped at RMB 50/day, while each passenger is capped at RMB 30/day.
To examine peak usage of the service, we need to revert to February 7, 2014, the day that many Chinese were returning home after paying visits to relatives on the occasion of the Chinese New Year: a daily peak of 2.62 million taxi rides was recorded, for which a not unsubstantial sum of approximately RMB 2 million was collectively disbursed to drivers and passengers.
An important reason for assuming the losses of Dididache by Tencent is that data about consumers' location is highly valuable to the internet service companies, in the same way that Google derives informational benefits from the location services embedded into its Map services. Knowledge about consumer whereabouts can generate tremendous value for Tencent, even if the initiative itself does not yield a direct profit. Furthermore, the subsidy can also be viewed as a form of introductory pricing to encourage market penetration. Once the market matures and a critical mass of users is achieved, the subsidy could be removed and higher price points organically sustained.
From a regulatory standpoint, it seems that municipal authorities have growing concerns about the magnitude of the service. For example, on February 27th, 2014 the Shanghai Municipal Transport and Port Authority issued a new set of regulations out of which two are particularly noteworthy for Dididache. Firstly, the use of taxi-booking apps during peak traffic hours is being restricted, with penalties of fines and a hotline for reporting infractions. Drivers are also not allowed to ignore ordinary street hails in favor of cruising around looking for smartphone-derived bids. Second, the use of transportation-booking apps for private vehicles that are licensed to carry passengers, a sort of grey-area which persists due to the shortfall of official taxis, is being restricted. These measures may portend further restrictions of taxi-hailing online services in the future. However, all is not lost on the regulatory front, because comments by the central government seem to indicate a more favourable disposition towards taxi apps: at the National People's Congress, Minister for Transport Yang Chuantang said that the government would “support and help to develop the taxi apps [for which] Instructional policy will be issued,” suggesting that the apps have a clear role to play in serving the market.
In sum, Tencent’s taxi-hailing service Dididache has seen tremendous growth and garnered significant popularity due to the indubitable convenience it confers on the inhabitants of the urban jungle. However, there are two preponderant questions that loom for its business model which have yet to be fully addressed: the first is when and how Dididache's current operations can be transformed into a profit-making venture; and the second is how the regulatory situation will evolve, therein facilitating or constraining the growth of the taxi-hailing app space. Either way, the convenience afforded by Dididache stands as a remarkable example of creative solutions being devised for the benefit of urban transport in China’s megacities.
Dididache is hailing the future, one cab at a time.