Economy

In China, Local Governments Crack Down On Sharing Economy

Mirroring some of the battles Uber has faced in cities around the world, local car-hailing apps in China like Didi Chuxing are getting heat from municipal administrations trying to protect the status quo.

Chinese ride-sharing app Didi Chuxing
Chinese ride-sharing app Didi Chuxing
Zhang Xiaohui

BEIJING — With a GPS chip in every smartphone and real-time access to the internet, online taxi-hailing has revolutionized the way people travel. The possibility that car owners can earn money from the use of their vehicles via a mobile application gave birth to Uber, the breakthrough ride-sharing company based in Silicon Valley.

The U.S. company's success would inevitably lead to Didi Chuxing, China's leading car-sharing operator, which acquired Uber China earlier this year. Founded in 2012, Didi Chuxing rose over four or five years to become China's online transport giant as Uber grew to dominate this market in all other parts of the world.

As with Uber elsewhere in the world, the rapid development of Didi has had a huge impact on China's traditional taxi business, and has pushed the sharing economy to the forefront in various sectors. According to Didi's data, in 2015, Didi drivers in Shanghai alone managed to achieve a total turnover of 3.3 billion RMB ($487 million).

The revolution in the transport model has brought about a structural change in the market, but there is political resistance. Although China's national Ministry of Transport has come out in favor of online taxi-hailing apps, and Premier Li Keqiang continues to encourage the use of internet technology to create innovation, a very different reaction is happening on the local level. Various cities have announced new regulations that would fundamentally restrict the development of mobile ride-sharing apps.

Local governments in Beijing, Shanghai, Chongqing and Chengdu all set tighter restrictions on vehicle size, licenses, as well as requiring driver's household (residency) registration and the number of years of driving experience. Take Beijing as an example. To start with, a resident of the traffic-plagued capital can only buy a car through a lottery system. The Didi driver is also required to possess a Beijing household registration as well as the city's vehicle license. This limits, right from the source, the supply of cars as well as eligible drivers.

This is a typical example how a disruptive transportation model is bound to encounter restrictive policies from local authorities in China, even if the essence of the sharing economy is to use internet technology to direct surplus productivity toward a more economical and efficient distribution of resources. Online public opinion is almost all one-sided: in favor of more apps that challenge traditional taxi systems and improve service.

In the U.S., where the car-sharing model was born, there are also the prototypes for how it is challenged. Take a lawsuit initiated by the Illinois Transportation Trade Association as an example. The association, representing the interests of Chicago's taxi drivers, claimed that because of the existence of online hailing services their revenues have dropped 50%.

However, the United States Court of Appeals for the Seventh Circuit decided that Uber, or its top American competitor Lyft, are different from regular taxicabs. They do not require fare supervision similar to that of the latter, nor do their drivers need a taxi operation license.

In Judge Richard Posner's verdict, he stated that: "Indeed, when new technologies or new business methods appear, a common result is the decline or even disappearance of the old. Were the old deemed to have a constitutional right to preclude the entry of the new into the markets of the old, economic progress might grind to a halt. Instead of taxis we might have horses and buggies; instead of the telephone, the telegraph; instead of computers, slide rules. Obsolescence would equal entitlement."

The American government's encouragement of innovation and market freedom has helped contribute to Uber's founding and to its becoming the world leader. China's central government has declared its intention of making the state the world's leader in "innovation of the masses," but local governments are challenging that with restrictive policies and regulations.

What will happen with car-hailing apps in China in the face of such tight restrictions? Many drivers who fail to conform to all requirements will give up trying, but others are bound to start operating on the black market. Another possibility will be that the taxi-hailing apps themselves will go underground, like in those cities in the world where Uber is still illegal. In this case, neither drivers nor passengers nor operators of the app will have any legal protection.

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Hannah Steinkopf-Frank, Anne-Sophie Goninet, Jane Herbelin and Bertrand Hauger

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