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Article / 24 October 2014 at 4:59 GMT

E-commerce rivals on board as China’s taxi app market heats up

China Watcher / Shanghai
China
  • Kuaidi DaChe and Didi DaChe have made finding a cab much easier in China
  • Alibaba and Tencent have snapped up stakes in the leading taxi app providers
  • They want passengers to use their payments systems, and take a cut for each fare

By Neil Flynn


Since moving to Shanghai, I have learned a lot about the way of life in China. One particular aspect that I am reminded of on a daily basis is that it’s virtually impossible to hail a taxi in the evening after work.

However, mobile technology has made finding a cab much easier, and several leading mobile apps are a must-have for residents. Kuaidi DaChe (Quickly Take A Taxi) and Didi DaChe allow users to locate nearby taxis, based on their location and destination. If a driver wants the fare, he will pick the user up. Then user can then track the taxi's location, and should the user need to call the taxi driver, the apps connect the user to the taxi driver.


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Call up, hop in and pay away ... taxi apps spell convenience for passengers, and opportunity for e-commerce giants keen on ensnaring consumers in payment systems. Photo: Thinkstock


The diagram below shows both Kuaidi DaChe (left) and Didi DaChe. At 10am in central Shanghai, there are lots of available taxis. But on a Friday evening, there are few available, which is when these apps have real value to the user. Users can pay a small extra fee for the driver to take their fare. The average taxi ride in Shanghai will cost no more than 30 yuan ($4.90), and adding 5 or 10 yuan is usually enough to persuade a taxi driver to pick you up at peak times.


Hailing a taxi on Kuadi DaChe, left, and Didi DaChe

Kuaidi DaChe & Didi DaChe























Alibaba and Tencent take stakes

This app technology has not gone unnoticed by China’s internet behemoths, with Alibaba having taken a stake in Kuaidi DaChe and Tencent snapping up a slice of Didi DaChe. Both firms are now integrated within the respective investor’s ecosystem, and users can now pay for journeys on Tencent’s WeChat and Alibaba’s AliPay

While Alibaba and Tencent offer little exposure to this burgeoning market, given their size, investors will soon be able to gain a much better exposure through eHi, which filed for its US IPO earlier this month, and could raise as much as $200 million. The online car rental agency firm eHi, which invested $25 million in Kuaidi DaChe in April for an 8.4% stake, has a warrant to buy another 4.7 million shares in Kuaidi DaChe’s next round of funding, according to a recently updated IPO prospectus.

The taxi hailing app market has seen an intense battle between the two apps, as both firms have been spending a lot of cash on subsidizing passengers and taxi drivers, in order to snatch market share from each other. The rapidly growing popularity of the service had also caused a media debate about its implications on wider society, such as whether people without smartphones, particularly the elderly, can hail a taxi, and whether taxi drivers would be able to focus on the road if they are trying to find their next fare on their phone.

The problem that both Kuaidi and Didi had was that spending money on subsidizing taxi drivers and passengers is fine if they can make a profit. However, neither firm was generating money, but simply burning through cash from deep-pocketed investors. They differ from Uber’s business model, because the apps can’t take a fee from the taxi journey measured by taxi meters.

Subsidies ended

Both Alibaba and Tencent have been eager to invest in these firms because they can encourage passengers to use the Alipay and WeChat Wallet functions, and take a cut from each taxi ride. On May 10, both firms announced an end to passenger subsidies, in order to focus their efforts on improving service.

For investors, the key question of how both firms will monetize their service remains. Advertisements are the standard way to monetize apps, but I expect that both Tencent and Alibaba will contribute revenue to these taxi apps for payments made through their respective digital wallets. 

Data for the industry is scarce, but recent estimates show that both firms control just shy of 50% of the market each. The user figures for the industry are very impressive, with data from April showing that Kuaidi books an average of 5 million taxi journeys every day.

– Edited by Robert Ryan


Neil Flynn is a trader on TradingFloor.com.



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