Despite Uber raid, Chinese e-commerce remains friendly

Despite Uber raid, Chinese e-commerce remains friendly

The raid on Uber’s offices in China does not herald a clampdown on e-commerce in China, but rather demonstrates the importance of understanding China’s internal stability concerns. Meanwhile foreign firms continue to profit, and Chinese firms seek new opportunities.

On May 1st, the offices of ride sharing app Uber in Guangzhou were raided by Chinese authorities.

Officials seized equipment, with Uber’s office in Shenzhen also being visited for “routine inspections.” While this is not Uber’s first international set-back, as the company has faced serious opposition and bans from various nations, some worry that this event signals a digital clampdown by Beijing.

Initially, these fears seem justified, following the government’s decision to accuse Uber of operating without a license. Specifically, the Guangzhou Transport Commission described Uber as an “illegal [business] that disrupt[s] the market and we will not be soft on these activities in the future [sic]”.

The furor in China surrounds the use of privately owned vehicles as taxi service providers. In China, utilizing private vehicles to such ends is illegal, with taxi operators having to first acquire a license permitting them to rent vehicles from vetted rental agencies.

Uber upsets the balance, pays the price

It is important to note that this rule is not merely a vestige of a planned economy, but rather one of China’s many sector-specific regulations which primarily seeks to maintain societal stability. As demand for taxi services has rapidly increased in China, supply has failed to keep up. This is because, in most cases, the government has not issued any new taxi licenses since the early 1990s.

While initially adequate, this relatively low number of licenses has caused prices to skyrocket, with a license in Shanghai fetching as much as ¥500,000 ($80,745).

Moreover, car rental prices have also jumped as taxi firms drive up demand by seeking to maximize their fleet numbers to offset the license price. This has caused rental fee prices in places such as Nanjing to rise to as much as ¥9000 ($1450) per month.

Recently, taxi drivers have gone on strike in various Chinese cities to protest for a reduction in rental fees. It is precisely here where Uber undercuts the established system by utilizing privately owned vehicles.

Consequently, in order to prevent unrest and economic losses, the Chinese government has gone after Uber, arguing the company does more harm than good. Moreover, since Uber is a foreign firm, this lessens any fallout for the government, as it does risk angering Chinese service providers.

China in localization push

Uber’s paradigm of shifting business practices makes it an ideal, and not wholly unjustifiable, candidate to blame. This scapegoatism becomes more evident when one discovers that despite Uber’s $40 billion valuation, it remains a marginal player in the taxi market in China.

Currently, Kuaidi Dache (Speedy Taxi) and Didi Dache (Honk Honk Taxi) control over 90% of the market. Prior to their $6 billion merger in February, these two firms were backed by top-tier Chinese internet giants. The former was partnered with Alibaba, benefitting from access to hundreds of millions of customers via Alibaba’s social platforms. Honk Honk Taxi was backed by Tencent, another internet giant.

Following suit, when Uber debuted in China in February 2014, it decided to partner with Baidu, thus gaining access to the leading Chinese search engine’s mapping and mobile technology.

Partnering with Baidu was an effort to integrate Chinese know-how into Uber’s operations. However, following recent events, Uber will have to go further to accommodate Chinese regulations by ensuring vehicles are sourced from rental agencies.

Interestingly, the Guangzhou government agreed that traditional taxis were no longer sufficient to meet demand, with the regional government even announcing that it is considering launching a government-run e-booking taxi service. This can be seen as part of wider Chinese efforts in recent months to promote or require domestic product/service use in important projects.

In particular, the Central government has pushed for localization over fears of foreign cyberspying, highlighting concerns about national information security. In a rare instance of a top CEO breaking rank with government policy, Eric Xu, CEO of Huawei, recently advocated in favour of maintaining open access in the market.

Xu candidly admitted that even though Huawei could gain more contracts if constraints were placed on foreign firms, he would still oppose such constraints. Xu maintains that China’s information security can only be guaranteed by attracting the best tech, whether foreign or domestic, to the country.

Xu went on to state that Chinese products could fill the gaps if foreign firms were restricted from various contracts, but that the overall quality would suffer.

China’s e-commerce biosphere remains friendly

While China may seek to increase domestic content in important projects, Beijing is hardly alone in doing so.

All nations seek to promote their local industries, with even adamant free-trade advocates such as the U.S. often preferring to utilize domestic firms over comparable foreign ones. In any case, the Chinese government is not going to undertake measures which drastically shake investor confidence, nor risk capital flight on rumors of punitive localization campaigns.

Fears over an impending clampdown on the e-commerce and mobile markets in China are unfounded. Indeed, Uber’s plight appears an outlier, likely the result of having brushed up against the stability apparatus that underpins much of China’s economic policies.

Foreign firms continue to report stellar growth in China, with TripAdvisor announcing that China is set to become its largest market; Chinese tourists spent $500 billion in 2014. TripAdvisor launched Daodao.com, its Chinese site in 2009, and capitalized on high mobile usage among Chinese travelers. Surveys by the company indicated stronger than expected willingness by Chinese customers to plan trips via mobile.

Similarly, China surpassed Europe in Q1 2015 to become Apple’s second largest market, with the company posting $16.8 billion in profits. According to David Garrity of GVA Research, “we are seeing a move away from large, form factor phones [running on] Android operating systems to Apple.”

While there is not yet a Chinese equivalent of Apple, mainland firms are taking heed of Xu’s words. Instead of pushing for government legislation to promote high-end Chinese alternatives to Apple, Chinese companies are seeking new opportunities.

China’s key to continued growth is the creation of new markets. This is the mentality of Alibaba, China’s e-commerce giant. Alibaba has recently partnered with state-backed China Telecom to sell budget smart-phones in China’s smaller cities and rural areas. The partnership gives Alibaba access to China Telecom’s 186 million customers. Alibaba is also promoting its own OS with these devices, in a bid to steal share from the current market leader, Android.

Ranging in price from ¥299 to ¥699 ($85-113), the devices come with four months of free 2G service. Alibaba has also pre-installed it’s Taobao consumer marketplace app; a program which has coined the term “Taobao villages” – highlighting the vital role the service plays in many local economies.

The phones will be available via T-mall, another e-commerce site run by Alibaba as it seeks to increase its share of China’s e-commerce market, set to expand to $76 billion by 2016.

Categories: Asia Pacific, Economics

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Jeremy Luedi

Jeremy is a widely referenced political risk expert and weekly columnist for Global Risk Insights (GRI). Jeremy’s writing has been featured in Business Insider, Huffington Post, Nasdaq.com, The Japan Times, MSN Money, and Yahoo Finance. His work also has been quoted and recommended by Time Magazine, Politico, Transparency International, and Greenpeace, among others.