Since Uber officially launched online taxi reservation in San Francisco in October 2010, many ride-hailing companies have emerged in China, such as Didi Chuxing (hereafter “Didi”), Kuaidi, Yidao Yongche, and Shenzhou as well as Uber China. After fierce market competition, Didi has become dominant. But since Meituan entered the industry in 2017, there has been a battle over subsidies for customers.

Since the emergence of online ride-hailing, there has been an ongoing controversy, and the conflict between traditional taxis and online ride-hailing has never ceased.

As a pioneer in the global ride-hailing industry, Uber first encountered resistance from taxi companies in the United States and then resistance globally. In China, taxi drivers in Tianjin and Wuhan staged a series of strikes, demanding that the government ban Didi, Shenzhou, and other ride-hailing apps. It was not until July 28, 2016, when the “Interim Management Regulations for the Operation and Service of the Online Ride-Hailing Industry” was issued by the central government that China became the first country to legalize ride-hailing on a nationwide basis. How did ride-hailing become legalized in China?

Beijing Cracked Down on Ride-Hailing in 2015 

In early 2015, Beijing stepped up its crackdown on private cars offering rides through ride-hailing apps, following the suspension of ride-hailing services in Nanjing, Shanghai, and Shenyang. Beijing Authorities Identified Didi and Other Private Cars as “Black (Unlicensed) Taxis”

From January 2015, the Beijing Traffic Management Department cracked down on illegal private vehicles that used the Internet and mobile phone software to provide rides. Responsible officials said that many of the software provided ride-hailing services, essentially offering passengers an unlicensed taxi ride. This was the first time that Beijing made it illegal for private cars to use ride-hailing apps. Once found to be operating illegally, the service providers would be fined up to 20,000 yuan.2 According to Liang Jianwei, a spokesperson of the Beijing Traffic Management Department, it was very common for some private cars to engage in illegal operations with the help of online platforms and mobile software.

Many of them were “clone taxis,” which had received many complaints from passengers. According to article 4 of the “Measures to Investigate, Punish, and Ban Unlicensed Businesses (Decree No. 370 of the State Council of the People’s Republic of China),” which had still been in effect at that time,3 this was a kind of unauthorized operation without the operational licenses, which seriously affected the normal operational order of taxis.

From January 2015, combined with the upcoming work to ensure the important Spring Festival transportation to be uneventful, the Beijing Traffic Management Department focused on all kinds of “unlicensed taxis,” especially those illegally operated by ride-hailing software such as Didi and Yidao Yongche. These behaviors that seriously disturbed the order of taxi operations would be severely punished according to the law. In fact, throughout 2014, Beijing investigated 47 cases of illegal operations using Internet platforms and mobile-phone software.

Two “Private Cars” Were Seized On January 6, 2015, at Terminal 3 of Beijing Capital Airport, a Volkswagen Sagitar owner who was using mobile-phone software to conduct transactions with passengers was found by law enforcement officials of Beijing Traffic Management Department. According to the driver’s bill of Yidao Yongche seized by officials, a passenger took a ride worth 171 yuan from Sanlitun district to Beijing Capital Airport. Excluding the subsidy from Yidao Yongche, the passengers paid 91 yuan, which was 10 yuan more than the normal taxi fare. According to the investigation, from the morning until the time when the car was seized in the afternoon, the driver received a total of eight orders and profited more than 800 yuan (excluding fuel and other costs).

Then a Volkswagen Passat owner was spotted by law enforcement officials. The passenger showed the order to the officers. Arriving at the Capital Airport from a hotel, the passenger actually paid 196 yuan after using the 50 yuan voucher. According to the passenger, he was on a business trip from Fujian to Beijing, a friend from Ctrip (a travel reservation company) booked the private car online for himself. “I found it convenient and the service was great. I didn’t consider whether the vehicle was licensed.” According to the investigation, the driver had already been fined for driving an unlicensed taxi in 2013.

According to law enforcement officials, those who provided services would be fined 20,000 yuan and have their vehicles detained after verifying the existence of illegal operations. The vehicle would not be returned until the fine was paid. According to officials, it was easy for private cars to join the list of available vehicles when drivers registered for various kinds of ride-hailing software, and their status (whether licensed or not) was not strictly reviewed by the software operators. Traditional “black (unlicensed) car” drivers could also use the platform to “whitewash” themselves in an effort to appear more legitimate. For private car drivers, driving could be a well-paid part-time job. But because private car insurance was generally lower than that of regular taxis, if an accident occurred, passengers’ rights and interests could not be guaranteed. At the same time, the charge of private cars was high and damaged the normal operational order of the industry. It would be unfair to taxis.

A reporter from Beijing Youth Daily found in an interview that it would take a combination of written record of a driver’s behavior and proof from a passenger to determine whether an operation was illegal. If a passenger insisted on knowing the driver, who provided the ride as a friend, even if the law enforcement official identified the “unlicensed taxis” driver, the official could not enforce the law.

Unlike traffic police who could stop cars, law enforcement officials could not stop cars on the street. They could work in places such as railway stations’ passenger drop-off areas that were convenient for law enforcement. Unlike traditional “cloned taxis” that looked like regular taxis (and would be easier to catch), these unlicensed private cars looked like ordinary civilian vehicles, which were difficult to identify and could only be caught using law enforcement officials’ experience.

At that time, Beijing did not have a specific law for all kinds of private car service software, the law enforcement officials could only fine the driver from the perspective of traffic violation (such as illegal parking in a no-parking zone). There were no effective restrictions on operators who offered software on the Internet or mobile phones.

Officials Said that “Private Car” Service Was Unlicensed and Illegal The “private cars” actually provided passengers with doorto-door, pay-per-ride, and pay-per-mile service, which was actually a taxi service. According to “Regulations on Taxi Administration in Beijing,” no organization or individual could provide taxi service except regular taxis.

Previously, Yidao Yongche indicated that all the vehicles it operated came from car-rental companies, whereas the drivers came from manpower-service providers. It said Yidao Yongche actually had four-party agreements with car-rental companies and manpower-service providers.

The company did not contract directly with individual car owners to use their vehicles. However, Liang argued that private cars engaged in taxi service were illegal no matter what kind of agreement was signed. In fact, in 2014, 47 cases of illegal operations were prosecuted, all of which were private vehicles. Officials did not uncover any contracts signed with car-rental companies.

If law enforcement officials encountered vehicles that were actually from the car-rental companies, these vehicles would be treated as unlicensed vehicles as well. According to the “Measures for the Administration of Car Rental in Beijing,” which came into effect on May 1, 2012, car rental refers to the business activities in which the operator delivered the automobile to the renter for use within the agreed-upon period of time, collected the rental fee, and did not provide a driver. It clearly stated that the vehicles should be owned by car-rental operators.

“In actual law enforcement process, we will investigate exactly who provided this service. If we find a car from a car-rental company, we will investigate who exactly organized the service. If it is a car-rental company, we will fine the company. If it is a driver who operates privately, we will fine the driver,” Liang introduced.

The Software Operators Said that “Private Cars Are Not the Same as Unlicensed Cars” In response to the Beijing Traffic Management Department’s increasing efforts to crack down on private cars, the person in charge of Yidao Yongche said that “private cars are not the same as unlicensed cars.” Private car service was the general trend of travel service improvement, which was required by the market. Authorities needed to listen more to consumers.

People can easily order customized travel services through the app. Private car service provides consumers with a choice of high-quality travel mode in addition to buses, subways, and taxis, which is consistent with improving the quality of people’s travel experience in the era of upgrading in all areas of consumption. The cars are more comfortable, the service is more friendly, and the safety is guaranteed. Consumers have more exclusive rights and interests such as airport exclusive VIP quick-security check. In foreign countries, such services have become an important part of urban transportation. This is something that the traditional “black (unlicensed) cars” cannot match.

According to the person in charge, in addition to meeting the needs of differentiated travel market, private car service can integrate and optimize the traditional car-rental market, effectively improve the utilization rate of idle vehicles, and indirectly reduce traffic pressure. In addition, it can be used as an effective solution for reforms on how government entities and companies used cars.

Didi and Kuaidi did not respond. However, earlier, the Shanghai Transportation Committee made it clear that Didi cars were unlicensed cars, and seized them. In response, Didi issued a statement at the time, saying that Didi and all its partner companies had signed contracts according to the law to ensure that users’ requirements for multidimensional, personalized, and safe service were met and that the whole service process was transparent, open, standardized, and controllable. This service was quite different from traditional “black (unlicensed) cars” with no service specification, no pricing standard, and no security guarantee.

Passengers Said that “the Private Car Service Has Hidden Dangers, But It Should Not Be Completely Banned” Being easier to hail, more attentive, and more comfortable than a taxi are common experiences for passengers who used ride-hailing software. Some passengers said that the service was a good solution to the difficulty of getting a taxi in busy downtown areas. However, a number of early adopters of private car apps admitted that while they enjoyed a ride home in a BMW, they still worried about whom to blame and how to claim compensation in case of an accident.

As for the crackdown on private cars, many passengers believed that although understandable, the crackdown was regrettable. They hoped there would be relevant regulations to help private cars optimize. A passenger said that on New Year’s Eve, it was almost impossible to find a taxi on the road, neither was taxi software possible, so she chose to use software to call a “private car.” “Although a lot more expensive than a taxi, the ride was very comfortable, with bottled water offered on the car. I see the driver also opened the door for passengers, where taxi drivers can hardly provide this service.” On the news of the crackdown, the passenger said: “I may think it can be banned for the sake of safety, but for the sake of service and convenience, it’s a pity. If it is just because of the lack of an operational license, I am not satisfied with the reason that they are banned simply because they are not licensed to operate.”

One passenger who used various ride-hailing apps said that if private car service was banned, he would have to raise his tip to get a taxi during peak hours. Therefore, he wanted regulations to legalize private cars. “Although private car service has hidden dangers, it should not be completely banned. For companies that want to improve, they should be given the opportunity to qualify legally. And then authorities crack down on truly illegal vehicles.”

Expert Opinion: To Use the Internet to Make Travel More Convenient in Accordance with the Law Wang Limei, secretary general of the China Road Transport Association, noted that ride-hailing apps had triggered intense debate in many countries. In India, ride-hailing services had been suspended nationwide after several terrible incidents. Private cars are like “traveling doctors,” who can treat people in remote areas, but they are unlicensed and risky. They need to be regulated.

Ride-hailing cars can bring convenience to people, but they are not licensed to operate, thus not conforming to legal requirements. Recently, there have been many incidents of missing college students, some involving homicide cases.

These college students took rides, either hailing on the side of the road or through software. No matter by what means, the cars they took were unlicensed, which made it difficult to hold the operators accountable for accidents, and there were no clear rules on how to pay for accident insurance.

“No company has clear rules on these and no company has said publicly that its cars are licensed.” Many parts of the country issued strict regulations to severely restrain private cars, treating private cars as traditional “black (unlicensed) cars.” However, compared with the traditional unlicensed cars, private cars were less recognizable, making them difficult to restrain. Wang said the crackdown on private cars was to regulate the market and, more important, to protect consumer safety. “Passengers should understand this and cooperate,” she said.

If cracking down on private cars was so difficult, why didn’t the authorities just stop ride-hailing apps? In this regard, this expert believed that the Internet was just a tool that should be used in accordance with laws and regulations, rather than being blocked if someone used it to commit a crime. “Like many frauds using the Internet, the crackdown targets the frauds, but not the Internet.” Wang thought how the Internet could be used to bring people more convenience also needed laws and regulations.

If a private vehicle wished to participate in the operation, it should be licensed according to laws. “The current crackdown on private cars, I think, is part of the process to enforce laws. The key is to let private cars apply for a license, so that it can operate legitimately.”
Online Ride-Hailing Has Gained Legal Status The Introduction of New Policies On July 28, 2016, a series of new policies that had been closely watched regarding reforms on taxis and private cars (especially online ride-hailing cars)—two years in the making—surfaced. Seven ministries, including the Ministry of Transport, officially announced “Guiding Opinions of the General Office of the State Council on Deepening Reform and Promoting the Healthy Development of the Taxi Industry” and “Interim Management Measures for the Operation and Service of the Online Ride-Hailing Industry” (hereinafter “Interim Measures”). The new policies legalized the status of online ride-hailing, and authorized private cars that met the requirements be converted to online ride-hailing. Passengers were encouraged to carpool in private cars. The new policies had a three-month grace period and would be implemented on November 1.

According to the new policies, the vehicles to be used in the online ride-hailing business should be registered as passenger taxis. Prior to the new policies, China’s laws dictated that the depreciation period—after which, the vehicles needed to be scrapped—for all vehicles used for business purposes would be no more than eight years, which meant that online ride-hailing vehicles should also comply with the standard after being registered as passenger taxis. In the 2015 solicitation of opinions, the biggest debate focused on the eight-year period. Some experts thought that the eight year depreciation time for online ride-hailing should be extended, because a large number of online ride-hailing vehicles would not engage in full-time operations, so they should be scrapped according to the actual operating mileage. The new policies allowed cars to be scrapped after 600,000 kilometers (375,000 miles), and but after eight years these cars must quit the online ride-hailing business rather than be scrapped. The new policies, thus, provided a great benefit to private car operators. In addition, the new policies provided for a three-month grace period, requiring local governments to come up with detailed local rules during that period. In three months, the legalization of “private cars” would be truly implemented.
Response of Online Ride-Hailing Companies Didi, an important participant in the online ride-hailing market, said after the new policies were introduced that legalizing ride-hailing was an encouragement for the country to develop a sharing economy. But ride-hailing only accounted for about 1% of China’s daily urban travel, and there was plenty of room for further growth. Didi would be in accordance with the “Interim Measures” requirements, professionalize the operations, and actively apply for licenses needed for ride-hailing platforms. Didi would actively explore with relevant government departments and fellow companies in the travel industry to increase technological innovation, improve the utilization of transportation resources and urban transportation efficiency, improve the travel experience, create more flexible employment opportunities for the society, and better provide hundreds of millions of people with safe, convenient, and comfortable travel services.
Uber China said the new policies reflected the government’s recognition and support for new forms of ride-hailing, making China the first major economy in the world to enact such nationwide regulations. Uber China would fully cooperate with the cities to formulate the corresponding implementation rules and was confident to obtain the operation license issued by the local governments at the first available time. Uber also said that “Uber has provided travel services in more than 60 cities, and is expected to cover more than 100 cities by the end of 2016.”
In addition to the legalization of ride-hailing, the accompanying “Guiding Opinions of the General Office of the State Council on Deepening Reform and Promoting the Healthy Development of the Taxi Industry” also made corresponding adjustments to the taxi industry. For a long time, taxi enterprises collected money from drivers and paid a large part of it to the government for their operating rights. However, according to the taxi-reform plan, all new operating rights of taxi should be free of charge. In this way, the operating cost of taxi enterprises would be greatly reduced.
In addition, the reform plan also proposed to encourage, support, and guide taxi enterprises, trade associations, taxi drivers, and trade unions to consult with each other on an equal basis to reasonably determine and dynamically adjust the taxi-driver contract fee standard (the minimum revenue that drivers must make every shift) and reduce the existing contract fee standard if it was too high.

Commenting on these new changes, Wang Xue, Dean of Transportation Research Center of Shenzhen Polytechnic, said in an interview with Securities Daily, “legalization of online ride-hailing will break the closed industry and incumbent special-interest. The new policies will turn excellent drivers and operational management experience into scarce resources, which will become the core competitiveness of the taxi or online ride-hailing industry in the future.”

Case Discussion Questions 

1. From an industry-based view, why did the taxi industry not like ride-hailing?
2. From an institution-based view, why were Didi Chuxing and other ride-hailing activities considered illegal at the early stage?

3. From an institution-based view, which institutions or individuals have played an active role in the legalization process of ride-hailing?

4. From a resource-based view, why would “the new policies turn excellent drivers and operational management experience into scarce resources”?