Illustration by Bernard Lee

Uber's China Problem

The ride-hailing service must contend with Chinese government crackdowns and disgruntled cabbies. Can it win on both fronts?

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May 25 2016, 1:30pm

Illustration by Bernard Lee

Last March in Beijing an expat mother, Elaine, and her seven-year-old son Boden took an Uber ride that turned out to be more dramatic than the usual routine of dodgy local radio and small talk about smog with the driver.

"We got to the crossroads when all of a sudden a car used by unmarked policemen cut us off at the traffic light," Elaine told the Beijing Kids website. "We slammed on the brakes and another unmarked car came down the side of our vehicle."

As detailed on the website, two police officers emerged from one of the unmarked cars, argued with Elaine's driver, then dragged him out of his vehicle and onto the road. One of the officers then got into the car, sat by Elaine, and questioned her. "Uber? Uber? Uber?" they asked.

At first Elaine claimed that the driver was a friend of a friend, but the driver had already come clean to one of the officers. "OK, yes," Elaine said. "Uber".

Elaine told the website she was "freaked out" by the event, and became concerned when police insisted on rifling through her phone, seemingly to confirm that she was an Uber user. Looking back, though, she said the police acted in a professional way and that she had not received contact from them since the incident. She has, however, not used Uber since.

Her experience is illustrative of a crackdown on taxi hailing apps like Uber in China, in the absence of mooted new rules for the ride-hailing sector in the country. It is currently illegal for a private car, such as one driven by an Uber driver, to be used for a paid-for ride in China. Legalization is expected soon per new rules drafted last October.

This legal status issue is one of two main fronts Uber is fighting on in China, a country which Uber sees as a top priority for its global team. Perhaps its most challenging but, with a population of 1.3 billion, most potentially lucrative market.

The other front is a fiery uprising of traditional cab drivers who believe they are being unfairly squeezed by the recent flood of ride-hailing apps.

Can the company win both, or either?

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Currently the letter of the law with regards to ride-hailing apps is starkly at odds with the Chinese government's public stance on such services. In March China's minister for transport Yang Chuantang seemingly gave the green light to ride-hailing firms such as Uber and market leading rival Didi Chuxing, which Apple recently invested $1 billion in. "As a new invention, online ride-hailing services have been a good experience for consumers, and welcomed by some passengers," Yang said. "So our solution is to provide a legal way [for them to operate]."

When addressing whether ride-hailing apps were illegal in China, Yang's words ensured that many still view the issue as a grey area. "Different local governments should supervise the industry according to the actual situation in their areas based on the present transport policies," he said.

A taxi attempts a road block as other taxis go on a strike to protest the Uber-like internet ride-sharing companies, August 10, 2015, Wuhan, China. Photo: Feature China / Barcroft Media via Getty Images

The result has been a confused sense of implementation across the vast country's provinces. In many Chinese cities car-hailing app drivers scoot around without much fear of police attention. Last October in Shanghai, for example, China's first municipal internet car-hailing license was awarded to Didi Chuxing, which is worth around $20 billion and claims an 87 percent market share in the private car hailing industry in the country. In contrast, earlier last year authorities in Beijing warned car-hailing app drivers that they faced fines of up to 20,000 Yuan ($3,060) if caught by police.

Of around 40 Beijing-based Uber drivers met by Motherboard over the past week, only one would mention crackdowns on record. "It's our biggest concern," he said.

This helps explain why reports of crackdowns like the one experienced by Elaine and Boden (not their real names) in mainland China largely remain anecdotal. In contrast in Hong Kong, an autonomous region of China that enjoys greater freedom of speech and press freedom, reports are more common. Last August it was reported that police raided Uber's Hong Kong office and also arrested five drivers.

Uber's China office declined to provide an interview to Motherboard, or answer questions about police crackdowns on drivers in the country. The firm sent a statement saying it was "optimistic that the new regulations will be good for riders, good for drivers, and good for the broader community."

Perhaps to temper concerns about crackdowns Uber, which launched in China in summer 2015, seems to have been making efforts to minimize the effects getting picked up by police has on its drivers. One Beijing-based Uber driver told Motherboard that the company reimburses drivers for police fines related to its service. Uber's China spokesperson said that the company doesn't comment on the issue of paying drivers' fines, while the Beijing Kids website quoted a source in its Uber article as saying, "Black taxi drivers have told me they can get a refund from their referral company if they can prove they've received a fine."

A source close to Uber has suggested that the company is not concerned about police crackdowns on mainland China, likely because they should subside once new rules are announced.

Indeed, some Chinese cities authorities' attitudes toward Uber have noticeably softened since last October's announcement of a draft of new rules for the sector. State media reported that in April 2015 Uber's offices in the southern city of Guangzhou were raided, with equipment confiscated. In contrast last month the company, along with five other cab-hailing firms, was summoned to a meeting in the city about unfair competition in the industry through subsidies. The firms were getting a dressing down, sure, but they were also being treated as companies offering legitimate services.

But there's another threat beyond the legal status issue: traditional cabbies.

Transport minister Yang has warned car-hailing firms against subsidizing drivers, a tactic that has allowed Uber to gain a strong foothold in China and make grounds on market leader Didi Chuxing. But such subsidies have also led to the issue arguably generating the most controversy around Uber in China: the largest traditional cab driver strikes in the country's history.

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The technically illegal status of Uber drivers and resulting police crackdowns are big obstacles for the firm in China, at least until the new rules kick in. But an even more prominent problem is the fuel the company's rise has poured on the fire of protest from traditional cab drivers. Protests and strikes from such drivers have been relatively common in China for decades, with complainants taking issue with high franchise and expenses costs. However, the rise of cab-hailing apps such as Uber in China has sharply focused their complaints.

"We need to compete, but our business model is built on … matching riders with drivers efficiently and conveniently."

January 2015 saw the biggest traditional cab driver strikes in China's history, with Quartz reporting that thousands went on strikes across ten Chinese cities. Drivers were mainly protesting against high franchise fees they have to pay to their companies, but said that authorities weren't doing enough to protect them from companies such as Uber and Didi Chuxing taking their business.

Then in January 2016, China Labor Bulletin, a non-government organisation that promotes workers' rights in China, reported that in the city of Dongguan, in the southern Guangdong province, around 1,000 cab drivers went on strike, again calling for the government to crack down on services like Uber. That protest followed a smaller, similar demonstration in the nearby city of Shenzhen. That two-day strike ended when the municipal government agreed to pay drivers a 1,000 Yuan ($150) subsidy each month as compensation for increased competition from ride-hailing apps.

Not all recent strikes and protests on this issue have been resolved so peacefully. As China Labor Bulletin noted, "The failure of many city governments to properly regulate the taxi market, combined with the lack of any effective trade union representation for taxi drivers, has often led to drivers' frustrations boiling over into violent actions."

Traditional taxi in Beijing. Photo: Ernie/Flickr

Incidents of attacks by traditional cab drivers on ride-hailing app drivers, which have seen cars being flipped over and stand-offs with police, have been reported in Nanchang, Jianxi province, and Xinyang, Henan province. "Taxi drivers have always faced problems of franchise charges and competition from illegal cabs," Geoffrey Crothall, spokesperson for China Labor Bulletin, told Motherboard. "Now you add the vast numbers of new live hailing cars added to that competition, and of course it's going to intensify the pressure the traditional cab drivers feel."

Uber attracts drivers with subsidies that have further enraged many traditional cab drivers. The company's China spokesperson would not release figures, but a Beijing-based Uber driver told Motherboard that drivers keep 80 percent of their fare charges, which usually undercut the capital's traditional cab fees, which start at 13 Yuan ($2). The driver said that current subsidies mean he gets a 50 Yuan ($7.50) bonus for giving 12 rides within a day, and 100 Yuan ($15) for 22 rides. "The subsidies are getting lower, though," the driver said.

Still, Uber is arming itself well to fight these sorts of battles. Much has been made of the firm's recent announcement that it is losing $1 billion a year in China, but rather than suggesting failure the figure more likely underlines the company's determination to succeed in the country—speculating on a massive scale to accumulate on a similarly massive scale.

Uber plans to double the amount of Chinese cities it operates in by the end of 2016, to around 100. (Didi Chuxing operates in around 400 cities.) "Chinese internet companies are very good at subsidizing the market in exchange for market share," Uber told Motherboard in a statement. "We need to compete, but our business model is built on … matching riders with drivers efficiently and conveniently. We believe that the industry must eventually return to a normal, sustainable and competitive course of development."

New taxi-hailing app rules may limit Uber's subsidising power as Chinese authorities seek to level the playing field for traditional cab drivers and for those who use the apps. But they should at least sort the problem of criminilazing their drivers, plus rivals such as Didi Chuxing will be under the same restrictions. However, Uber being welcomed fully into the legal fold is not likely to appease the traditional cab drivers, who will see the move as legitimising the flooding of the taxi market that is crippling their incomes.

And the new rules may not come as quickly as many expect. "Traditional cab owning companies have considerable clout at provincial government level," points out China Labor Bulletin's spokesperson Geoffrey Crothall. "It's a bit of a political quagmire for the government and [finalising new rules for the sector] won't be easy; nowhere in the world has really got to grips with it yet. Meanwhile, in China, it's going to be more of the same in terms of regular protests and demonstrations."

The traditional cab drivers in Beijing do, at least, have a couple more customers in the shape of Elaine and her son Boden. "Now me and my son joke around when we see a police car, 'Oh! Are we going to get a lift home?'" Elaine said after her Uber police encounter. "My son absolutely refuses to get into any black taxis and insists on city-approved taxis."

Uber Earth is Motherboard's exploration of the ways Uber has already changed the world and how it stands to do so in the future. Follow along here.