One Year of China's Ride-Hailing Rules: The Policy Isn't Fully in Place, and the Growth Is Already Over

22.7% fewer users open Didi every day, and on average they open the app just 5.5 times a month

On the afternoon of October 8, 2016, the first workday after the National Day holiday, Beijing, Shanghai, Shenzhen and Guangzhou—China's first-tier cities—published their ride-hailing rules one after another.

Each of the four raised the bar for private-hire cars on household registration (hukou), license plates and vehicle models.

Beijing and Shanghai, the two cities where a hukou is hardest to get, both required drivers to hold local household registration. All four required local plates, and all four used wheelbase limits to restrict cars to mid-size (Class B) models.

That was the start of strict regulation of China's ride-hailing business. Dozens of cities followed Beijing, Shanghai, Guangzhou and Shenzhen with rules of their own over the following months.

A few months later, Didi, China's largest ride-hailing company and valued then at $38 billion, was still hoping the policy might loosen.

"Our government is very open. The Chinese government was the first in the world to legalize ride-hailing—that's a remarkable step forward," Didi president Jean Liu said in June 2017 at a forum during Summer Davos in Dalian.

"But at the same time, when ride-hailing gets implemented on the ground, there is bound to be some deviation, one way or the other, in how different localities enforce it."

A full year has now passed. What has changed in the policy, and how is the industry doing?

Local governments have generally relaxed vehicle requirements, but hukou and license-plate rules remain strict

Last November we compiled a list of the cities that had issued detailed ride-hailing rules. By that count, 58 cities at or above the prefecture level had published rules, and among the 31 municipalities and provincial capitals, 13 had published nothing detailed online.

Now 133 cities have published implementation rules, and another 86 have solicited or are soliciting public comment. Of all the country's municipalities and provincial capitals, only Lhasa has yet to publish.

Local restrictions fall into a few categories: driver household registration, license-plate ownership and vehicle-model limits. They determine where drivers can come from, and they set the cost of buying or renting a car and of fuel—which in turn sets the price of the service.

Outside the first-tier cities, plates are not much of an obstacle, but vehicle models directly affect both the barrier to entry and operating costs.

Localities classify models differently, using wheelbase, price, engine displacement or vehicle length.

We sorted the vehicle requirements into three tiers:

Strict: any one of these requirements rules out almost all Didi Express cars, and quite a few Didi Premier cars as well. A 4.8-meter length limit, for instance, excludes even a BMW 3 Series.

• Price > 150,000 yuan;
• Wheelbase > 2,700mm;
• Displacement > (1.8L naturally aspirated, 1.6T turbocharged);
• Length > 4.8 meters

Moderate: any one of these requirements rules out a fair number of Didi Express cars, such as the Volkswagen Lavida, Santana and Bora—models with large fleets in China. But plenty can still drive.

• Price > 120,000 yuan;
• Wheelbase > 2,650mm;
• Displacement > (1.6L naturally aspirated or 1.2T turbocharged)
• Length > 4.6 meters

Loose: no restriction goes beyond the following, and most Didi Express cars are unaffected

• Price > 100,000 yuan or no requirement
• Wheelbase > 2,600mm or no requirement
• Displacement > 1.4L naturally aspirated or no requirement
• No length requirement

Of the 58 cities at or above the prefecture level, 35 are strict.

Between the first draft put out for comment and the rules that finally took effect, most cities changed their terms to some degree.

We tracked what happened in some of them over the past year.

Beijing: set a five-month grace period, with the rules taking effect on May 21 this year; while the grace period was still running, Didi had already begun phasing out dispatch to non-Beijing-plated cars inside the Third Ring Road. Once the rules took effect, out-of-town plates could no longer accept orders, while the hukou requirement was neither enforced nor relaxed.

Shanghai: the new rules set no grace period, but lowered the wheelbase requirement to 2,600mm and stopped distinguishing between gasoline and new-energy vehicles; drivers no longer needed a local Shanghai driver's license, but they still needed an expensive Shanghai plate. From June 14 this year, Didi shut down online registration for new drivers in Shanghai—every new driver now has to register offline, which stops people from signing up with forged photos of Shanghai plates.

Guangzhou: a city that originally asked nothing about a driver's hukou now requires Guangzhou household registration or a residence permit. Its displacement requirement dropped from 1.8T or 2.0L to 1.8L.

Shenzhen: set a six-month grace period, relaxed its displacement requirement and tightened its wheelbase requirement.

Tianjin, Fuzhou and Shijiazhuang adjusted wheelbase, price and displacement requirements respectively, lowering the bar from Class B cars to Class A cars.

Kunming: no specific requirement for the car, but drivers must hold Kunming household registration or a residence permit. Vehicles must be registered for "reservation taxi passenger transport" use and must carry clearly painted or affixed operating markings.

Hangzhou: relaxed its hukou rule. Alongside local Hangzhou household registration or a Zhejiang Province Residence Permit held in Hangzhou for more than six months, it added a third option: a Zhejiang Province Temporary Residence Permit held in Hangzhou for more than 12 months.

In the end most of these cities relaxed their vehicle requirements, from strict to moderate. Drivers no longer need a Class B car to get on the road.

The hukou rules did not loosen. Guangzhou, whose draft had no hukou restriction at all, added one after the comment period closed. Hangzhou, with its "temporary residence permit for more than 12 months" option, is the only first- or second-tier city that has relaxed its hukou rule.

In the biggest markets, Beijing and Shanghai, hukou plus plate requirements shut out the vast majority of drivers.

In practice, the new rules are gradually taking hold.

Beyond the familiar routine of summoning platforms such as Didi and UCar for talks and ordering them to clear out non-compliant cars, traffic enforcement squads have been checking for out-of-town plates and non-local drivers at airports, train stations and other crowded places.

On January 1, for instance, Guangzhou transportation officers caught six out-of-town cars at Baiyun Airport.

By March this year, with two months left in the transition period, Didi began purging non-compliant drivers and vehicles, and dispatch to non-Beijing-plated cars was gradually restricted across the whole city. After Beijing's rules took effect on May 21, cars with out-of-town plates could not accept orders at all.

In July, a Didi Premier driver with Beijing household registration told QDaily that at a recent training session he found most of the other drivers were still from out of town. "I thought to myself, Didi isn't playing fair—what if one day they just can't drive anymore," he said.

Beijing's traffic enforcement authorities are now catching drivers without Beijing hukou at airports and train stations, even when the car has a Beijing plate.

Smaller cities have not been idle. Since the new rules took effect, Xiamen has removed 150,000 non-compliant ride-hailing cars, and its enforcement authorities recently ran a hard crackdown on illegal operation in key areas. In four days they caught 34 illegally operating vehicles—double the previous daily average.

In the space of a few months, drivers taking orders in their own cars have gone back to being "illegal cabbies."

There is one more change, this one about the driver qualification exam.

On September 8 the Ministry of Transport issued its "Notice on Reforming Work Related to the Taxi Driver Professional Qualification Examination," simplifying the content of the test.

The reason is probably that too few people were passing. So far localities have issued only 100,000 ride-hailing driver permits and about 50,000 vehicle operating permits—meaning just 100,000 drivers in the entire country hold a driver permit.

Earlier local figures: as of May 4 this year, Guangzhou's pass rate was 21.5%. Shanghai's in February was under 50%, and Shenzhen's in June was 21.3%.

The vast majority of drivers and cars are still working in a gray zone.

22.7% fewer users open Didi every day, and on average they open the app just 5.5 times a month

According to data from the Aurora Mobile iAPP monitoring platform, Didi's average daily active users fell from 15.45 million in October 2016, when the first batch of cities put out draft rules for comment, to 11.94 million in August this year.

That is 22.7% fewer users opening Didi each day, and the average user now opens the app on only 5.5 days a month.

Over the past year Didi added services that have nothing to do with hailing a car—ofo bike-sharing, bus route queries, designated driving, car rental—and former Uber users were steered toward downloading the Didi app. Its activity still fell.

Opening the app is not the same as using the ride-hailing service, and requesting a ride is not the same as getting one.

These figures leave out people who reach Didi through third-party platforms such as WeChat Wallet and Alipay. But it is fair to assume most regular Didi users have the app installed.

Hailing a ride has clearly gotten harder.

Count the largest platforms—Uber, UCar, Yidao and Shouqi—and active users across the sector have fallen compared with a year and a half ago.

Even Didi's own data says so: in June this year, the difficulty of hailing a ride during morning and evening rush hour in Beijing, Shanghai, Guangzhou and Shenzhen rose by 12.4%, 17.7%, 13.2% and 22.5% respectively against the same period last year. In Beijing, passenger orders on ride-hailing platforms dropped by around 10% after the rules took effect.

The most direct way to feel it: even off-peak, in ordinary weather, hailing a ride anywhere outside Beijing's CBD often means queuing inside the app.

Didi only introduced the queue this year. When demand nearby runs too high, you submit a request and the screen tells you that you are being placed in line.

Uber founder and former CEO Travis Kalanick used to love saying that nowhere in the world should a ride make you wait more than five minutes.

The queue is itself an admission that peak-hour waits are too long. It exists to keep users from giving up and walking away.

With users falling and rides getting harder to hail, there is only one explanation: there are fewer drivers.

Order growth is over, and Didi is reworking its products to sell pricier services

One of Didi's countermeasures is to push carpooling.

Carpooling lets the platform carry more passengers and complete more orders without adding drivers. Drivers dislike it, but they have to take the carpool orders the system assigns them; each driver gets only three chances a day to pause carpooling.

Yu Jun, Didi's vice president of product, said in a recent interview: "Station-based carpooling was the single most important thing in the first half of this year." Short of capacity, Didi designs its product to push users into carpools to meet demand—which plainly cannot solve the whole problem.

Beyond its two main businesses, Premier and Express, Didi has launched Express Plus and a luxury-car service.

Express Plus takes the better cars and the higher-rated drivers out of Express and builds what is essentially a "cheap Premier" business inside Express. Six months on, Didi announced that Express Plus had reached 1.5 million orders a day.

Premier has been segmented too.

In May this year Didi launched a luxury-car service in Beijing at twice the Premier price. It also lets Didi reach users that ordinary Premier could not satisfy.

Express Plus and luxury cars are both ways to pull more revenue out of an order volume that is no longer growing.

Before the new rules arrived, Didi had already stopped subsidies and started pricing drivers and passengers separately—the two sides see different numbers, and the driver's per-order rate is lower. Didi then began taking 21% out of every fare. In its main businesses, Premier and Express, Didi does make money.

Didi's $38 billion valuation came from investors' expectation that it would own the whole transportation industry. Under the new rules, its revolution against the taxi business stopped short; a high-end taxi company cannot carry that valuation.

Didi, which has more than 6,000 employees and says it provides flexible work for 17.5 million drivers a year, has to find more directions to grow in.

Besides carpooling, Express Plus and luxury cars, Didi went abroad.

In February this year it set up an internationalization business unit and put Zhu Jingshi, previously in charge of investment, in charge of "launching substantive global business expansion." His competitor there is still Uber.

The one piece of good news for Didi is that Uber's expansion has stalled on growth problems and a run of internal scandals coming to light.

Beyond hailing cars, Didi has plugged in bike-sharing, folded in bus route information and, recently, added Renrenche's used-car marketplace—all reasons for users to open the app.

After backing bike-sharing company ofo in three consecutive rounds, Didi added an ofo entry point inside its app in April. A source close to Didi told QDaily that the bike-sharing boom has in fact taken a serious bite out of short-trip demand in the ride-hailing market.

As car time-sharing rental drew attention, Didi last month launched its own per-minute rental service, Fenfenzu.

Its most recent attempt is used cars.

A few days ago Didi announced a $200 million investment in the used-car platform Renrenche, and shortly afterward a Renrenche used-car page appeared inside the Didi app.

But used-car e-commerce is still a business of burning cash to buy market share, and Renrenche is not one of the top two players.

And the core problem in the ride-hailing business remains unsolved.

Among Didi's rivals only UCar is clearly growing—and it is still losing money

In this industry, besides Didi, both UCar and Shouqi Yueche raised new money over the past year.

UCar began as a project incubated by Car Inc., its parent company, which is listed in Hong Kong. Its car-hailing business trades on the National Equities Exchange and Quotations (the "New Third Board") as UCAR Inc.

According to UCAR Inc.'s 2017 interim report, revenue in the first six months of this year was 4.45 billion yuan, up 91.3% year on year, of which car-hailing revenue was 2.8 billion yuan, up 20.6%. Its loss narrowed from 800 million yuan in the same period last year to 200 million yuan.

Most of that growth did not come from car-hailing. It came from UCAR Maimaiche, its car sales arm, and UCAR Chexiandai, its auto lending arm. Those non-car-hailing businesses now account for 37.1% of total revenue.

Of the top four ride-hailing platforms, UCar is the only one still growing, mainly because it runs its own fleet. On license plates the new rules did not hurt it at all; its model made it a beneficiary of the policy.

In the first half of this year UCAR Inc. announced two share issuances, taking in 7 billion yuan from investors including PICC and China UnionPay.

But UCar's driver recruiting has never explicitly demanded local household registration or a local vehicle permit.

Beijing, Shanghai and other cities have not relaxed their hukou requirements; they have simply not enforced them yet. Once they do, most UCar drivers in China's biggest cities will not be able to drive either.

Shouqi Yueche belongs to BTG (Beijing Tourism Group). In this quieter year for Didi, Shouqi has run a top-up-and-rebate promotion every month to buy users with subsidies. On driver hukou, vehicle requirements and platform licenses, Shouqi is the most fully compliant company in the field. It now covers 48 cities.

Take Beijing: by March this year Shouqi Group had nearly 9,000 taxis in the city, a sizable share of which had been converted into ride-hailing cars.

By June, Shouqi Yueche closed a Series B round; at the time it had 5,000 compliant ride-hailing cars in Beijing. After the round it started recruiting individual drivers from the public, but only those who met the "Beijing person, Beijing car" requirement could join.

Running the same premier-car model and with no out-of-town drivers, Shouqi cannot grow fast.

According to data from the Aurora Mobile iAPP monitoring platform, a year of rebate promotions took Shouqi's app installs only to 1.44 million by August this year, 13% of Didi's. The real gap is far wider than installs suggest, because that figure does not count Didi's entry points on the WeChat Wallet and Alipay home screens.

Yidao, closely tied to LeEco, has been sliding since the start of this year and cannot even guarantee that drivers can withdraw their earnings.

In Yidao's driver group chats, drivers still trade tips on how to get their money out. Those who manage it face the whole ordeal again if they keep taking orders on Yidao.

Since the Ministry of Transport's rules came out last year, the car services backed by local governments have had the advantage of legality. That does not mean they can catch up with Didi on fleet size or scale.

Meituan, which started piloting a car-hailing business in Nanjing on February 14, provoked Didi into subsidizing rides there, but it still has not expanded to a second city.

In Beijing lately, after dark, the car you order on Didi has once again started arriving with a plate that does not match the one in the app.

The driver calls to give you a different, out-of-town plate number. Standing at the curb waiting, it feels much as it did two years ago.

Hundreds of investment firms, dozens of companies and tens of billions of dollars are tied up in this. In the end, what these companies can count on is still policy handed down from above.

Cover image from VisualHunt