28 October 2016
The success of Uber can be attributed more to the problems that have plagued our taxi industry for years than to the new technology itself. Photo: HKEJ
The success of Uber can be attributed more to the problems that have plagued our taxi industry for years than to the new technology itself. Photo: HKEJ

How to reinvigorate the traditional taxi industry

The rapid development of information technology has given rise to all sorts of new business models.

Among them is Uber, which has become the arch-rival of the traditional taxi service industry in major cities around the world.

Like many other new business ideas, Uber tries to gain an advantage by reducing the time and cost for consumers to search for the products and services they need, with the help of technological innovations.

Uber has proven that its model works, as it is always easier to get a taxi through your cellphone app than to hail one on the street, especially during rush hour or in bad weather.

Despite the fact that new competitors like Uber have revolutionized the taxi service and pose an enormous challenge to the traditional taxi industry, I really don’t think the competition between new business models made possible by new IT technologies and conventional business operators is necessarily a zero-sum game.

Rather, I see a lot of potential for cooperation between them, thereby creating a win-win situation.

I haven’t called a cab through Uber, but I do pay a lot of attention to the operating environment of the local taxi industry.

Based on my observations, I believe it is probably not an overstatement to conclude that Uber’s success can be attributed more to the problems that have plagued the traditional taxi industry for years than to the new technology itself.

Simply put, rigid government regulations have prevented the conventional taxi industry from operating efficiently, giving rise to new competitors like Uber, which has taken the world by storm almost instantly by providing more flexible and customized service to customers.

Around the globe, the taxi service industry is mainly regulated in two major aspects: the number of vehicles and the level of taxi meter rates plus the charging methods.

In fact there wouldn’t be much of a problem fixing taxi fares at a certain level if demand for the service remains unchanged at all times.

However, what happens when in reality demand for taxis often fluctuates wildly throughout the day?

Can a fixed rate guarantee the most efficient service and suit the needs of customers under different circumstances?

Let’s take New York City as an example.

Data collected by the New York City government through the GPS system shows demand for taxi service in the city varies a lot between different hours during the day and different days throughout the week.

For example, the number of fares is always at its lowest on Mondays, while cab drivers always have to work around the clock over the weekend.

The hour between 5 a.m. and 6 a.m. is usually the quietest.

The busiest time for cab drivers is between 7 p.m. and 8 p.m., during which they can often earn 30 percent more than in the early morning.

And it goes without saying that the number of fares tends to soar when the weather is bad.

As we can see, a fixed fare at all times is out of touch with reality and is against the most basic economic principle: prices rise when demand is high, and prices drop when demand is low.

I believe most people in Hong Kong have heard of the “20 percent discount gangs”, which refers to individual taxi drivers or companies that operate a small fleet of cabs that charge their passengers according to the distance of their rides rather than the rates that appear on the meter.

The longer the distance you wish to travel, the higher the discount you can get, usually up to 20 percent.

The key to the success of these “gangs” is flexibility.

At one point, they were flourishing across Hong Kong and welcomed by Hongkongers, who can choose the kind of service and price that suit their needs.

Based on the success of the “20 percent discount gangs”, why can’t we allow some taxi drivers to charge a higher rate during rush hour to cater for customers who are in a hurry and willing to pay more to spare themselves having to queue up for taxis?

One of the most notable innovations of Uber is that it allows customers to negotiate a price with drivers beforehand, so that they don’t have to pull over to argue over the fare, and I think such a model can be applied to the existing taxi service industry, too.

Allowing our taxi drivers to charge more flexibly and negotiate fares with passengers can not only rejuvenate our taxi industry but also boost its competitiveness against new challengers like Uber.

It is entirely possible for new competitors like Uber and existing service providers to coexist peacefully.

All it takes is for the government to think outside the box.

This article appeared in the Hong Kong Economic Journal on Oct. 15.

Translation by Alan Lee

[Chinese version 中文版]

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Assistant professor, Department of Business Administration, Chu Hai College

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