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Hello, taxi? India embraces a multi-billion dollar industry

Holger Leue | Lonely Planet Images | Getty Images

India's roads are notoriously nightmarish, as commuters navigate severe congestion, disorderly infrastructure and frequent road accidents, but relief is in sight as a taxi boom is driving a much-needed change in the country's chaotic mass transport system.

Traditionally, cab rides in India has meant rickety vehicles, tampered meters, unreliable drivers and poor service. So when GPS-linked, electronically-metered cabs arrived in 2006, they came as a welcome reprieve, especially in a country of 1.3 billion people of whom only 2 percent own cars.

"This virtually means a market with unlimited demand that is only constrained by the supply side. That makes the space very attractive to us," says Avnish Bajaj, Managing director Matrix Partners, a U.S.-based private equity firm and an early investor in the space, with stakes in like cab companies like Ola, Easy Cabs, Savaari, Taxi For Sure and bookmycab.com.

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Matrix, together global funds like Tiger Global, Accel Partners and Bessemer Venture Partners, have pumped in more than $100 million for a piece of the India taxi market, which is estimated at $6-$9 billion and growing at 17-20 percent per annum. At this rate, the market is projected to balloon to a whopping $25 billion by 2025.

It's not surprising that Meru Cabs, India's biggest taxi company, is now looking for a second round of investments. The company has grown from small single-city operation to a seven-city, 7,000 cab network valued at $135-$150 million within a span of 7 years.

But the investment is not limited to India-based companies alone. San Francisco-based Uber, who provides mobile apps that connect passengers with drivers of vehicles for hire and ride-sharing services, is aggressively expanding in Bangalore, Hyderabad, Mumbai and Chennai.

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"India is a perfect market model for Uber; the pace of urbanization is rapid, so there is unmet demand for reliable, convenient and safe transportation, not to speak of the infrastructure challenges," said Allen Penn, Uber's head of Asia operations.

Technology's role

Aside from demand, mobile technology has also played a key role in the rapid growth of taxi services. The taxis can be booked either online or via the phone, and with more than half 800,000 million Indians now equipped with cellphones, cabs are literally a call away for most commuters.

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"Booking the cab is now easy. I can call from anywhere, anytime of the day or night and be sure that the taxi will arrive on time. They even call back to tell me when the taxi has arrived and keep my family informed when I have reached my destination. That is a big thing for a woman in the city of Delhi," says Priti Pawha, a training professional from New Delhi.

Ola Cabs is also harnessing technology for its expansion plans; by using a fleet aggregation model, it aims to encourage car owners to participate by providing them with the technology to connect with customers.

The fleet aggregation model enables small fleet owners or single car owners to register with a company like Ola cabs or Easy cabs and display the company logo on their vehicle. Cars are free to take up non-company rides, but for every company-initiated ride, they are required to pay the company a fixed percentage commission.

"We are working with car makers, banks and funding institutions to build an ecosystem for [taxi] drivers to own their cars," said Ola Cabs' CEO Bhavish Aggarwal. "We see ourselves in at least 100 cities/towns in the next five years."

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Challenges

As with many industries growing rapidly in an economy not known for proper structure, India's burgeoning taxi industry has its share of problems.

"The organized taxi segment is only 5 percent of the market, compared with 70-80 percent in developed countries," Meru Cabs CEO Siddharth Pahwa said, citing attendant inefficiencies and organization issues.

There is also a severe crunch of skilled drivers, which makes standardizing the quality of the customer experience an uphill task.

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Moreover, each Indian city's problems are different. "Delhi could ask for more safety, Mumbai for more comfort, Bangalore for more availability and Chennai for transparent fares. You have to find a way to solve every city's unique needs," said Ola's Aggarwal.

Still, the stress on the roads will likely keep commuters hankering for cabs for now.

"I invested in a car last year thinking I would save time and money. But traffic conditions are so nerve-wracking that I use taxis five days a week for work commute. It saves me headache, money and is also safer and more comfortable," said Pawha.

Meru's Pahwa added: "The cost of owning a sedan in India is $680 a month. The average monthly run is 1,200 kilometers, so the cost works out to be $0.56 per kilometer. With good quality taxi service available at $0.39 a kilometer, it makes economic sense to hire a tax rather than own a car."

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