The tech companies trying to break into China's taxi market have been dealt a setback as the Shanghai government flagged that it would limit the use of taxi-hailing apps in the city and ban their use during rush hour.
Apps that help users hail and pay for cabs with their smartphones have taken off in China, and have become the site of a proxy war for dominance in the country's lucrative mobile payments market.
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Bad traffic and high demand for cabs makes hailing them on the street difficult – a problem that the apps addressed by allowing users to offer drivers additional tips to accept them as passengers.
Apps backed by local internet giants Tencent and Alibaba also offer generous subsidies to users as the companies try to grab share in the burgeoning market.
Globally, car-hailing apps have sparked fierce fights between tech start-ups and regulators, the former keen to challenge entrenched transit industries and the latter worried about the apps' impact on taxi drivers' livelihoods and the high fares that apps sometimes charge consumers.
Cities across the US and Europe, notably Paris, have toyed with the idea of banning or limiting the apps' reach.
In China, Shanghai on Thursday said it would ban the use of the apps, with names like "Fast Taxi" and "Beep Beep Call a Cab", during rush hour.
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It also blocked the use of taxi-hailing apps by private vehicles licensed for hire – a ruling that could affect US-based, Google-backed Uber, which launched the service this month in Shanghai.
Uber declined to comment.
"Though the taxi booking apps raised efficiency, their marketing and the function to add premium prices have disturbed the fair market order", the Shanghai Municipal Transport and Port Authority said in a statement. "App enterprises unwilling to be regulated will face a shutdown of their apps."
Shanghai's restrictions follow similar steps taken last week by Beijing. Taxi drivers in the city are restricted to using only one such service to find customers, in order to prevent undue distraction, according to Xinhua, the state news agency.
For Alibaba and Tencent, backing taxi-hailing apps puts them in the fast lane to mobile commerce markets, which are growing rapidly both in China and developed economies.
Mobile internet payments in China nearly quadrupled between the first half of 2012 and 2013 to Rmb130bn, according to research consultant iResearch.
Both companies operate payment networks, similar to PayPal, that are linked to the taxi app each supports. The hope is that as consumers get comfortable using their smartphones to pay for taxis, they will more regularly use their phones to do other online shopping and ultimately even to pay for other offline goods, like groceries or meals at restaurants.
Drivers have been encouraging passengers to use the apps because of the bonuses they receive for accepting bookings that way.
Alibaba said that those subsidies will not be affected by the new rules in Shanghai, as drivers, while they cannot be hailed by app during rush hour, can still accept payment by scanning a QR code in the Alipay Wallet app.