By China Economic Review

The taxi trade anywhere is a direct link to the real local economy.

Taxi drivers feel the pulse of a city, and their takings reflect whether people are feeling expansive or cautious. But in China, the taxi business also reflects some underlying changes to China’s economic structure.

The bottom line: business volume is up, but so are taxi numbers and alternatives, and the taxi trade as a state enterprise-controlled sure-fire profit center is coming under threat. And about time too.

In Beijing and Shanghai – the two biggest taxi markets in China – basically all taxis are operated by state-owned companies. These companies sign contracts with drivers stipulating that drivers have to pay a rental fee every day, regardless of how much money they take in. The drivers have to hit this minimum (bao ben) before they start to cover running costs. Only after running costs have been covered do the drivers start to make anything.

Under this structure, the taxi companies transfer all risk to the drivers, who must pay regardless of weather, traffic, or the fact they may be off the road for car maintenance in the garage or driver maintenance in the hospital. Older drivers have gone in the span of a career from total socialist job security as salaried drivers in state enterprise companies to total capitalist risk.

The question is: what do the companies provide in return for the fee that drivers hand over every day? The answer is not much. Drivers typically have to pay for their own insurance and car repairs. So the fees are in effect a tax on the drivers, and on the consumers beyond them.

Any company able to operate in a way that guarantees profits and no risk is unnaturally fortunate and the recipient of some form of anti-competitive protectionism. Which must breed inefficiencies.

But it also breeds creative work-arounds from companies and individuals excluded from the magic circle.

The latest trend on China’s roads is of course the arrival of large numbers of private cars. Only a few years ago, sedans were either official cars or they were taxis. No longer. How does this impact on the taxi industry?

The answer is that there are growing numbers of unofficial hire cars on the roads, directly competing against the official taxis, and operating at lower rates because they do not have the burden of the state enterprise taxi company to worry about. They are called “black cars,” and drivers with the main taxi companies are not happy about them.

The drivers of the black cars, of course, have amongst their “costs of business” the risk of fines if caught by the traffic police. And as unofficial taxis, it is harder to pick up business by cruising around the streets. But there’s a lot of business that is not so random, more related to regular trips, fixed routine arrangements. They can grab a big slab of that.

Which cars are the black taxis? It is not so easy for outsiders to spot them. But the taxi drivers can.

There also are a few private licensed taxicabs on the streets of both Beijing and Shanghai, the remnants of experiments in the early 1990s which were stopped when the state taxi companies realized the implications.

Ask any taxi driver if he would like to own his own taxi licence, and he of course says yes. There is no plan to auction them to anyone beyond the state companies.

So how’s business? Every taxi driver in the history of the world has always underplayed the true situation in answering this question. But even taking that into account, the impression is that overall takehome pay has been falling for years.This year is better than last year because of the post-SARS bounce-back, and on the streets of Shanghai there are palpably fewer empty taxis cruising around than there used to be. But Shanghai taxi drivers are fearful of the major advances in public transport being made by the city.

The buses are now air-conditioned and pleasant, and the subway system looks likely to become the premier means of moving round the city once more lines have been opened up.

The failure of the slightly up market Passat to catch on amongst drivers in Shanghai is an indication of their fears for the future of the business. The baoben fee for a Passat is higher than for a regular Santana taxi, and drivers are unwilling to pay the extra fee because they do not see the prospect of extra income.

The taxi business in Beijing is going though significant changes, with the end of the road finally in sight for the smaller RMB 1.20 taxis.

The city is considering what models to approve for the next generation of taxis ahead of the 2008 Olympics. It is said that the standard color for taxis may be shifted from the current not-very-revolutionary red to some other color, yet to be chosen.

Another effort is being made to get advertising TV screens into taxis in Shanghai. There have been at least two attempts before to get them installed in the eye shields for the front seats, but they have never caught on. This time, the screens are installed in the back of the passenger headrest, so it can be watched by the passenger sitting in the backseat.

Here’s what you do: take off the white headrest cover, turn it round, and replace it, covering the screen. The driver doesn’t care and the next passenger will thank you for it.