05 February 2008

The cab business in Japan

Via »Japan Inc Newsletter, 30 Jan 2008

In 2001, getting into a Tokyo taxi for the first time, I remember being surprised by a number of things. The door opened before I could get a hand to it, the driver was wearing white gloves, puffing a cigarette, and when I got in, he didn't seem to have a clue where the Japanese address that I handed to him was. After a short interchange on the radio, with who I assume to have been HQ, he said 'OK' and drove me off to my destination leaving me generally rather impressed with the cleanliness and politeness of the experience.

Since that time, taking taxis in Japan has become a part of life that I spend little time dwelling on. However, there are some interesting facets to the business and culture of taking cabs here that have changed significantly in recent years. The most recent change is of course the smoking ban that has been imposed on most cabs in Tokyo this month. The two main taxi associations, The Tokyo Taxi Association and the Tokyo Kojin Taxi Association have implemented a ban covering 52,000 taxis out of the reported total of 53,619 cabs. The ban has not been extended nationally yet but will most probably be complete by the autumn. A breakthrough for the anti-smoking lobbyists, like all such regulation, the ban will rile smoking drivers and passengers and be met with applause by their non-smoking counterparts.

One thing is for sure, the trademark cigarette for cab drivers will rapidly become a thing of the past. However, while this might be referred to as 'regulation' the industry at large has been locked into a trend of deregulation for over 10 years. Before then, since the 1970s, the industry had faced major restrictions that in part resulted from the sudden surge in demand for cabs during the period of economic consolidation in the 1960s. The government was so concerned by issues such as taxis refusing customers for short distance trips that it brought in the Emergency Measures Law for Optimization of Taxi Services, in 1970.

Together with the existing 1951 Road Transport Law, this gave the government almost absolute control of fare prices, the number of taxis on the road, licenses granted, operating hours and allocated patches.

During the 1990s however, reformers came into power and started to deregulate across a specturm of sectors. A paper from the Kyoto Institute of Economic Research argues that the first manifestation of deregulation in the taxi industry occurred in July 1993 which allowed for a dual price structure in Osaka allowing most cabs to start from 600 yen but some from 540.

By the turn of the century, excessive demand had turned to an excess of supply; worried that the restrictions might fuel less than savory modes of competition, and also as Diet reformers initiated a more thorough general program of deregulation, the Road Transport Law was reformed in 2002 making it much easier for new firms to enter the market.

Taking advantage of the new legislation, many operators set up fleets and the number of taxis on the roads increased dramatically. Firms such as MK Taxi, kept their prices low and managed to grow their business substantially. Liberalization thus created more jobs and introduced more competition into the industry. However, much to the confusion of economists, the government's release of control over supply and demand has not exactly gone as planned. Firstly, although the supply levels have risen, demand has actually gone down. This has led to deteriorating conditions and pay decreases for drivers and apparently there has been a downturn in the level of service.

As a recent paper by Walter Skok and Sakoto Kobayashi (in Knowledge and Process Management) observes, the reforms were intended to 'improve service quality as a result of increased competition. However, the resulting situation is the opposite to that expected.' They continue: 'Although the number of cabs has steadily increased, the demand has correspondingly decreased. This paradoxical situation may be explained by the damaging effects of the recession that had an adverse impact on personal spending power.'

Others argue that it was also the result of 'excessive competition' in the industry as a consequence of deregulation. This explanation is possible but ignores the nature of the problems that regulation caused in the first place; attempts to control supply and demand can be futile in the face of oscillating consumer spending power and discourages sorely needed entrepreneurialism. But it is also arguable that the liberalization has not really gone far enough. In particular,prices are still controlled by the government and taxi companies had to fight hard for the right to rise to 710 yen in Tokyo, effective from last month. If the government allowed companies to control pricing, this would give firms more freedom to carve out budget or luxury niches. On the other hand, when it comes to prices, passengers tend to go for the first cab to stop rather than look out for the cheapest one. Companies such as Nihon Kotsu, one of the big three companies has got around this by introducing taxi ordering services that respond to one ring of a mobile phone.

The recent fare hike has had a mixed reaction and arguably favors the bigger companies. The Nikkei reported that the fare rise was driving customers away. This can put the squeeze on the smaller operators and it has been the case that the larger
companies have been acquiring increased numbers of their smaller competitors in the last few years. Smaller operators are the least likely to be able to keep fares low and even if they do, their fleets are too small to derive major benefit from this. Last July, Nihon Kotsu bought its smaller rival Toyo Kotsu, and lower down the food chain, several midsized firms have bought out smaller ones. In terms of labor too, big companies find it easier to get staff and therefore keep expanding - another
industry paradox is that despite a falling wage, demand for drivers has gone up with the increasing number of operations.

Perhaps further deregulation would allow for more independent operators and smaller companies who could sustain their business by providing a more tailored, targeted service-once the playing field is more level.

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