A passenger uses Uber to get a ride home in Beijing

Uber's operations in China are under deeper investigation as its services - roping in private car owners to offer taxi services - are against local regulations.

On May 6, the transport authorities in Chengdu, capital of southwest China's Sichuan Province, visited Uber's local office as part of a new investigation into the online taxi service. After the investigation, the company texted its drivers in the city, saying its services had not been affected.

It was the second recent visit by the transport authorities to Uber's China offices. On April 30, transport authorities in Guangzhou, capital of south China's Guangdong Province, raided Uber's office on suspicion of unlicensed operations. A number of mobile phones were seized for investigation. The raid took place following protests by some taxi drivers in Guangzhou after Uber rolled out a new carpooling service in October last year, called People's Uber.

Uber's services are available in nine Chinese cities. Such services have become hugely popular in China's congested cities, particularly in the capital, Beijing, and the financial hub of Shanghai, where hailing a taxi during rush hour is all but impossible.

With ride-hailing apps experiencing skyrocketing growth in China, the government is seeking to regulate the business. In January, the Ministry of Transport said private car owners were forbidden to pick up passengers for profit. Only vehicle rental companies' cars could be used for car-hire services.

Uber claims that People's Uber is a non-profit platform aimed at benefiting drivers and encouraging carpooling. The app service is still available across the country.

An Uber driver, who gave only his surname Chen, said Uber offers a substantial subsidy to Chinese drivers to persuade them to join the service.

"If you take more than 70 orders a week and the total revenue is less than 7,000 yuan ($1,130), Uber will subsidize you to make your weekly income 7,000 yuan," Chen said.

Chen says Uber is in a gray area in China.

"In China, a private car can easily register under a car rental company. Then is it still illegal for such cars to offer taxi-like services?" Chen asked. "Also, People's Uber is a non-profit platform where drivers are Uber's partners. They don't have to pay any commission and are offered an attractive subsidy. In addition, People's Uber is designed to encourage carpooling, something the government wants to encourage too."

Going by Chen's comments, it's understandable why no decisive action - either for or against the company - has been taken.

"It's not a clear-cut issue and a lot of issues are disputable," Chen said.  

A bumpy ride

Established in 2009, the California-headquartered Uber allows users to get a taxi, private car or carpool by calling from their mobile phones. The service allows users to find available private vehicles nearby and pay via the Uber app. Uber has services in more than 250 cities around the world.

According to a Wall Street Journal report, Uber could become the most valuable startup company in a new round of funding that could see its worth exceeding $50 billion. It could then beat the $50-billion record Facebook attained before its initial public offer in 2011 for the highest ever valuation for a private company.

Despite the history-making valuation, Uber faces multiple legal and regulatory challenges as it expands throughout the world. It seems that wherever it goes, its legitimacy is questioned. Though its passengers welcome its services, taxi companies and city regulators are up in arms.

The setback in China is one in a series of legal obstacles Uber has faced around the world in countries including India, Spain, Thailand, South Korea, France and Germany as well as in several states in its home country.

Uber is a comparative latecomer in China, where the number of taxi-hailing app users is forecast to triple to 45 million by 2015 from 2013, according to Internet consulting firm iResearch. In December, Uber gained strategic investment from Baidu, China's search engine giant.

In China, like elsewhere, the app has often sparked anger among licensed taxi drivers who protest against profit dips caused by competition from private car owners. Also, Uber faces heavy competition from more established local apps backed by major investors.

Domestic firms Kuaidi Dache and Didi Dache, backed by e-commerce giant Alibaba and Internet giant Tencent respectively, have the lion's share in the online ride-hailing market. The two announced plans to merge in February, resulting in undisputable market dominance.

According to a report by Analysys International, a market research institution, Didi Dache and Kuaidi Dache had a combined market share of 78.3 percent in the first quarter of the year in terms of orders, while Uber accounted for 10.9 percent.

Uber's business model mobilizes idle private cars to offer taxi-like services. Although the business model has a good market prospect, it has a natural flaw: private cars don't have the qualifications to run commercially and face far less government regulations, which could make risks shoot up.

Both Didi Dache and Kuaidi Dache claim the cars they use are from car rental companies and not private cars.  

Controversy

Although unlicensed private cars are prohibited from offering taxi-like services, the high demand for taxis has fueled the popularity of private service providers.

As the regulations on ride-hailing apps began to tighten, Uber-like apps, including Didi Dache and Kuaidi Dache, also got warnings from local transport authorities to clear out the illegally operating private cars in their stables.

Cao Zhiwei, a real estate company chairman and member of the political advisory body of Guangzhou, said the taxi industry is to blame.

"The taxi industry can hardly meet the market demand and needs to be completely reformed," Cao said. "Previously, government departments used to issue licenses to taxis. Now, the market should call the shots in allocating resources." He noted that the government monopoly on licenses should end and all qualified individuals should be issued a license to improve the quality of taxi services.

Wang Limei, Secretary General of China Road Transport Association, said the legal status of ride-hailing apps that allow private cars to offer taxi services has been discussed worldwide heatedly.

"Private cars offering taxi services are just like unlicensed doctors offering medical care to patients," Wang said. "They can create convenience for people but there are a lot of risks."

But having said that, Wang also argued that ride-hailing apps shouldn't be cracked down on as a whole.

"The Internet is only a tool. The fact that some people use it for illegal purposes doesn't mean the Internet should be targeted. A clearer legal framework to regulate ride-hailing apps will give those cars a chance to be legalized," Wang said.

Li Yuheng, an analyst with market research firm CIConsulting, said private car owners joining the market would greatly mobilize resources. He noted that it was the fastest and most economical way to expand the market.

"Car rental company vehicles can hardly fulfill the enormous market demand. That's why so many private cars are joining ride-hailing apps, and those apps turn a blind eye to illegally operating cars," Li said.

The analyst's suggestion is that the government loosens control of the market.

Chen, the Uber driver in Beijing, said Uber has a long way to go in China.

"There is not enough marketing effort in China; therefore Uber has a tiny market share," Chen said.