The Past, The Present and The Future of Sharing Economies
The emergence of the Internet has shaped the world to become more interconnected than ever before. Millions of global citizens are able to exchange their intellectual, physical and financial capital with international networks.
Since the first generation of Smartphones, these technologies have catalyzed the freeexchange of cars, homes, and other belongings for financial capital. The sharing economy has given rise to several of the largest companies in the world such as Uber, Airbnb and Didi Chuxing. Since 2007, these powerful stakeholders have acquired significant market shares and have served as fierce competitors against companies with traditional business models. Nonetheless, the recent rise of the sharing economy has seen limited regulations and subsidies from government forces. The success of this industry will require meticulous speculation and oversight to ensure equity with the conventional hospitality and service companies. The “sharing economy” has been around since the era of the Hunter-Gatherers, when human communities share collective foods, shelters, and tools.
The term “sharing economy” is often currently associated with small scale start-ups from the Silicon Valley, where small companies skyrocket in market value while directly investing limited quantities of human and financial capital. To government regulators, the sharing economy has become a powerful player in Canadian markets. With approximately 10% of Canadian adults engaged in some form of economic sharing, the sharing economy created $261 million USD of untaxed, and largely unregulated income. (Government of Canada, 2017) Thus, companies engaged in the traditional industries have been, understandably so, challenged from the lower costs of operations, the lack of regulations, and the possibility that they face competition from companies that may not follow the same rules. The economic influence of the sharing economy is ubiquitous and effectively enters into previously traditional industries with ease.
In 2015, the total transactions of the private accommodation sharing economy reached$1.4 billion in Canada, and were only partially taxed as either personal income or real estate earnings. (Brownell, 2017) The remainder financial capital goes largely unnoticed and under monitored by the Canada Revenue Agency. While in San Francisco, a report indicates that almost 40% of all room and house rentals were organized and commissioned solely through Airbnb. (Tyler, 2015) This contributed to what is known as an “invasion” of residential neighbourhoods where the housing shortage in major cities becomes accentuated by numerous rental properties. As companies like Airbnb expand, their market power translates to greater government influence.
Evident efforts in political lobbying has recognized the sharing economy as powerful economic stakeholders and not only software start-ups. In 2016, data released by Uber indicates that almost 11,000 trips were made in Toronto. (Jones, 2016) During the same period, Uber’s market value grew to $68 billion USD, substantially larger than GM or Ford, and much larger than Beck Taxi – the largest taxi company in Toronto. (2016) In response to this high volume of Uber rides, the price of a taxi driver licence in Toronto decreased from $360,000 to $100,000 as the taxi industry attempts to minimize marginal costs for its drivers to stay locally competitive.
(Cain, 2015) In Toronto, there are nearly 5000 taxi drivers with more than 13,000 directly employed in the taxi industry. It is estimated that taxis completed 65,000 trips and generated $1.5 million daily.(City of Toronto, 2015) The professional taxis are regulated by the government with mandated insurance and training courses. On top of this, taxi companies take a larger percentage of the revenue earned by drivers.
With Uber on the negotiating table alongside the large taxi companies, it is a distinct possibility that the taxes levied on Uber by the city of Toronto and the federal government, will be decreased. Insurance regulations and safety standards are not strictly enforced with Uber, and without cooperation from the company, it would be impossible to enforce the consumer protection laws necessary for riders. In China, the largest ride hailing company in the world, Didi Chuxing, encountered fierce domestic competition in its fast-growing market. A temporary period of rapid growth saw over 4 billion USD in foreign investment and the eventual merging of Uber and Didi within years of the Chinese company’s inception. (He, 2016) Over ten million drivers from China’s advancing middle class powered over twenty million rides per day in the hot month of July 2016.
(2016) The unsustainable growth in number of drivers presents lax regulations as less than 20% of rideshare vehicles met proposed wheelbase requirements. (2016) Although difficult to regulate, Didi Chuxing proves to be a close substitute and often advantageous alternative to China’s largely monopolistic taxi industry. The great majority of Chinese taxis are operated by state-owned companies with high entry costs and uncompetitive salaries. If regulated similarly to the taxi counterparts, ride sharing companies can substantiate the Chinese middle class with stable incomes. This is granted that strict government policy is continued such as those imposed in Shenzhen that localizes drivers, controls model and mileage of vehicles and mandates insurance policies.
(2016) Ride sharing and home rental companies are not the only businesses challenging traditional industries. Bike sharing, which has become very popular in China since 2015, has become one of the main contributors to the sharing economy with an estimated revenue of $1.5 billion USD that is expected to increase to $3.5 billion USD by 2020. (Wang, 2017) Beneath the masquerade of success for bike sharing startups such as oFo and MoBike, deeper issues are surfacing including concerns around bicycle maintenance and the abandonment of these bikes in crowded cities.
Although these bikes are very cheap to rent, sometimes as little as $0.50 USD an hour, they cost around $450 USD to manufacture, which makes maintenance very costly, causing bikes to be abandoned after six months. Governments around the world are facing pressure from traditional industries and consumers to actively regulate the sharing economy. The argument for regulation is compelling – ensuring that every stakeholder in the industry is playing by the same rules. When the low costs of business incentivize people to share their motor vehicles or their houses due to a lack of coherent tax codes and a close to nonexistent method of enforcing safety standards, it directly puts traditional industries at a disadvantage.
The 2017 Canadian Budget outlines a process in which Uber will be forced to pay a 13% service tax on every ride that it provides, and it is reasonable to conclude that Airbnb and other companies will attempt to minimize sales taxes. Uber has recently launched a campaign for citizens to call their Members of Parliament to protest these taxes, and to some extent, the dissatisfaction has been heard on Parliament Hill. In 2015, Airbnb ran a series of advertisements in San Francisco criticizing efforts to implement taxes on those who share their properties as well as corporate profits. Despite social outrage over these advertisements, their effects are undeniable. There are many sympathetic citizens towards these companies, and governments are struggling to update their laws to catch up with the rapidly developing industry.
Some governments around the world have opted to proceed with heavy fines for those who operate these sharing economy businesses should they fail to prove they have met all the requirements such as proof of insurance and safety standards. In Belgium and some other European countries, companies such as Uber and Airbnb are banned from operating, which has riled complaints from these companies. (Euracitiv, 2015) While there is no doubt competition in the market will overall lead to better service, lower fares, and higher standards of service, proper regulation is necessary. There has been a lack of quality control and inconsistency in prices, standards and experience for each consumer. Companies will always attempt to maximize their profits, and one of the ways to do that is to decrease prices to incentivize consumers to purchase their product.
The counter argument to increased regulation has been strongly displayed by companies faced with a future of more competition from the anachronistic traditional industry. This is evident in the fall in market valuation for Uber, Airbnb, and Didi when revenue falls in response to government regulations to even the playing field. More regulations cause undue burden on consumers and producers and will hinder innovation in an industry, but the drawbacks of appropriate controls include consumer safety concerns and future transitions of markets to become monopolistic as technology conglomerates. As markets shift away from competition, the desire for innovation decreases, which is a serious symptom of an unhealthy economy. It is important that any measures taken to address the issue of unregulated sharing companies be scrutinized in order to promote innovation in the industry by all stakeholders, traditional and modern, to protect consumers and ensure an even field for transparent competition. Once these aspects are met, it is possible for firms to maximize safety and fairness over ruthless, unbalanced markets in which the only sharing economics receive benefits.
Although the impacts of new regulations can result in more short term variable costs for these companies, the opportunity cost for inaction is simply too extreme to justify in the future to come.