Uber and its expansion strategy in China - Free Essay Example

Introduction Uber Technologies Inc. mission is To bring transportation for everyone, everywhere (Uber Technologies Inc., 2018), by contracting everyday drivers to pick up passengers on trips. Once a dominant force in the Transportation industry, Uber has lost its competitiveness in Asia, especially after quitting China in 2016, Russia in 2017, and Southeast Asia in 2018. This global phenomenon is predominantly due to its poor leadership and company culture, which has led to multiple consequences including low employee satisfaction, low sense of belonging, bad public reputation and consequently, worsened market performance (Sherman, 2017) . Contextually in China, Ubers dismal performance was the result of multiple agencies: poor understanding of the local business environment, bad inter-business relationships and even government intervention. From 2010 to 2017, the 7 years from Ubers inception has seen a meteorite development . No business enterprise has ever generated more investments, grown as fast, achieved such international coverage, and attained such high market valuation. (Sherman, 2017). At end 2017, Uber was the most valuable U.S. start-up, with a valuation of USD $68 billion, $37 billion more than the second most valuable start-up, AirBnB at $31 billion. However, Uber is simultaneously haemorrhaging money at a prodigious rate. In 2017, Uber reported a third-quarter loss of nearly $1.5 billion, bringing its annual losses to $3.2 billion (Fig. 1). Losses of such magnitude are definitely not sustainable, which require drastic restructuring of the companys business model and focus in order to remain competitive in the current ride-hailing industry. Figure 1: Uber Net Revenues and Profits by Quarter (Sherman, 2017) Research as to the firms decline will be conducted primarily through literature review, and will cover the firm at its peak as a global monopoly followed by its drastic decline in market share, and why it ultimately failed to retain a foothold in Chinas business environment. Uber conceding defeat in China and selling its shares is a disturbing trend it employed multiple times, even back home in Singapore (Daga, 2018). Internal background of the company In March 2009, Travis Kalanick and Garrett Camp founded Uber in San Francisco. Its business model was developed on the basis of a ride-sharing app that allowed for passengers to connect with drivers at any time and location. Fig. 2 shows how this simple concept was to be continuously enhanced to ensure a cycle of improvement. Figure 2: Ubers Business model (Damodaran, 2014) After only six months of its conception, Uber was valued at $60 million, having received funding from not just angel investors and venture capitalists, but also from prominent celebrities like Ashton Kutcher (founder of A-Grade Investments), Jay Z (co-founder of Roc-A-Fella Records), and Jeff Bezos (founder of Amazon) (Wirtz Tang, 2016). Having secured its dominance in America by edging out domestic competitor Lyft, Uber then set its sight on globalisation. Increasing its scope of operations beyond the US, Uber posed a distinct threat to taxi services in Europe and Asia, triggering protests in France, Germany, an d India, due to the disruptions it presented to the transportation landscape. Despite closer government scrutiny, more stringent regulations and clashes with local taxi companies, Uber successfully posed an effective challenge to taxi monopolies in the countries it operated in (Rahel, 2016). As of August 2015, Uber clinched the title of the most valuable start-up in the world, valued at $51 billion. Nonetheless, it is important to note that Ubers rise is not without its fair share of scandals and controversy. The apps inception triggered protests in cities such as Paris, Berlin and London from local taxi drivers threatened by its predatory prices. The app has since been banned in Berlin by the government, and the firms application for a new licence in London was initially rejected, before finally being reinstated as a probationary 15 month license (Satariano, 2018). In 2017 the sheer number of scandals was deemed too damaging for the companys image, which led to CEO Travis Kalanicks resignation in June 2017, although he remains on the board of directors (Dogtiev, 2018). Entry motivation and business environment Ubers determination to conquer the Chinese market came directly from Travis Kalanick, then Ubers CEO and co-founder, whose aggressive personality has defined the companys rise. (Hook, 2016) Quoting Allen Penn, Ubers Head of Asia Operations, Travis was personally invested in the success of Uber in China to a much greater degree than any other country. In 2015, Kalanick spent nearly one in five days in China, close to 60 days. In the other locations that Uber operates in, the company hires local chief executives, but in China Kalanick maintains a hands-on role as chief executive of Uber China. The global ride-hailing industry is a lucrative one, valued at $36 billion in 2017, and projected to increase to $285 billion by 2030 (Huston, 2017). As more ride-hailing companies join the scene, Uber faces ever increasing competition, both domestically and internationally. Foreseeing this potential trend, Uber thus decided to endeavour to gain a foothold in one of, if not the largest, financial markets in the world. China, with a projection of 221 cities containing a population of one million or more, was a highly attractive market for any internationally-minded taxi company. In 2014, for every 1000 people, there were 113 cars in China. Even with efficient public transport systems, this indicated there existed an extremely high demand for private-hire cars for business or leisure rides. From this point-of-view, Chinas ride-hailing market is significant and full of potential. (Dai, 2016) Uber was thus enticed by this potential market to tap into, and was determined to be the first foreign ride-hailing provider to establish itself in China. Moreover, entering difficult markets wasnt a novel experience for Uber, since it had previously successfully navigated diverse markets in the UK, India, and South Africa. Entry Strategy and Process Prior to entering the China market in 2013, Uber formulated a unique strategy that it hadnt employed elsewhere. It would set up a separate Chinese entity, Uber China, to attract local investors as well as maintain financial support from its parent global Uber business, which held a large undisclosed stake in the subsidiary. This was a calculated move by Uber in hoping that a Chinese company could avoid some of the restrictions faced by foreign businesses. Ubers formal launch in China came in February 2014, with the introduction of luxury car services in Shanghai, before branching out to Guangzhou and Shenzhen. At the time of its inception into China, Chinas ride-hailing industry was locked in intense competition between two local powerhouses, Didi Dache and Kuaidi Dache, who were competing for market dominance. Both Didi and Kuaidi were backed by their parent companies, Tencent and Alibaba respectively, both of which are conglomerate giants, allowing Didi and Kuaidi to engage in all- out price wars in terms of subsidiaries and incentives. (Dai, 2016). This initially allowed Uber to sneak in under their competitive radar, and increase its market share from 1% to 35% over a period of 8 months. Local Operation Subsidiary Management When Uber entered the Chinese market, it was quickly apparent that it had to change its core product. Uber was initially targeted at foreigners and expats living in China, offering an English ride-hailing service in contrast to the traditional Chinese-speaking taxi services offered. However, this resulted in Uber having a smaller market share (Fig. 3), which is why it decided to expand further into the local scene. When Didi Dache and Kuaidi Dache merged to become Didi Kuaidi, combined they boasted more than one million drivers in 360 cities in China, whereas Uber only had about 100,000 drivers in 20 cities. Figure 3: Market Share of Ride-Hailing Apps in China (Tang, 2015) Originally, to open an Uber China account, customers had to first validate their credit card information. This however, presented a major obstacle for many potential Chinese users, due to the differences in banking systems employed; Uber offered a credit-card based payment system, while most people in China do not use credit cards. Uber China recognized this disadvantage in its business approach and added the additional option of cashless payment through Alipay and WeChat, before its formal launch in February 2014 (Kirby, 2016). Beyond that, Uber was initially developed to utilised Google Maps to locate and match customers with drivers. However, Google Maps coverage in China was extremely limited and notoriously inaccurate, mainly stemming from China banning Google services. To work around this, Uber China entered into a strategic partnership with Baidu, an economically powerful and politically connected company, in December 2014. To ensure the smooth continuation of operations, Uber China also installed servers in China itself, aside from its global networks, to bypass Chinas notorious firewall (Kirby, 2016) Despite a more appealing core product, Uber still had to invest heavily to produce incentives locals to use their app, both as customers and drivers. Discount codes and coupons were offe red to new users for their first trip, often equivalent to the full cost of the ride. Similarly, drivers were encouraged to join the service by offering subsidies and bonus pay. In Chengdu, Uber drivers numbered 42,000, nearly the same as the number of Uber drivers in London, Paris, and San Francisco combined. Strategy Transformation And Business Model Revision However, Ubers encroachment of the ride-hailing market did not go unnoticed and in 2015, Didi and Kuaidi merged into a monopoly to compete directly against Uber. One immediate result of the merger was that both companies no longer had to split the market by between themselves and could focus on offering subsidies for private-hire car rides. In the beginning 5 months, the newly combined company spent $270m on subsidies for its drivers, which dramatically challenged Ubers business model. Uber was able to maintain its profit margins by keeping costs low, only deducting 25% of fare fees from drivers and allowing drivers to keep the rest. However, as their Chinese competitors were offering subsidies to attract drivers, which could lead to high driver turnover, as the smaller play Uber had to, in the words of Kalanick, follow the lead of the number one (Hook, 2016). Uber thus engaged in a costly price war with Didi, paying drivers a multiple of the passengers fare in order to retain them, causing the company to suffer fiscal losses on most, if not all, trips. Analysis and Comparison Ubers failure in China can be mainly attributed to multiple factors. For starters, the business environment in China is very insular and protectionist, which makes it extremely challenging for foreign firms to establish a foothold. On the physical aspect, Chinas infrastructure, financial markets, and banking systems are very different from those employed elsewhere in the world. Uber found it hard to leverage on the local Chinese infrastructure, which made setting up their business and developing their app difficult. On the social/cultural aspect, Chinas political scene, legal system, and regulations are complex and tough to navigate. Moreover, the Chinese practice of guanxi, ?†¦Ã‚ » (the mixing personal and business relationships) is foreign to U.S. companies accustomed to more transactional and commercial relationships with their business-to-business associations. On one hand, Uber understood the importance of establishing a steady foundation and building relationships with the correct partners. Kalanick frequently visited China to cultivate political contacts and pave the way for an extensive network of drivers. For Western companies expanding to China, it is often important to identify the right local business partners as they typically have a better situational understanding about the cultural, economic, and political environment, and can help foreign firms navigate the full set of risks they face. In Ubers case, they managed to attract the support of local investors such as China Minsheng Banking Corp, real estate developer China Vanke Co Ltd and China Broadband Capital. (Carsen Spring, 2016) On the other hand however, Ubers competitor Didi was a local company, which gave it a homefield advantage. It partnered with taxi drivers rather than individual car owners. This immediately won over local authorities and placated disgruntled taxi drivers. In addition, culturally Chinese tend to trust taxi drivers more than strangers assigned to them. Didi also a llowed passengers to pay in cash, which is a great convenience to locals as they are mostly accustomed to cash transactions. Didi eventually incorporated WeChats cashless payment system, which offered even greater convenience for passengers. The inception of WeChat posed a significant challenge to Uber, as Tencent, WeChats parent company, had invested in Didi. Sometimes, WeChat even blocked Uber from using the app, which hurt Ubers business (Hern, 2015). Apple deciding to back Didi by investing $1 billion in May 2016 (Balakrishnan, 2017) did not improve Ubers business prospects. In short, Uber was operating out of its league. Ultimately, it wasnt direct competition that resulted in Ubers demise in China; it was impending national regulations (Kirby, 2016). The nationalization of the transportation industrys regulation was bad news for a start-up that depended on the local variance in ride-hailing practises and legal grey zones. Ubers aggressive push into China was only possible by t he fact that the space was largely unregulated, in terms of pricing mechanisms, hiring practises and training methods. While the losses Uber was taking to win market share were unsustainable, likewise the same constraints apply to its rival, Didi Chuxing. Neither company could maintain the high costs of providing subsidies, and the resulting abuses from driver corruption (drivers fake trips to earn more subsidies), necessary to maintain the competitive edge, in terms of recruiting new drivers, attracting riders and establishing new markets. To provide a sense of these regulations, Xinhua news released on July 28, 2016: China Grants Legal Status to Ride-Hailing Services (McDonald, 2016). This legal status in China that is referred to while provides legitimacy to ride-hailing companies, in also shackles the way they operate. The countrys first nationwide regulation of the industry would have seriously hampered Uber, as under the new regulations, the data collected by Uber would come u nder the jurisdiction of the government. Companies would no longer be able to influence pricing through subsidies, rather prices would be determined by the free market, unless as the regulations state, when municipal government officials believe it is necessary to implement government-guided pricing. According to Xinhua, ride-hailing companies would be urged to merge with taxi companies, many of which are affiliated with local authorities. Uber would then have to get both provincial and national regulatory approval for its activities anywhere in China, which would curtail its plans for expansion, giving the amount of paperwork they would have to go through each time they want to expand to a new city. Furthermore, online and offline services would be regulated separately, which would prove taxing for Uber given that it effectively already has to manage two distinct markets: the rest of the world, and China. Moreover, foreign companies like Uber would be subject to even more regulatio ns than their competitors (Kirby, 2016). Even though Uber had been registered as a local company in the form of Uber China, its national platform would now be handled differently. And despite this supposed standardization of the industry, local governments would have the final say on issuing ride-hailing service drivers licenses and determining who is eligible to be a driver and what kinds of cars can be driven. Such governments would naturally favour local businesses over what they perceive as guailo intruders, which puts Uber at a disadvantage. This national regulation was thus an imminent disaster for Uber, yet in hindsight it was something it should have expected, given its role in justifying to the Chinese government the need for such regulations. Internationally, Uber does its best to flout or bypass local legislation and taxation in the countries it operates in (Lownsbrough, 2017). This is apparent from its development of its Greyball software in 2014, a specially commissione d shadow program that allows Uber to evade local law enforcement while offering its services illegally without detection (Sulleyman, 2017). 2016s data breach is another example of dishonesty. Uber intentionally hid from not just the public, but its own employees, that company servers had been breached and the personal information of 57 million users and drivers were stolen. To make matters worse, Uber tried to cover up the issue by paying USD100,000 for the hackers silence (Newcomer, 2017). This incident exemplified the companys end justifying means culture that was nurtured under the leadership of ex-CEO and founder, Travis Kalanick, which would have alarmed investors and government officials in China, seeing as Kalanick was the face of Uber in China, having spent so much time. Conclusion To conclude your finding on the determinants to the success or failure of the case, and show implications for managers In a way, Ubers defeat is no surprise. Chinas business world is a very different sector that few Western firms have been able to entrench themselves in (Wang, 2016). eBay was quickly overwhelmed and dominated by Alibabas Taobao service, Google retreated in the face of government opposition, while Amazon hasnt gained much footage. In retrospect, perhaps Uber could have remained independent while remaining profitable by keeping to its initial niche market of wealthy Chinese people and expats. However, in deciding to reach out for the mass market to gain greater market valuation and build on its strategy of expanding its app platform, Uber brought the spotlight to itself, in terms of direct competition and central government regulations. What Uber could learn from this experience would be to not try to compete in such a complex and difficult market alone, and avoid enga ging in self-ruinous predatory price wars (Salomon, 2016). Rather Uber should have identified local companies and partners to bridge the cultural differences, provide critical infrastructure and services (mapping and payment), and circumvent the inevitable government regulations. Additionally, local partners would be the proverbial man on the ground, being able to understand local market needs, such as consumer payment preferences and trust profiles. In the end, recognising defeat was the smartest, if not only, option left available to Uber. By merging Uber China with Didi for a 20% share of the new merged company, Uber will no longer have to endure an excess of $1 billion annual losses. Conversely, it will be able to consolidate its global offices and focus on regions it can remain competitive in, while also preventing other competitors from encroaching on its current market shares.