18 May 2015

The Trials and Tribulations of Uber in China

App-based transportation network Uber has experienced rapid worldwide growth and the controversial service is now muscling its way into Asian markets.

But it hasn’t all been plain sailing for the taxi hailing app in China’s feisty environment. Uber offices have now been raided in two separate Chinese cities and the use of private cars for taxi rides has been banned. With the merger of Uber’s two main local rivals, both of whom rely on regular taxi drivers rather than private cars, there’s fierce local competition. So, what can other brands learn from Uber’s experiences in China?

Like many of the most stratospheric success stories of recent times (like Airbnb and Ebay) Uber works by connecting people and enabling peer-to-peer transactions, letting users fulfil each others’ requirements. In the case of AirBnB, it’s for accommodation; for Uber it’s transportation. That’s quite a new business model even compared to earlier web businesses such as Amazon or the ill-fated Webvan, where players actually owned stock or infrastructure themselves. Instead of owning product and fulfilling services, Uber works by putting buyers and sellers in touch with one another.

Uber’s flawed model

This new model of business isn’t without its flaws. It’s a system based on offloading responsibilities onto other parties who may not fulfil them adequately.

In the case of Uber, there’s quite a lot that can go seriously wrong from a safety point of view. In San Francisco an Uber driver was accused of running over a pedestrian; in India a driver was accused of raping a passenger. Uber’s body of drivers consists essentially of many thousands of independent contractors and it’s all but impossible to ensure these drivers comply with local requirements for safety, such as safe working hours, and insurance.

Although Uber has experienced amazing growth across the globe, it certainly hasn’t been without controversy or localised failures. It’s been banned in places including India, Thailand and Belgium. Uber’s being sued in Portland, Oregon, and exited the US state of Kansas after legislators insisted the company had to carry out background checks on all its drivers and make them carry additional insurance on top of their own private car insurance to cover their professional responsibilities. There are also some cities, usually those where promotion wasn’t sustained after initial launch, where the service hasn’t caught on.

In general though, Uber tends to spread vigorously through word of mouth and the use of member-get-member discount codes. Whilst authorities wrestle with Uber’s ‘Wild West’ style of business, it’s a popular service with its customers who prefer being able to hail a ride straight to where they are, without having to flag one down. Customers also find it’s often a cheaper ride than licensed taxi firms – but that’s partly because Uber drivers aren’t complying with the same regulations that established taxi companies have to operate within.

Unsurprisingly, Uber is deeply unpopular with many professional taxi firms who point to the deeply unfair nature of the competition it introduces. Uber drivers dodge expensive licensing requirements faced by taxi firms – also a source of revenue for local authorities.

Don’t be fooled by the setbacks however: on average the service opens in a new city nearly every day. From its inception in San Francisco back in only 2011, Uber spread first to the US East Coast and then to Western Europe. It’s now aggressively penetrating many Asian countries, in particular the lucrative markets of India and China.

The raids on Uber offices in Guangzhou and Chengdu are just the most recent examples of the multiple legal and regulatory challenges that the transport app has to respond to in the various markets in which it operates.

Insurance is likely to be one of the biggest barriers to operations – because it uses private rather than licensed drivers, Uber’s drivers are unlikely to have the requisite professional insurance. Well-organised driver unions are fighting tooth and nail against the service in cities like London. There’s also the question of tax avoidance by foreign firms – an issue on which the government has toughened its stance.

China’s powerful taxi lobby

Over in China, the sudden clampdown on Uber by the authorities seemed to be in support for local taxi drivers. Local established drivers organised themselves to protest against the incomer – showing themselves to be a powerful lobby that the authorities may have been keen to placate.

There does seem to be a strong tendency for authorities to find always in favour of the local plaintiff against the incomer in China. That’s perhaps the key lesson to be learned from Uber’s experience in this market. In any dispute, foreign organisations are usually at a disadvantage as authorities side with local incumbents. The authorities have an instinctive desire to avoid organised domestic protest and there’s also a high degree of xenophobia working against foreigners.

The fact is, Uber’s adventure in China wasn’t as make or break as it might have been for a brand with a more conventional business structure. As a transaction facilitator, it has low cost operation and one that is easy to scale up when compared to other more traditional types of operation, such as bricks-and-mortar retail stores.

Whilst it’s true that Uber did adapt itself to the local market, in the long term the service essentially only faces the costs of operating a web presence.

When Marks and Spencer’s entered China, it faced the cost of installing water tanks in the food hall to sell live fish and organising a huge supply chain. Uber’s costs of scaling up are minute in comparison. Other brands should be aware that the higher the cost of entering the market, the greater the risk for them if they run into the kind of operating problems recently experienced by Uber.

Uber’s approach to new markets

For a young startup, Uber has almost unprecedented focus when it comes to tackling the big markets such as China and India. It typically approaches a new market by bringing in a dedicated but fairly lightweight team, building out from its initial country location.

In China the company first tackled Shanghai, the most common starting point for any brand entering the country, then spreading operations to Guangzhou, Shenzhen and Beijing. To distinguish itself from local rivals, Uber initially took a high-end approach, offering a luxury service to customers.

Catering to the top end of a market to avoid clashing with low-cost operators is the usual approach for Western brands entering this market. The service also partnered with a major local player, Baidu. Not only did that introduce capital but Baidu also provided technological input, helping Uber to localise its mapping and payment systems and establish a presence on China’s largest search engine.

Right from the start, Uber was up against strong local competition. Rivals were backed by giants such Tencent and Alibaba and the two main competitors later merged. But what was significant was that the local rivals used professional drivers rather than Uber-style private cars. When the authorities clamped down it banned the use of private cars, this allowed local rivals to continue operating.

Business models such as Uber’s make governments uncomfortable. With little physical presence, it’s hard to tax and regulate them. Local authorities are still figuring out ways to adjust to this new ‘Wild West’ style of doing business. Many local people supported the clampdown on Uber in Kansas. In an authoritarian economy such as China’s, it’s perhaps not surprising that the local authorities took a closed-minded approach to a disruptive force they had little ability to control.


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