Uber and its expansion strategy in China

UBER
Goes
Global:
Heading
for
expansion

in
China

Company
Background

Uber
is
a
startup
founded
in
2009,
officially
launched
in
2010
in
San
Francisco
as
a

mobile
app
platform
for
both
iPhone
and
Android
cellphones.
Its
value
proposition
is

a
solution
to
the
pain
that
conventional
taxi
users
have
been
experiencing
through
the

years,
such
as:
steep
prices,
insufficient
cabs
supply
for
an
increasing
demand,
and

others
issues
linked
to
a
poor
service.
The
core
application
functionality
is
a

matchmaker
that
allows
users
to
enter
a
pickup
location
on
their
cellphones.
Then,
an

Uber’s
driver
will
accept
the
request
to
pick
them
up
and
after
that,
they
drive
to
the

users
destinations
request.

Since
its
start
in
2009,
Uber
had
grown
over
68
countries
and
more
than
300
cities

around
the
world1.
In
August
2015,
it
reached
the
title
of
the
most
valuable
startup
in

the
world,
valued
at
$50.0
billion
as
is
showed
in
Exhibit
1.
As
an
example
of
its
rapid

growth,
Uber
announced
in
January
2015
that
it
had
more
than
160,000
active
drivers

in
the
US
who
provided
more
than
a
million
rides
a
day,
covering
75%
of
US

population
and
it
was
expected
that
the
startup
would
have
a
yearly
revenue
of
$10.84

billion
in
2015
and
$26.12
billion
in
20162.

Uber
has
come,
as
a
disruptive
innovation
in
an
industry
that
long
ago
showed
no

efforts
to
improve
its
services
in
order
to
attend
their
costumers
needs.
That
is
the

main
reason
because
this
application
service
has
been
extremely
popular
with

consumers.

The
great
success
of
the
company
has
not
been
deployed
without
problems
in
each

country
where
Uber
has
been
implemented,
and
it
has
been
criticized
from
several

sides
of
the
incumbents.
On
one
hand,
in
each
city
it
has
received
a
hostile
reception

from
unions
taxi
drivers,
who
are
at
risk
in
its
operation
and
market
share
with
the

entry
of
this
type
of
competitors;
on
the
other
hand,
state
regulators
have
put
barriers

to
normal
operation
of
this
new
type
of
transportation
service,
since
they
do
not

receive
incomes
for
taxi
licenses
and
other
taxes,
as
they
do
with
conventional
taxi

industry.
Finally,
from
consumer
side,
Uber
has
been
criticized
by
one
of
the

cornerstones
of
its
business
model
based
on
the
surge
pricing,
which
varies
according

to
the
demand.
This
last
issue
had
also
the
potential
to
raise
ethical
concerns
in

society,
for
example,
during
the
2014
hostage
crisis
in
Sydney,
Australia,
the
minimum

fare
for
a
Uber`s
ride
in
that
city
was
more
than
AU$100,
which
means
four
times
the

regular
price.
The
company
apologized
for
this
situation
and
refund
all
who
had
paid

rides
during
that
occasion3.

There
have
been
other
concerns
such
as
those
related
to
passenger
safety,
like
in
India

where
a
driver
has
been
accused
to
rape
a
female
passenger4

Uber
Business
Model

Uber
has
a
unique
business
model
that
gives
it
comparative
advantages
over
their

competition,
which
are
the
taxi
&
limousine
industry.
It
owns
no
taxi
and
has
no
cab

driver
as
employees,
clearly
an
advantage
in
the
company
cost
structure
over
its

competitors.

Its
role
or
function
is
to
match
a
driver
with
its
passengers
who
are
looking
for
a
ride

in
a
timely
efficient
manner,
and
for
this
service
Uber
will
take
an
average
of
20%
of

the
total
payment
made
it
to
the
driver.
There
are
no
cash
transactions
between
driver

and
passenger,
because
prior
to
the
first
use
of
the
app,
the
user
needs
to
enter
a

credit
card
account
or
other
electronic
mode
of
payment
(e.g.
Paypal),
with
the

advantage
to
give
a
secure
mode
of
payment
for
both
parts.

One
of
the
core
features
of
its
business
model
is
the
surge
pricing
strategy,
based
on
a

patented
technology
built-‐in
algorithm
that
automatically
adjust
the
rate
for
a
journey

based
on
the
current
supply-‐demand
ratio5

Uber
has
a
variety
of
services
as
a
strategy
to
capture
value
in
a
wide
range
of

segments
in
people
transportation:

• UberX:
the
low-‐cost
uber

• UberTaxi:
regular
taxi
provided
with
a
more
accessible
method
of

getting
a
cab,
in
addition
to
a
convenient
method
of
payment.

• UberBlack:
a
private
driver
operating
a
high-‐end
sedan.

• UberSUV:
seats
up
to
six
people
in
style.

• UberLUX:
the
finest
cars
selection.

Taxi
&
Limousine
Global
Industry

Uber
operates
in
the
taxi
&
limousine
service
industry,
which
has
total
revenues
of

$11
billion
in
the
US,
$14
billion
in
the
UK
and
$25
billion
in
Japan6.
A
variety
of

products
and
services
are
offered
within
this
industry,
such
as:
taxi
services,
leasing
to

taxi
operators,
“special
needs”
transportation
services,
limousine
services,
and
luxury

and
corporate
sedan
services.

In
recent
years,
a
bunch
of
new
app-‐based
rides
have
entered
to
this
industry,

representing
direct
competitors
to
Uber.
Examples
of
these
new
apps
are:
Lyft,
Hailo,

GetTaxi,
LeCab,
Didi
–
Kuadi,
Yidao,
among
others.

Despite
these
new
competitors
compete
for
the
same
customers
that
Uber
does,
Uber

enjoys
an
important
brand
positioning,
because
of
its
quality
and
for
being
one
of
the

first
movers
in
this
relatively
new
type
of
service.

Porter`s
Five
Forces
Analysis
(in
a
macro-‐level
perspective)

Threat
of
new
entrants
(High):

• Uber
has
34
US
patent
applications
pending7,
this
means
that
it
doesn´t
have

any
protection
over
these
processes
or
key
activities.
This
could
be
a
time

opportunity
to
the
new
entrants
to
compete
and
do
reverse
engineering
in

order
to
get
the
technologies
that
Uber
has
been
trying
to
protect.

• Uber
started
with
a
low
initial
capital
investment
of
$200,000,
an
amount
that

is
easy
to
gather
for
a
new
competitor.

Buyer
Power
(High):

• Customers
have
a
variety
of
substitutes
and
the
switching
costs
are
low
for

Uber
users
(the
app
is
free).

• Most
of
the
customers
are
price
sensitive.

Threat
of
Substitute
(High)

• Within
the
industry
of
network
transportation,
Uber
has
quite
a
few
substitutes

that
can
be
utilized
by
customers
for
transportation
(such
as
another
app`s
like

Uber,
taxis,
train,
subway,
buses,
etc.)

Supplier
Power
(Moderate)

• Uber
drivers
and
their
vehicles
can
choose
to
operate
with
rivals
such
as
Lyft

or
to
become
a
conventional
taxi
operator.

• Uber
drivers
are
not
affected
by
significant
switching
costs.

• Despite
this
situation,
Uber
has
the
power
to
set
their
rates,
and
as
they
reach

more
and
more
Uber`s
drivers,
they
will
be
enabled
to
control
supply
power.

Competitors
(High):

• Many
competitors
in
this
industry.

• Low
switching
costs.

• Fierce
competition
for
space
(cities),
and
drivers
and
their
cars.

Based
on
this
analysis
we
can
say
that
Uber
is
in
a
very
competitive
industry,
where

prices
and
profit
will
be
kept
relatively
low
in
the
future.
But,
since
is
an
immature

industry
so
far,
there
is
a
huge
potential
for
growth
that
this
company
can
take

advantage
of.

UBER
Goes
Global:
Heading
for
expansion
in
China

Uber
did
its
first
entry
to
China
in
2013
under
the
name
of
“Youbu”.
This
country

offers
interesting
business
opportunities
within
the
taxi
market,
and
specifically
for

new
ventures
as
the
app
based
companies
like
Uber.
Chinese
taxi
&
limousine
industry

still
have
several
pains
that
are
not
completely
solved
by
local
companies,
such
as:

expensive
rates
in
large
cities,
distressing
experiences
during
busy
hours
(traffic

jams),
cab
drivers
refuse
to
transport
a
passenger
if
the
distance
between
the
two

points
of
the
ride
is
short,
the
car
conditions
and
quality
service
are
inconsistent,
etc.

The
number
of
taxis
was
growing
every
year
in
this
country
(see
Exhibit
2)
alongside

with
a
rapid
growth
in
online-‐to-‐offline
commerce
(see
Exhibit
3),
which
offered
a

perfect
scenario
to
develop
mobile
application-‐based
initiatives.

Chinese
Market,
a
Big
Opportunity

By
June
2015,
Uber
had
covered
11
major
Chinese
mainland
cities
and
reported
to

have
one
million
rides
per
day,
fact
that
is
comparable
to
all
rides
in
Uber
markets

outside
United
States,
as
reported
in
December
20148.

Uber
first
entry
was
in
Shanghai
trough
the
UberBlack
implementation
as
a
premium

chauffeur
service,
but
it
did
not
have
a
great
reception
from
passengers,
given
its
high

cost
compared
to
a
conventional
cab
service
or
the
other
competitor’s
rates.
In

response,
Uber
announced
a
dramatic
price
reduction
in
Shangai
(50%
off)
in
order
to

gain
market
share
and
be
more
competitive.

In
addition
to
this
practice,
Uber
announced
the
introduction
of
“People´s
Uber”
in

October
2014,
which
led
to
an
extraordinary
growth.
This
initiative
existed
only
in

China
and
it
was
a
“non-‐profit
ride
sharing”
program
that
was
to
believe
stimulated
by

a
government
document
issued
by
Beijing
in
early
2014.
The
intention
to
implement

this
program
was
a
part
of
a
promotion
and
marketing
plan
of
Uber
in
order
to
engage

more
users
and
prepare
it
for-‐profit
products9

Local
Deals

In
order
to
get
a
closer
relation
with
its
costumers
and
gain
visibility
in
the
Chinese

market,
Uber
linked
its
service
to
Alipay,
China`s
most
popular
payment
solution.
In

December
2014,
Uber
partnered
Baidu
Inc.,
a
Chinese
giant
web,
for
mapping
support.

These
strategic
commercial
associations
were
seen
as
real
intentions
of
Uber
to
build

good
relationships
with
local
government,
leveraging
support
from
the
regulation

point
of
view.

CAGE
Analysis
for
Chinese
Uber
Expansion
Opportunities

Cultural
Distance:

• Language
could
be
a
problem
but
the
application
could
be
easily
translated
to

the
target
language
market.

• Chinese
business
culture
is
based
on
personal
connection
rather
than
a
pure

transactional
act,
which
is
the
service
that
Uber
offers.
But
since
Uber
is
only
a

digital
platform,
they
can
encourage
Chinese
driver
to
be
kind
to
their

customers
in
order
to
avoid
this
distance.

Administrative
(or
Political)
Distance:

• China
and
US
economic
trade
relationship
has
been
developed
over
the
years

as
a
solid
partnership,
giving
a
perfect
scenario
for
American
companies
to

deploy
their
businesses
in
this
country.

• The
involvement
level
of
the
Chinese
government
in
commercial
activities,
and

specifically
web-‐based
initiative,
is
known
to
be
high.
This
could
be
a
threat
for

a
company
that
operates
in
a
service
100%
Internet
dependent,
because

Chinese
government
has
the
power
to
block
this
kind
of
apps,
with
the
huge

cost
of
an
action
like
this
could
mean
to
a
company
like
Uber.

Geographic
Distance

• Since
Uber
is
an
app,
geographical
distance
it
has
been
reduced
with
the
use
of

this
technology,
and
because
the
business
model
of
this
company
doesn’t
own

cars
or
other
physical
assets,
there
is
no
need
to
export
this
kind
of
goods.

• Technological
distance
is
not
a
problem,
since
Chinese
use
of
mobile
platforms

is
currently
updated
and
experiencing
significant
growing
rates.

Economic
Distance

• China
had
a
GDP
per
capita
of
$15,184
(PPP
in
2015)10,
and
this
index
has
been

growing
over
the
years.
This
fact
is
reducing
distance
in
order
to
implement

new
investments
in
the
country.

• Growing
rates
of
taxi
industry
activity
is
a
good
signal
to
develop
businesses

like
the
Uber
proposal.

From
this
analysis
we
can
conclude
that
the
expansion
plan
of
Uber
within
the
Chinese

market
is
a
viable
strategy
given
the
conditions
offered
by
this
country
to
the
claims
of

the
company.
China
offers
great
growth
opportunities
in
niche
applications
for
the

transport
of
people,
despite
the
current
scenario
where
Uber
is
distant
third
player

with
a
8,4%
of
market
share,
following
to
Yidao
with
10,9%
in
a
second
place
and
Didi

Kuaidi
with
78,3%
in
first
place
as
the
largest
Chinese
online
chauffeur
player
(See

Exhibit
4)

What`s
Next?

In
order
to
be
a
success
competitor
in
China,
it
should
implement
various
strategies
to

gain
market
share
to
its
competitors
such
as
Didi
Kuadi
and
Yidao.
Some
of
them
are:

• In
order
gain
confidence
from
the
government,
Uber
should
partner
with
local

government
and
local
companies
trough
joint
ventures
or
commercial

agreements.

• Uber
needs
to
better
understand
local
demand
for
transportation
methods.

This
can
result
in
adding
more
services
or
products
to
the
actual
mix.
For

example,
it
can
add
compact
city
cars
in
large
cities
and
motorcycles
in
rural

areas
with
cheap
fares,
or
can
be
extended
to
another
dimension
like
delivery

services
as
Fedex,
but
with
private
cars.

• More
investment
in
marketing
and
promotions,
in
order
to
get
customers

attention
and
loyalty.
Through
this
strategy
Uber
also
can
gain
public
support

and
reduce
the
public
negative
concerns
of
possible
future
problems
with

regulators.
This
last
topic
is
one
of
the
main
reasons
why
Uber
is
having

troubles
in
its
international
expansion
strategy
(see
Exhibit
5).

• Finally,
Uber
needs
to
implement
innovative
strategies
to
improve
profitability

in
Chinese
market
in
order
to
get
a
sustainable
operation
in
that
country,

because
it
has
been
investing
considerable
amount
resources
in
projects
to

gain
visibility
within
customers
that
are
causing
reduction
in
profit
margins
in

the
short
term.
To
solve
this
issue,
they
need
to
find
a
well-‐balanced
strategy

that
allows
them
on
the
one
hand
to
gain
market
share
and
awareness
from

customer,
and
on
the
other
hand
to
improve
their
profit
margins.

EXHIBIT
1:
THE
WORLD`S
TOP
10
STARTUPS

EXHIBIT
2:
TAXIS
IN
CHINA,
2005–2013

EXHIBIT
3:
ONLINE/MOBILE
MARKET
IN
CHINA,
2010–2013,
AND
ESTIMATES

FOR
2014–2017

EXHIBIT
4:
CHINESE
ONLINE
CHAUFFEUR
MARKET,
FIRST
QUARTER,
2015

EXHIBIT
5:
UBER`S
TROUBLE
SPOT

Source:
http://mashable.com/2014/12/17/uber-‐map/#4jbWnMHwLGqu

ENDNOTES

1
Uber
official
site,
Our
Cities
-‐
Uber

https://www.uber.com/cities

2
“Uber
seen
reaching
$10.8
billion
in
bookings
in
2015:
fundraising
presentation”

http://www.reuters.com/article/us-‐uber-‐tech-‐fundraising-‐idUSKCN0QQ0G320150821

3
“Uber
Charged
4
Times
Its
Usual
Rate
During
Sydney
Hostage
Siege,”
Time
Inc.

http://time.com/3633304/uber-‐sydney-‐hostage-‐surge-‐pricing/
4
“Uber
cab
service
banned
in
Delhi,
accused
sent
to
3-‐day
police
custody”

http://indianexpress.com/article/cities/delhi/uber-‐cab-‐driver-‐a-‐repeat-‐offender-‐
jailed-‐earlier-‐in-‐a-‐rape-‐case/

5
Xiaoke Xu, Xin Wang and Neil Bendle. UBER: MANAGING A RIDE IN CHINA Case
Study. Richard Ivey School of Business Foundation.
https://hbr.org/product/uber-‐managing-‐a-‐ride-‐in-‐china/W15425-‐PDF-‐ENG

6
“Waiting
on
the
Uber
IPO”

http://www.techinvestingdaily.com/articles/waiting-‐on-‐the-‐uber-‐ipo/463

7
“UBER
TECHNOLOGIES,
INC.
Patent
Owner”

http://www.patentbuddy.com/Company/Profile/UBER-‐TECHNOLOGIES-‐
INC./1957650

8
“Uber Is Logging 1 Million Daily Rides in China — as Many as the Rest of the World,
Combined”
http://qz.com/426561/uber-is-logging-1-million-daily-rides-in-china-as-many-as-the-rest-of-
the-world-combined/

9
“Behind the Price Cut,” Sohu News,
http://auto.sohu.com/20150324/n410251796.shtml
10
“Economy
of
China”

https://en.wikipedia.org/wiki/Economy_of_China

Uber and its expansion strategy in China

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