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

Ubers 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 doesnt 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 competitors 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 Peoples 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 doesnt 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, 20052013

EXHIBIT 3: ONLINE/MOBILE MARKET IN CHINA, 20102013, AND ESTIMATES
FOR 20142017

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