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