Business environment

Uber’s bumpy ride in China

Geeta Singh, Rishi Dwesar and Satish Kumar

Introduction

The battle in China had become global. We had the sovereign wealth of China being invested in

our competition globally. We had American tech companies that were being compelled to invest

in our competitor in China. And so China battle had become a global battle [. . .]. At some point,

we realized that we can’t do everything ourselves. So we partnered in China so that we can focus

on other interesting things we are doing worldwide like Ubereats, what is going on in India,

driverless cars. There are the whole bunch of things that we needed to focus on. We could not do

everything ourselves. We did put our heart and soul in that effort (China operations).[1] -Travis

Kalanick, CEO, Uber, 2016.

I am amazed at how far Uber got. When I saw them come into the market in 2013, my friends and

I predicted they would exit quickly. I wouldn’t consider it a complete failure – they made a

merger with Didi happen! That is a big event, as competitors normally fight to the death. Uber

China has a presence and is still operating to this day (Bailey, 2016). Mike Michelini, a US social

media and e-commerce specialist based in China, 2016.

On one morning of August 2016, 24-year-old Chu He of Jiangbei District, Chongqing, in

southwestern China, opened her ridesharing app (Uber) to book a cab but she immediately

decided to take the bus instead. Usually, it cost her around 14 yuan (about $2.11) to get to

work but today the fare for the 20-min ride to her office had suddenly soared (Miao, 2016). It

had doubled with the estimated price of 28 yuan. She was not the only one, many Chinese

riders in multiple cities were complaining about the non-availability of cheap rides. This was

the result of a merger between the Chinese subsidiary of the US-based ride-hailing service

provider, Uber and its biggest rival in China, Didi Kuaidi (Didi).

In August 2016, Uber, after struggling for more than two years to generate sustainable

profits, surrendered to Didi. Consequently, Uber too joined the list of big companies such

as Yahoo, eBay, Microsoft, Qualcomm and Apple, which had been facing problems in the

world’s second-largest economy, China, to set up their businesses and gain market share.

After its official launch in China in 2014, Uber’s aggressive business model helped it

expand in the country initially. It established a separate regional entity, adapted many of its

strategies and modified its products and services to match the demands and needs of

Chinese customers. In all, Uber made efforts to win Chinese customers but all went in vain

against the market leader, Didi. Finally, to escape further losses, Uber sold its business to

Didi.

Analysts and industry experts from across the world believed that China was a very different

market with fierce local competition and tough regulatory systems. The country was well-

known for being home to the world’s most sophisticated ride-hailing scammers (Hook,

2016a), and Uber could not escape from fraud and scams in China. Despite all barriers,

Uber was optimistic about its expansion in the country until early 2016; however, soon after

the Chinese government announced new regulations governing the taxi-sharing markets,

Uber gave up and merged with its biggest rival in China. While many believed that Uber’s

Geeta Singh, Rishi Dwesar

and Satish Kumar are all

based at IBS Hyderabad

(ICFAI Foundation for

Higher Education),

Hyderabad, India.

Disclaimer. This case is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.

DOI 10.1108/TCJ-03-2018-0040 VOL. 16 NO. 2 2020, pp. 185-214, © Emerald Publishing Limited, ISSN 1544-9106jTHE CASE JOURNALj PAGE 185

late entry in China was the main reason for its failure in the country, others opined that the

merger was not a failure.

The beginning

In 2008, Travis Kalanick (Kalanick) and Garrett Camp (Camp), we’re stuck in a snowy evening in Paris and had trouble hailing a cab.[2] Camp had recently sold his business to

eBay[3] and was hanging around with another entrepreneur Kalanick (Chokkattu and Cook,

2014). The problem of finding a cab during odd hours and extreme weather made them

come up with a business idea – “tap a button, get a ride.” Working on this business idea,

the duo divided the total cost of a driver, a Mercedes S Class, a parking slot in a garage

and an iPhone app among themselves. The initial vision was to address the taxi problem by

connecting passengers with drivers using mobile technology. By March 2009, Camp and

Kalanick were ready with a prototype of their business, which they named UberCab. In

January 2010, they tested the services of UberCab in the streets of New York with three

cars. In the meantime, Oscar Salazar who helped Camp and Kalanick develop the business

model joined the startup. The business model of UberCab was very simple; it acted as a

platform where drivers with their own cars could match the needs of people who wanted a

ride (Refer to Exhibit 1 for the business model of Uber). In March 2010, Ryan Graves

became the general manager of UberCab. In this way, the car-hailing business took off as

an app to request premium black cars.

In July 2010, the company went live in San Francisco for the first time. In the next few

months, UberCab raised $1.25m in an angel financing round. In October 2010, it received a

Cease and Desist (C&D) order from the San Francisco Metro Transit Authority and the

Public Utilities Commission of California for allegedly operating as a cab company without

proper licensing.

In October 2010, the company changed its name to Uber. The app went live on Android

systems. Kalanick became the CEO in December 2010. In 2011, Uber expanded to New

York, Seattle, Boston, Chicago and Washington along with international expansion in Paris.

As the company grew, Uber faced several hurdles. It started to experience backlash for

surge pricing, especially during the holiday season. While Uber claimed that surge was

designed to ensure that passengers could request and receive a quick pickup anytime,

passengers were unhappy with sudden price hikes.[4] Apart from this, Uber met regulatory

opposition in multiple markets including internationally. In 2013, Uber entered into a deal

with the Public Utilities Commission of California, which resulted in removing the C&D order

from the company. After another round of funding, Uber stood at a valuation of $3.7bn.

In September 2013, CA became the first city to regulate ride-sharing services, which came

as a big relief for Uber. By the summer of 2013, Uber started feeling the heat of competition

from other ride-sharing services like Lyft. In 2014, Uber and Lyft blamed each other for

disruptions; drivers and employees of these companies were regularly hailing and

canceling the rides of each other’s services. Where Uber said that 13,000 trips were

canceled by Lyft employees, Lyft stated that Uber had canceled 5,000 of its rides

(Chokkattu and Cook, 2014) (Refer to Exhibit 2 for Competitors of Uber and their Valuation).

Despite facing stiff regulatory opposition in many countries, Uber believed that the

company had helped strengthen local economies of markets, improved access to

transportation and made streets safer.[5] Further, its app gave a flexible new way to men

and women who drove Uber to earn money. Over the years, Uber grew into a personal car

service that had disrupted taxi and transportation companies around the world and became

a part of a freshly evolved concept of the ride-sharing economy. The company had adapted

and enhanced its mobile application and service offerings over time to support international

growth. Uber’s mission statement, “make transportation as reliable as running water,

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everywhere, for everyone” was focused on making commuting easy for everyone across

cities (Dobush, 2018).

By April 2014, Uber was serving more than 100 cities from across the world. Among many

target countries, Kalanick was very interested in China and wanted to handle this market

himself.

The promises and pitfalls of China

Uber’s attraction to the Chinese market could be attributed to the growing demand for

transportation in China’s congested and pollution-choked cities, which required immediate

solutions. According to a report released by China’s Ministry of Ecology and Environment

2018, motor vehicle emissions have become a major source of air pollution in the country. In

2017, automobiles emitted around 436 million tonnes of pollutants (Li, 2018). Also, vehicle

exhaust emissions contributed to between 13.5 per cent and 52.1 per cent all of the major

pollutants in 15 heavily contaminated cities such as Beijing, Tianjin and Shanghai. Further, it

was not easy for anyone to buy their own car or motorcycle in China. Metropolitan cities

such as Beijing issued only a certain number of license plates per year. In 2014, the

Chinese government removed 5.3 million old vehicles from the roads of the country, which

failed to meet the minimum national standards (Duggan, 2014). This again reduced the

number of vehicles available for commuting. Comparing the number of cars available per

1,000 persons in China and the US, there was a huge difference; 83 and 797,

respectively.[6] Further, in a bid to cut traffic and smog, the city also set a rotating schedule

of “no drive” days according to the license plate number; and drivers, if caught driving on

their blackout day, were severely fined (Makinen, 2015). As of 2015, Beijing had a

population of almost 21 million residents but with only 66,600 licensed cabs (Kuo, 2015).

The country had a shortage of cabs, which made it the biggest market for the ride-sharing

economy (Griswold, 2016). The huge size and success of China’s ride-sharing economy

attracted many other companies to come to the country. As of 2015, the sharing economy in

China was valued at $299bn and China’s National Information Center projected it to grow 40

per cent by 2020, making up 10 per cent of the country’s total gross domestic product

(GDP) (Turnbull, 2016). With the country’s economy and government undergoing

restructuring and transparency reform, the Chinese Central Government was willing to

embrace ride-sharing as an integral part of the economy.

China was fast in rolling out mobile network coverage, and mobile technology had become

indispensable for the majority of the population in China. As of 2015, more than 600 million

people were using the internet through their mobile phones (McCarthy, 2018). Moreover, it

had attracted western tech companies from Google, Twitter, Facebook to Uber to capture

an untapped and huge chunk of market share in China. However, alongside the offer of

hundreds of millions of consumers, markets in China were very competitive. Analysts

believed that China had complex political structures, legal systems and regulatory rules and

its infrastructure, financial markets and banking system were relatively underdeveloped

than those in the west (Beech, 2016). All these factors made it difficult for western firms to

operate in China the same way as at home. Comparing China with the US in the ranking of

ease of doing business, as per the report by the World Bank 2015, China seemed to be a

difficult country to operate in (Refer to Exhibit 3 for the Ease of Doing Business Rank for the

Year 2015). Further, the taste of Chinese consumers was so different from Westerners’ that foreign companies had to adapt products and services to meet the specific needs of

Chinese customers.

In August 2015, the American Chamber of Commerce in China conducted a survey and

found that only 25 per cent of its members in the service sector including banks, restaurants

and companies such as Uber were optimistic about the regulatory environment in China

(Lopez, 2016). The survey found that respondents were worried about the uncertainties

associated with regulations passed by the Chinese Government. Further, it was found that

VOL. 16 NO. 2 2020 jTHE CASE JOURNALj PAGE 187

Chinese markets were so difficult that often multinationals ended up selling out to local

partners. The high chances of failure of western companies operating in China could be

attributed to its unique market, which offered tough local competition and unexpected laws

and regulations.

Uber’s entry in China

China had been attracting many multi-national companies from across the world and ride-

sharing service providers were no exception. In 2014, for every 1000 people, there were

only 113 cars in China and despite having efficient public transport systems, there still

persisted an extremely high demand for cab-sharing services (Dai, 2016).

While deciding on which city to choose to launch its services, Uber focused on cities with

heavy traffic and imbalanced supply-demand. Uber’s entry strategy for Chinese markets

was considered a relatively low-key affair (Tech and Hong, 2015). Before making a formal

announcement of entering China, the company conducted a test phase in Shanghai in early

2013, which allowed it to quickly test its success through trial and error. Soon Uber started

hiring staff in Shanghai and Beijing. Uber’s usual global expansion strategy included setting

up a local team, which took charge of operations for its own market. This strategy ensured

the localization of services, which was very important to the Chinese market. Soon, Uber’s

localization strategy was implemented in China in terms of language and support.

Finally, in February 2014, Uber made a formal launch in China with the introduction of luxury

car services in three Chinese cities as follows, namely, Shanghai, Guangzhou and

Shenzhen (Dai, 2016). (Refer to Exhibit 4 for Uber’s presence in China and across the

Globe) China was special for the company, as stated by Uber’s Head of Asia Operations,

Allen Penn, “Travis was personally invested in the success of Uber in China to a much

greater degree than any other country” (Hook, 2016a). Furthermore, in contrast to other

markets where the company hired local chief executives, Kalanick himself took over the role

of chief executive in China.

Analysts opined that given the combination of big competitors, cheap taxi prices and tough

regulations in China, this market would be the toughest challenge for Uber (Russell, 2013).

Uber’s strategies in China

Soon after entering China, Uber adjusted and adapted its strategies to meet the needs and

trends of Chinese markets. In general, Uber’s business model relied mainly on being the

first entrant to a market, and then rapidly scaling up to put its competitors at a disadvantage

to the point of a forced exit. Thus, by being first to a market, it offered subsidies to drivers

and cheap rides to passengers and generated a rapid scale. Increasing the number of

passengers further attracted more and more drivers to receive more fares (Colley, 2016).

This model made it difficult for the late entrants to attract passengers without drivers being

there to provide a competitive service level. In China, Uber entered the market when

competitors were already established, and therefore, lost its first-mover advantage. Further,

Kalanick, also believed that China was very different from other markets. As he said, “it is

just different than everywhere else[. . .]. Then, so, you cannot take your pattern or your

model for other places and take that to China. You just cannot. You have to do it differently”

(Dai, 2016) With this thought, Uber modified its existing strategies.

Establishing a separate entity

While entering China, Uber decided on a strategy that was unlike anything it had tried

anywhere else. It separated its Chinese business from the global business and set up a

separate Chinese entity-Uber China (Hook, 2016a). Uber China was a separately-held joint

venture between the global Uber business, a major investor – Baidu and other outside

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investors (Weinberger, 2016). Setting up a separate subsidiary helped Uber invite local

investors along with getting financial support from the global Uber business. Further, it was

believed that becoming a Chinese company would help Uber avoid many restrictions faced

by foreign businesses operating in China.

Changing the core product

As soon as Uber entered China, it realized that it had to change its core product. When

Uber started its business in China, it included a credit card system where customers had to

validate credit card information before opening an account on its app. However, many

potential Chinese users were not comfortable with sharing their credit card information.

Considering it as a major obstacle, Uber added another option of payment through Alipay –

a China-based third-party online payment platform (Kirby, 2016). Alipay was the most

common payment method used in the country, which Uber adopted to operate in China

(Bailey, 2016).

Uber in all of its markets used Google Maps to locate and match customers with drivers.

However, in China, the coverage of Google Maps was extremely limited and inaccurate.

Thus, Uber China had to redesign its software and switch its mapping partner. In December

2014, Uber entered into a strategic partnership with an economically powerful and

politically connected company, Baidu (Kirby, 2016). It was the first time Uber used local

offerings for maps (Huet, 2015). Baidu Maps were as popular in China as Google Maps

were in the USA. Under the terms of the partnership, Baidu invested in Uber China while

enabling the users of Baidu Map and Mobile Baidu, to connect easily with Uber drivers.

Uber planned to leverage Baidu’s strengths in mobile search and mapping through this

partnership (Dai, 2016). For the Chinese market, Uber installed some special servers to

prevent and protect its operations from getting disrupted.

Moving from English to mandarin

Uber had been offering only an English-language app across all its markets. However,

before its formal launch in China, Uber’s iOS app was updated to add simplified Chinese

features. It introduced a Chinese-language app, which was called You-bu, (“excellent step”

in Mandarin) to attract local drivers and passengers (Makinen, 2015).

Uber’s partnership with Baidu and the introduction of the Chinese language app was

considered a part of its localization strategy.

Celebrating festivals in Chinese style

In a bid to crack the Chinese market, Uber China distinguished itself from its competitors

with high-quality cars and a streamlined interface. It tried to attract Chinese clients during

special events similar to the ones the company was doing in the USA.

In 2014, on the occasion of the Chinese New Year, Uber customers were offered a

promotion to order a lion dance team to perform at their home or office. Further, when the

iPhone 6 went on sale in China, Uber users could buy it and have Uber deliver it to them.

Uber also tried out a puppy-delivery day when cute dogs were brought to customers’

offices for 15min of playtime (Makinen, 2015).

The game of subsidies

By the time Uber reached China, its two biggest competitors as follows, namely, Didi Dache

and Kuaidi Dache were on the way to achieve economies of scale in the ride-hailing market.

They offered huge subsidies and incentives to drivers and passengers (Dai, 2016).

VOL. 16 NO. 2 2020 jTHE CASE JOURNALj PAGE 189

Though Uber started its operations in China by offering high-end Uber Black cars only, by

June 2014, it initiated aggressive expansion in China and launched another line of

economic services, UberX. (Refer to Exhibit 5 for Different level of services provided by

Uber) In August 2014, it launched People’s Uber, which operated on a not-for-profit basis.

Typically, Uber generated revenues by taking a cut of about 25 per cent of the passenger’s

fare while passing the rest of the fare on to the driver. However, People’s Uber gave up any

cut of the fares. Considering the fierce competition in the Chinese market, Uber started

aggressively attracting drivers and paid its drivers a multiple of the passenger’s fare.

Following this, Uber China was losing money on most rides (Hook, 2016a).

This was not Uber’s usual move. Kalanick said, “Uber does not really do this type of thing.

But we are number two in China and we have to, in some ways, follow the lead of the

number one” (Hook, 2016a). It was believed that the company was so desperate to gain

market share in China that it started paying big salaries and incentives to its drivers. In

some cases, the amount equivalent to two to three times the fare Uber customers were

charged during rush hours was paid, apart from additional bonuses for working extra hours

(Makinen, 2015). Further, it was found that the incentives offered by Uber China per trip

were the highest in China than in any other global market of the company.

Local investment and partnership

In January 2014, the Beijing Commission of Transport released a regulation to relieve traffic

pressure and encourage non-profit carpooling. Considering this new regulation, Uber

launched People’s Uber and being a non-profit ride-sharing service in Beijing, this service

was successful and grew further after its launch in more cities.

In March 2015, the company signed a strategic cooperation agreement with a Chinese

automobile company, Yongda Auto, which became its first car dealer partner in China (Dai,

2016). Under the agreement, both parties shared resources to construct the business

model based on the automobile, finance and the internet. In April 2015, Uber entered into

another strategic partnership with the world’s largest wireline telecommunications – CDMA

mobile network and broadband internet services provider of China. The partnership helped

Uber with a package of solutions in telecommunication and advertising resources.

Another collaboration of Uber China happened in September 2015, when it signed a

strategic cooperation agreement with the National Center of ITS Engineering and

Technology, ITSC of China. The agreement’s primary objective was to collaborate on

promoting research projects based on the internet and transportation.

By March 2016, the company received funding of around US$2bn from various Chinese

investors.

The bumpy ride of uber china

Despite its localization strategies and adaptation to the Chinese system, Uber China was

still finding it hard to strengthen its hold in the Chinese market. There were many factors,

which obstructed Uber’s growth in China, including fierce competition from local taxi-hailing

and ride-sharing apps, protests from irritated cabbies, government raids and police

crackdowns, etc (Salomon, 2016a).

Intense local competition

Uber China had two big competitors in China, namely, Didi Dache and Kuaidi Dache, which

occupied the biggest chunk of the market share of the country’s taxi-hailing market. Asa

pioneer in China, the two local competitors had an advantage over Uber in reaching wider

areas. Established in 2012, Didi Dache had wider coverage with multiple lines of business

including taxi, private car service, ride and designated driving services. Thus, being a

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comprehensive one-stop consumer transportation platform, Didi Dache became a great

challenge for Uber. Within three years of its inception, Didi Dache established a large scale

of users, attracting more drivers to receive orders at any time within a closer distance.

In 2015, Didi Kuaidi (Didi or Didi Chuxing) was born as a result of the merger between Didi

Dache and Kuaidi Dache (Salomon, 2016a). After this merger, Didi accounted for 83.2 per

cent share of active users of private car-hailing apps against Uber’s 16.2 per cent market

share (Milward, 2015). The overall volume of Didi Taxi grew to as large as 10 times of Uber

China with the financial support of some of the biggest Chinese companies such as Tencent

and Alibaba.[7]In 2015, Didi had arranged 1.4 billion rides in China, more than what Uber

had managed worldwide.[8]

Uber’s strategies to acquire more market share in China failed to outperform Didi. As

opined by Zhang Yi, the CEO of a consultancy, iMedia, “for Uber, the biggest risk is from a

competitive market, not from the government” (Hook, 2016a) Further, Minyuan Zhao,

associate professor of management at the Wharton School of the University of

Pennsylvania, also said, “competition in China is strong. Throwing current incumbents off

the throne will be a big challenge” (Makinen, 2015).

By June 2016, Didi raised funding of $7bn while Uber received $3.5bn. Both companies

spent heavily on subsidies to lure drivers to sign up; however, Didi enjoyed an upper hand

over Uber. Even after initial years of rapid growth, Uber China was operating in only 60

cities and served 40 million rides per week against Didi’s presence in more than 400

Chinese cities covering 100 million journeys per week (Hook, 2016b).

Didi tempted its drivers who wanted to buy new cars by offering car loans. For passengers,

Didi’s app let them book test drives of new cars on behalf of carmakers such as Mercedes

and Audi[8].

Didi enjoyed another advantage over Uber when half a billion users of the Chinese

messaging app – WeChat were given the option of calling a Didi cab via the app (Baron,

2016). Initially, Didi gave its riders an option to pay in cash, which came as a great

convenience to Chinese but later, it incorporated WeChat’s payment system, which by that

time had become hugely popular among Chinese users (Wang, 2016). WeChat even

blocked Uber from using its app, hurting the ride-hailing company’s business. Uber had

made a similar arrangement with Facebook but the Facebook app was blocked by the

Chinese Government. Uber, being a late entrant, was at disadvantage in China as its

competitors got enough time to develop strong links with some very strong companies of

China like internet giants Alibaba and Tencent (Dasgupta, 2016).

Scammers

The local competition was something, which Uber always knew it had to face in China but

the company also had to struggle with a different threat – scammers and fraud. Given the

fact that China had been home to many ride-hailing scams, drivers and hackers exploited

ride-sharing companies to get extra subsidies without driving anyone anyplace at all. These

scammers often created fake passenger accounts for taking a ride with a driver who

received the bonus.

During the summer of 2015, about 3 per cent of Uber’s rides, equivalent to about 3,000

daily rides, were found to be fraudulent in China. The company’s managers spent several

hours to check for fraud patterns. Recalling such activities, an ex-Uber employee said,

“every Monday is payday and fraud day. The frauds that got caught were the really severe

cases [. . .] only those who do hundreds [of fraudulent trips] per week” (Hook, 2016a).

Though Uber tried to change the algorithm to keep a time gap between matching the

closest rider with the closest driver, it resulted in creating a user experience mess because

VOL. 16 NO. 2 2020 jTHE CASE JOURNALj PAGE 191

when a fake rider requested a ride and a real driver picked it up, the ride was canceled

immediately.

Analysts believed that there was no denying that subsidies had encouraged substantial

fraud. Uber stated that such activities formed only 10 per cent of total rides but various

Chinese media reports pegged it closer to 30-40 per cent (Lacy, 2015).

Mounting losses

As a consequence of intense competition and fraudulent activities going on against Uber,

the company was not able to generate substantial revenues in China. In fact, it was under

huge loss. Though by June 2016, China became the largest market of Uber and accounted

for more than a third of its global business in terms of weekly trips, the company was losing

more money in China than any of its other market in the world.

Further, Uber China spent billions of dollars subsidizing the rides to gain more and more

market share. By offering large discounts on trips (often equivalent to the full cost of the

ride), Uber’s performance became unsustainable in the long run (Isaac, 2016). On the one

hand, one of Uber’s spokeswomen revealed that they had sustainable financial strength to

win in China in the long-term (Yan, 2016). On the other hand, Uber’s biggest competitor Didi

Kuaidi, said, “Uber was using fictitious numbers and that its strategy was unsustainable and

severely challenged.” Though neither Uber nor Didi could afford the high level of subsidies

for the long-run, Didi still became the dominant Chinese player in the space because of its

wider presence (Kirby, 2016).

In its war against Didi, Uber was burning more than a billion dollars a year in China. Uber

CEO Travis Kalanick said, “We’re profitable in the USA, but we’re losing over $1bn a year in

China. We have a fierce competitor that’s unprofitable in every city they exist in, but they’re

buying up market share. I wish the world was not that way.”[9] Moreover, Uber was using its

profits from other markets to support investment in China.

Complicated status of uber China

Uber was not technically illegal in China yet many Chinese drivers believed it was illegal

(Hook, 2016a). The company experienced occasional police raids; its drivers while taking

rides near train stations and other popular destinations had to look out for police waiting to

detain them (Hewitt, 2016). In January 2015, the Transportation Commission of Beijing

declared special services of Uber illegal and in April, Guangzhou’s police and

Transportation Commission cracked down on Uber and confiscated 1,000 iPhones

(Makinen, 2015).

Further, in 2015, Uber’s branch office in Guangzhou and Chengdu also faced investigation.

The unclear status of Uber and police crackdowns posed big obstacles for the company to

operate in China.

Growing protest against uber

Another prominent problem for Uber China was protests and strikes by traditional cab

drivers of the country. There was an increasing number of incidents of attacks on Uber

drivers by traditional cab drivers. In January 2016, a non-government organization, China

Labor Bulletin, reported that in Dongguan city, around 1,000 cab drivers went on strike

demanding the government to crack down on services such as Uber.

According to Geoffrey Crothall, spokesperson for China Labor Bulletin, “taxi drivers have

always faced problems of franchise charges and competition from illegal cabs. Now you

add the vast numbers of new live hailing cars added to that competition and of course, it is

going to intensify the pressure the traditional cab drivers feel” (Fullerton, 2016). Didi

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countered this issue by preferring to work with taxi drivers rather than individual car owners,

and hence, won over local authorities and pleased taxi drivers of the country (Wang, 2016).

Further, given the fact that Chinese riders had more trust in taxi drivers than any stranger

who owned a car, this again took away passengers from Uber.

China’s national regulation

It was believed that Uber’s aggressive push into China became possible only because the

space was largely unregulated. Further, different cities in China had very different

regulatory environments. In some areas where either the government was not present or

there were no regulations, the rate of companies’ success was very high. It implied that

companies could succeed in any form of business in China if it fell into a gray zone and

ride-sharing was one such business. This made Uber optimistic about its success in China.

The nationalization of industry regulation was bad news for companies such as Uber, which

took advantage of the gray zones. The impending national regulations became a reality in

July 2016 when the Chinese government announced a new set of rules governing the ride-

hailing industry of China (Kirby, 2016).

Under the new rules, all drivers must pass a criminal check and have a minimum of three

years’ experience of driving. All the ride-hailing companies and driving vehicles must be

registered with authorities. Further, it came under the discretion of cities’ administration

where ride-hailing services were operating to set minimum and maximum prices to control

fares, which meant that subsidies would come to an end. The regulations stated that the

market prices would prevail only until municipal government officials felt the need to

implement government-guided pricing. The national regulation gave more powers to local

authorities who were free to place any additional requirements on vehicles (Spring, 2016)

(Refer to Exhibit 6 for Details of New Regulations).

The new set of rules put pressure on companies such as Uber and Didi to harmonize their

businesses with taxi operators. On the one side, Didi promised to make large investments to

integrate online ride-hailing and taxi services (Makinen, 2016). On the other side, the

differences in the culture and regulatory systems of China and the USA made it difficult for

Uber to fit into the Chinese system. Though the Chinese government legalized ride-sharing

in its own way, there were provisions, which made the business model of Uber – selling

rides below cost to push out competitors, illegal (Lopez, 2016). Experts believed that all

circumstances were stacked against Uber China.

Being a foreign company

Kalanick made efforts to cultivate political relationships in China and paid frequent visits to the

country. However, for western companies, it was always a challenge to expand in China given

that local companies had an advantage in the country’s cultural, economic and political

environment. Many experts believed that foreign companies like Uber were facing government

pressure. Analysts observed that the Chinese Government had always supported domestic

companies. According to Robert Atkinson, President of the Information Technology and

Innovation Foundation, “as President Xi Jinping took office; they have increasingly switched

from an economic strategy that emphasizes attracting foreign direct investment to one that

favors indigenous innovation and Chinese-owned firms” (Ablaza, 2016). As a result, foreign

companies such as Uber were subjected to tougher regulations than local players. Further,

Arthur Dong, a professor at Georgetown’s McDonough School of Business, said, “there is a

home-field advantage. Whether it is the state function of government policy or a less formal

policy, foreign companies are at a great disadvantage” (Ablaza, 2016).

VOL. 16 NO. 2 2020 jTHE CASE JOURNALj PAGE 193

The exit

Amidst fierce competition and unfavorable national regulations passed by the government

of China, Uber China finally surrendered in the country. On August 01, 2016, the regional

subsidiary of Uber announced its merger with its biggest and major rival in the country –

Didi in a mega-merger of $35 bn (Weinberger, 2016). While some analysts believed that

Uber’s operations in China were not sustainable in the country, and it was left with no other

option than to wrap its business in China, others believed that the newly launched national

regulations pushed Uber out. Others faulted Uber for its inability to fully understand the

country’s local culture, business dynamics and consumers. According to Jost Wubbeke,

head of the program for economy and technology at the Mercator Institute of China Studies

in Berlin, “the fierce battle for market shares was a big loss-making business for both

companies. With huge losses in China, but only modest market influence, Uber had to

surrender to Didi” (Dasgupta, 2016).

Under the merger, Uber Global would take a 5.89 per cent stake in the newly merged entity;

Chinese shareholders of Uber China, including Baidu, would receive a 2.3 per cent stake in

Didi (Cadell, 2016). In the short-term, Uber would maintain the management of its app in

China. The terms of the agreement suggested not only a financial transaction but also a

strategic alliance with Kalanick taking a seat at the board of Didi and Didi founder, Cheng

Wei, joining the board of Uber. Uber would get a 20 per cent minority stake in Didi. Further,

Didi invested $1bn in Uber, based on the later’s overall valuation of $68bn (Byford, 2016).

Uber China – DIDI merger: an easy escape for Uber?

Many believed that the merger would be beneficial for both Didi and Uber. Being an

American company and given the fact that the $2bn, which Uber spent gearing up in China

had become worth about $7bn in the newly merged entity, the deal was as good as a win

(Manjoo, 2016). According to Richard Ji, Hong Kong-based co-founder of All-Stars

Investment Ltd, “this will lead to favorable outcomes for both companies. The biggest

benefit is cost savings; they no longer have to give out subsidies to drivers and passengers.

It will give pricing power as the new entity will become the dominant player. That means

profitability will come sooner than later” (Somerville and Thomas, 2016). Further, the

partnership would help both companies recover from the losses incurred while competing

with each other.

It was believed that the Uber-Didi deal had provided a graceful exit for Uber with it getting

the best out of a bad situation. Commenting on the merger, analysts Li Yujie, said, “China is

such a tough market, in terms of regulation, competition and culture; they faced challenges

on so many fronts. Cooperating with rather than fighting Didi might not be such a bad idea”

(Newcomer and Wang, 2016). Further, the merger would help Uber to focus on its other

markets and ambitious technology projects such as mapping, delivery and driverless cars

(Hook, 2016b). Calling this merger a positive move, an economics professor at New York

University, said “the biggest existential risk to Uber over the past two months was that in

China they were losing money in a way that possibly put the rest of their worldwide

operations at risk. In the short term, it may be seen as a loss, but in the imminent years, it is

definitely a good move. Now they can put their efforts on the rest of the world” (Heffron,

2016).

Way forward

Though some industry experts believed that Uber China’s exit was mostly bad news,

Kalanick was optimistic about the future of Uber. He said, “I have no doubt that Uber China

and Didi Chuxing will be stronger together. That’s why I’m so excited about our future [. . .] in

China – a country, which has been incredibly open to innovation” (Salomon, 2016b).

However, Uber’s problems in China did not end with its merger with Didi. In September

PAGE 194jTHE CASE JOURNALjVOL. 16 NO. 2 2020

2016, some of the Uber drivers in China were using zombie-like profile pictures to scare

customers who ended up into canceling their rides (Farber, 2016). These drivers, thus,

collected a small cancellation fee. As Uber was in transition after the merger deal, it could

not handle these frauds making it an easy target for scammers.

Further, China’s Ministry of Commerce opened an anti-trust investigation into Didi – Uber

deal after it received complaints that the Uber-Didi merger did not follow the country’s

anti-monopoly laws.[10] A Ministry spokesman, Shen Danyang said that an investigation

into the deal was opened based on the Anti-Monopoly Law and Didi was summoned

twice to explain why it did not report the transaction for approval. Further, according to

Wan Yuchen of the China Market Research Group, “consumers were concerned that

there would be a monopoly, and the price would go up. Drivers are also concerned that

current subsidies would be gone. Consumers want more competition in the market at this

point” (Bailey, 2016). Uber riders in China feared price surge after its merger with Didi

and expressed their concern that the merging of services would put an end to the heavily

discounted trips.

Though there were many challenges that China posed against Uber, there were certainly

many lessons that the company learned from its journey to China. Analysts believed that the

major lessons from Uber’s journey in China were to adapt to local markets and respect local

cultures. Given that Uber did everything in China, which any foreign company was

expected to do, yet it failed. What led to Uber finally giving up to Didi? Was it the right

decision to exit out of China? Was it Uber’s late entry in China, which put it in a

disadvantageous position in the country?

Notes

1. “Battle in China became global: Uber CEO on exit from China,” www.financialexpress.com

December 16, 2016.

2. “Our Story,” www.uber.com

3. eBay Inc. is an American multinational corporation and e-commerce company, providing

consumer-to-consumer and business-to-consumer sales services via the internet.

4. “What is dynamic pricing?” https://help.uber.com, (accessed December 04, 2016).

5. “Our Story,” www.uber.com

6. www.nationmaster.com/country-info/stats/Transport/Road/Motor-vehicles-per-1000-people (accessed

September 2019).

7. “Uber Expansion in China Market,” http://daxueconsulting.com (accessed November 2, 2016).

8. “More than mobility,” www.economist.com January 30, 2016.

9. “Uber is burning through more than $1bn a year in China as it struggles to fight off ride-sharing

competition,” www.dailymail.co.uk February 18, 2016.

10. “Uber-Didi merger being investigated by China’s antitrust regulators,” http://tech.economictimes. indiatimes.com September 03, 2016.

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VOL. 16 NO. 2 2020 jTHE CASE JOURNALj PAGE 197

Exhibit 1

Exhibit 2

Table EI Uber’s business model

Key partners Key activities Value proposition Customer relationship Customer segment

Drivers with their cars Product development

and management

For customers: Social media Users:

Payment processors Marketing and

customer acquisition

Minimum waiting time Customer support Those do not own a car

Map providers Hiring drivers Prices lesser than the

taxi fares

Review, rating and

feedback system

Those who do not want to

drive themselves for a

function

Investors Managing driver

payouts

Cashless ride Those who want cost-

efficient cab at the

doorstep

Customer support

For drivers: Channels Drivers:

Key resources An additional source of

income

Website People who own a car

and want to make money

Technological platforms Flexible working

schedule with option of

working part-time

Mobile app for android People who love to drive

Easy payment

procedures

Mobile app for iOS

Drivers get paid online

Cost structure Revenue streams

Technological infrastructure Car rides on per Km/mile basis

Salaries to permanent employees Surge pricing

Launch events UberX, Uber SUV, Uber Black, etc

Marketing activities Uber Cargo, Uber rideshare, etc

Source: “How Uber works: insights into business and revenue model,” http://nextjuggernaut.com, September 24, 2015

Figure E1 Competitors of Uber and their valuation, June 2016

62.5

25

5.5

5

1.7

0.6

0 10 20 30 40 50 60 70

Uber

Didi

Lyft

Ola

Grab

Gett

Valuation in USD Billion

Valuations of leading ride-hailing companies

Source: Adapted from Griswold (2016)

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Exhibit 3

Exhibit 4

Uber’s presence across cities in China, June 2016

1. Beijing

2. Changchun

3. Changsha

4. Chengdu

5. Chongqing

6. Dalian

7. Dongguan

8. Foshan

9. Guangzhou

10. Guiyang

11. Hangzhou

12. Harbin

Table EII Ease of doing business rank for the year 2015

China US

Overall ease of doing business rank 90 7

Specific parameters

Starting a business 128 46

Dealing with construction permits 179 41

Getting electricity 124 61

Registering property 37 29

Getting credit 71 2

Protecting minor investors 132 25

Paying taxes 120 47

Trading across borders 98 16

Enforcing contracts 35 41

Resolving insolvency 53 4

Source: World Bank (2015)

Table EIII Uber’s presence across the globe, June 2016

Country Cities covered

North America 242

Central and South America 70

Europe 88

Middle East 13

Africa 14

China 37

East Asia 9

India 33

Southeast Asia 10

Australia and New Zealand 18

VOL. 16 NO. 2 2020 jTHE CASE JOURNALj PAGE 199

13. Hefei

14. Huizhou

15. Huzhou

16. Jiaxing

17. Jinan

18. Mianyang

19. Nanjing

20. Ningbo

21. Qingdao

22. Shanghai

23. Shaoxing

24. Shenyang

25. Shenzhen

26. Shijiazhuang

27. Suzhou

28. Taiyuan

29. Tianjin

30. Wuhan

31. Xi’An

32. Xiamen

33. Yantai

34. Yichang

35. Zhengzhou

36. Zhongshan

37. Zhuzhou

Source: www.uber.com, June 2016

Exhibit 5

Table EIV Uber’s different level of services

UberX The service’s lowest-cost option, which runs in everyday cars like the Toyota Prius

Uber Black It was the company’s original service, costing a bit more but running in high-end

town cars with professional drivers

Uber SUV This segment of services charged a premium for a larger vehicle

Uber LUX It is the top-of-the-line option, operating in posh rides such as Porsche

Panameras and BMW 7 series sedans

People’s Uber It was a not-for-profit service launched in Beijing to woo Chinese customers

Source: Pullen (2014)

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Exhibit 6

Main features of the regulations governing the ride-sharing industry of China

� Online car booking services will be made legal.

� The government will encourage the development of a sharing economy and online car

booking and non-cash payments.

� Drivers must have a minimum of three years of driving experience to work on a ride-

hailing platform.

� Cars cannot have more than seven seats and must be retired from service after

reaching 600,000 km.

� User information and data collected by car-booking platforms must be stored within

China and for at least two years.

Source: Russell (2016)

Corresponding author

Satish Kumar can be contacted at: [email protected]

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