Reference no: EM133187829
Case Study 1 Alternative Assignment
Read the Uber in China case study, then answer the following questions:
1. What factors in the external environment (PESTELE), led Uber to believe China was a good country to expand their operations? Give at least two examples.
2. Uber entered China through a separate Chinese entity comprised of Uber and Chinese firm Baidu. What are two reasons Uber thought that the joint venture strategy was needed for China?
3. What factors in the external environment (PESTELE), presented challenges to Uber attempt to expand in China? Give at least four examples identify which eternal environmental factor the example is categorized under.
4. What is your recommendation for what Uber could have done differently in their expansion in China?
Uber's bumpy ride in China VOL. 16 NO. 2 2020, pp. 185-214, Emerald Publishing Limited, ISSN 1544-9106 / THE CASE JOURNAL
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 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 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 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 ridesharing 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