Reference no: EM133097735
Case Study: Uber Technologies Inc.
Company overview
Uber Technology Inc. (Uber) was established in March 2009 in San Francisco by Garrett Camp and Travis Kalanick. At the time, Camp was still the CEO of StumbleUpon Inc., a company he had co-founded, while Kalanick was a co-founder of Red Swoosh, a peer-to-peer file sharing company. Identifying the need for a fast and reliable transportation service in densely populated areas, the pair came up with UberCab, which was originally a luxury car timeshare company that was operated based on an iPhone application. The underlying idea behind the creation of Uber was to employ non-professional drivers to use their personal vehicles to transport customers by using an iPhone application that facilitated communication between the two concerned parties (e.g. the taxi driver and the passenger). Having already pre-loaded their credit card information through the smartphone application, the customers digitally paid their fare once the ride was over.
Historically battling with regulations around the world
Shortly after the launch in San Francisco, in October 2010, UberCab encountered its first roadblocks, as the metro transit's authority issued them a cease and desist order for operating like a taxi company without required licenses. After changing its name to just "Uber", the company was able to get around the regulation because unlike a taxi company, Uber pre-arranged customer pickups and did not acquire curbside customers. By late 2011, Uber had raised US$49.5mn through angel investments made by large entities across the country, including The Goldman Sachs Group, Inc. and Bezos Expeditions, LLC (founded by Jeffrey P. Bezos, the founder of Amazon.com, Inc.), while it was valued at $330mn. As of March 2016, Uber was valued at more than $50bn, making it the most valuable start-up in the world.
Uber expanded internationally into Paris, France in December 2011, Vancouver, Canada in March 2012 and London, UK in July 2012. Like in the USA, there was also some pushback from taxi union groups, including a violent riot on the streets of Paris in June 2015. Uber had also been banned from operating in other international cities, like Brussels, Belgium and Berlin, Germany. Despite all of the difficulties Uber was facing, the company had always focused on the original idea of achieving fast growth with more rides in more places, most of the time by undercutting the competition based on price, even at higher costs and losing money. The reason behind this aggressive strategy was its ambitious strategy to become "too big to ban." As of June 2016, Uber operated in 465 cities worldwide, in 75 different countries. Several other companies across industries had tried to emulate Uber's peer-to-peer business model (P2P), an emerging trend commonly referred to as "Uberisation." Aggressive mode of expansion
Uber's financial position had been increasingly scrutinized by investors because of its continuing fundraising. Unofficial reports being revealed to the public indicated that Uber' net losses grew faster than its net revenues between 2014 and the first three quarters of 2015. In particular, its revenues increased 134 per cent, to $1.16bn, while losses grew 151 per cent, to $1.68bn. The increased losses were primarily a result of higher sales and marketing expenses. For instance, net revenue rose 30.8 per cent between the first and second quarters of 2015, while sales and marketing costs doubled to nearly $200mn during the same period.
The rising losses also reflected Uber's aggressive expansion efforts in emerging markets like China and India, where the company struggled to gain market share against strong local competitors. In China, the world's largest transport market, although Uber did not face major regulatory challenges, it had spent several millions to catch up with its local rival Didi through a price war. Yet Didi, which received $1bn funding from Apple Inc. in May 2015, claimed that its share of the Chinese market was still around 87 per cent. Considering the progressive saturation of the ride-hailing apps market, Uber began to diversify into other on-demand markets. It had a division called UberEverything, which was tasked with identifying opportunities outside of its rides business. In 2015, the company launched UberRush, an on-demand package delivery service for online sellers in San Francisco, Chicago, and New York. In March 2016, it launched the food delivery app UberEats. Kalanick had also revealed his plans to eventually introduce a driverless-car transportation service by 2020.
Uber in South Korea - A first failed attempt
After three months of providing a free service to test the market, Uber quietly launched its UberBLACK service in Seoul in September 2013, this was a luxury service that was mostly used in the business world. The launch was quiet because Uber knew that the scope of its service was in theory limited by regulations in South Korea, which allowed any paid chauffeur services to only certain groups of people, such as foreigners or people with special needs. Although being aware of this limitation from the beginning, Uber figured that it was not actually observed and thus it started the operation without worrying too much. The operation seemed to work for a while. However, only in August 2014, when the company introduced UberX and UberTAXI, did things begin to go wrong. UberX was the most common and least expensive among Uber's services. Unlike UberBLACK, UberX did not require drivers to own a commercial license and high-end vehicle. Anyone over 26 years old with a proper license and an insured car could be a driver. As for UberTAXI, it was much less controversial, as it was just a platform that connected users to licensed taxicabs. Immediately after the launch, UberX faced anger from local taxi drivers, being upset that amateur drivers were undercutting their fares. Whereas Uber did not require that its UberX drivers have any special licenses, private taxi drivers in Seoul were reportedly expected to pay around W70 million ($60,900) for the proper documentation. In response to such rising anger from local taxi companies, the Seoul authorities opposed Uber's operations. On December 24, 2014, South Korea became the first country to indict Uber on violating the Passenger Transport Service Act. As Kalanick refused to stand trial in the nation, the city passed an ordinance that would offer a reward of up to W1 million ($870) for those who reported Uber's illegal activities. Uber commented that the ordinance was a "predatory move". The company even offered UberX for free in February this year to grow users' appetite for the service while negotiating with the government. But several weeks later, the company bent to mounting pressure and shut down UberX on March 6, 2016, two weeks before Seoul prosecutors charged Kalanick and nearly 30 other Uber's employees for running an illegal taxi company. UberTAXI continued operating but was quickly overtaken by a homegrown rival KakaoTaxi, which had just entered the market.
Re-entry strategy
After suspending UberX, Uber began working with the city and federal governments to revise the service in compliance with the law. New national and city rules that enabled the launch of KakaoTaxi Black had also allowed UberBLACK to widen its service offerings. As a necessity at the peak of the crisis, Calvin Kang replaced the former General Manager. His new approach was softer and humbler, as if attempting to undo the damaging image of an aggressive foreign company that expected the local market to bend to its will. Some said that this new approach reflected a company-wide strategic change at Uber's operations around the world. In November, Kang announced the relaunch of UberBLACK, provided by veteran taxi drivers and open to everyone. He said agreements had been reached with the local government, who had "recognized the ability of services like Uber to benefit citizens and provide a reliable transportation option across the city, at any time of the day" (Ramirez, 2015). Also, trying to improve Uber's image among taxi drivers, he said: "No one knows Seoul better than veteran taxi drivers, so we're pleased to be working with them and providing Uber's technology and service expertise in order to serve Seoul citizens and improve drivers' livelihoods". In relaunching the service, Uber partnered with a local carmaker Kia Motors, which offered would-be drivers a discount on its luxury K9 sedan and the Mappy navigation system developed by an affiliate company. The K9 price without discount was W48.99 million ($42,621.3). As of December 2015, Kia Motors was 33.87 per cent owned by the Hyundai Motor Group.
"Uber's innovative technology is absolutely aligned with our philosophy of ingenious thinking and continuously challenging new frontiers", said Cho Yong-won, head of sales at Kia Motors.
QUESTIONS
- Describe Uber's early international strategy. Explain what is meant by 'too big to ban' according to the case study?
- Explain the challenges that Uber faced when expanding operations to overseas markets? Please use the case study to support your answer.
- Discuss how Uber adapted its strategy when (re) entering the South Korean market?