KE1032 October 31, 2017 ©2017 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Alice M. Tybout with assistance from Broderick Lee Turner. Cases are...

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KE1032 October 31, 2017 ©2017 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Alice M. Tybout with assistance from Broderick Lee Turner. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Some details may have been fictionalized for pedagogical purposes. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail [email protected] No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing. A L I C E M . T Y B O U T Uber China The Marketplace In 2015 China had 750 million urban commuters, making it the largest commuter market in the world, roughly five times the size of the 150 million U.S. commuter market. However, Chinese car ownership was comparatively low, with only 69 car owners for every 1,000 people living in mainland China versus 786 car owners for every 1,000 people in the United States in 2014. China also had a short supply of taxis. For example, Beijing had 60,000 taxis to cover a population of 11.5 million in 2015. Taxi drivers suffered poor pay, earning even less during rush hour when heavy congestion left them idling in traffic instead of completing fares. As a result, taxi drivers sometimes refused passengers traveling only short distances and elected to take their breaks during times of peak demand (e.g., rush hour). Many urban commuters had no choice but to rely on buses, trains, and bicycles for transportation despite dissatisfaction with the reliability, comfort, and personal space these modes offered. These factors made China an attractive market for new companies offering ride-sharing and online chauffeuring services. However, ambiguity existed around the legal status of these upstart options. The Chinese government accused companies offering ride-sharing apps of providing illegal taxi services, created checkpoints to fine drivers without commercial taxi licenses, and even conducted raids of ride-share company offices, shutting them down in some cities. Nevertheless, the government also partnered with some local ride app companies to build an integrated online taxi-hailing service for the four major taxi companies in China. This document is authorized for use only in Lawrence Potter's Integrated Business Experience 1 - Q1 course at Western Sydney University, from January 2018 to April 2018. 2 U b e r C h i n a KE1032 K e l l o g g S C h o o l o f M a n a g e M e n t Uber China Uber entered China in 2013 with a pilot program in Shanghai, the country’s largest city. The ride-hailing app featured the UberBlack brand, the high-end service that delivered luxury sedans for each trip. Consistent with Uber’s process in other global markets, the app assigned drivers to requested rides using its GPS algorithms to find the closest driver. Uber also partnered with Baidu, China’s largest search engine, for maps and GPS and with Alipay, China’s largest mobile payment platform. Baidu’s partnership with Uber represented one of its competitive fronts in its effort to keep pace with the other two leading Chinese internet companies, Alibaba (Alipay’s parent company) and Tencent. Chinese consumers did not initially warm to UberBlack, complaining about the high price of the service. Instead of contracting with private car owners, as Uber did in the United States, Uber China partnered with local car rental and chauffeur companies in an attempt to sidestep regulatory issues, so the UberBlack rate far exceeded a typical taxi fare for similar distances. As a result, when Uber expanded to Beijing and Shenzen, it did so with UberX, its lower-cost service that relied on mid-size sedans. By June 2015, Uber competed in 11 of the 15 most populous cities on the Chinese mainland, and Uber China represented the largest market for Uber outside of the United States. Uber China logged more than 1 million rides per day in 2015.1 To address the needs of price-sensitive consumers, Uber China dramatically reduced its prices on UberX and introduced “People’s Uber” in October 2014. People’s Uber, a sub-brand unique to China, was officially defined as a non-profit ride-sharing program; Uber connected passengers with drivers but did not receive a portion of the driver’s earnings. (In contrast, Uber kept 20% of the total fee per ride in the United States.) This structure allowed the service to operate legally when the government cracked down on for-profit ride-sharing services. People’s Uber also helped introduce the Uber brand to the masses, with the hope that a portion of passengers would trade up to its for-profit services, UberX and UberBlack. People’s Uber based its fares on the cost of owning and operating a car, which often fell below taxi fares for comparable trips. Drivers also benefited from the People’s Uber fare structure, as they were able to keep the total fare when driving for Uber but had to pay licensing fees when driving a taxi. In its for-profit offerings, Uber China faced intense competition from local players Didi Chuxing and Yidao, which together controlled more than 89% of the ride-hailing market in 2015.2 To compete, Uber spent more than $2 billion subsidizing rides for both drivers and passengers. For example, one promotion paid first-time Uber users 30 yuan. Current users of Uber could receive a 10 yuan coupon up to three times a day, and drivers received a 10 yuan reward for completed rides up to five times a day. Although this program obviously attracted both passengers and drivers, it also led to abuse. Passengers and drivers set up fake accounts to skirt the limits on the promotion incentives they could earn. It also initiated a brutal price war with competitors.3 In addition to battling for customers and drivers by using price as a weapon, Uber China diversified its services by adding green (hybrid) car services and limousine rentals. As of October 2015, Uber China had built a business valued at more than $8 billion. This document is authorized for use only in Lawrence Potter's Integrated Business Experience 1 - Q1 course at Western Sydney University, from January 2018 to April 2018. 3 U b e r C h i n aKE1032 K e l l o g g S C h o o l o f M a n a g e M e n t Competitors Didi Chuxing In 2012, a year before Uber entered China, Didi Dache (“dache” roughly translates to “taxi calling” in Mandarin) was founded as a taxi-hailing app. It built a substantial customer base by establishing relationships with the largest taxi companies in China before branching out to offer ride shares. The company quickly became the leader in the ride-hailing market with 78.3% share by offering aggressive subsidies to both riders and drivers and by acquiring key rivals.4 Specifically, in February 2015, Didi completed a $6 billion partnership with its domestic rival Kuaidi Dache to form Didi Chuxing. Didi Chuxing’s vision was to be the one-stop travel platform for Chinese consumers, offering an array of sub-branded services named for their specific functions: Didi Taxi (taxi hailing), Didi Fast Ride (sedan ride-share equivalent to UberX), Didi Chauffeur (premium car ride-share equivalent to UberBlack), Didi Carpool, Didi Sub Driver (drivers for one’s own car when one is incapable of driving, such as after drinking), and Didi Bus (online bus booking). To achieve this goal it built partnerships with the three largest technology companies in China. As with Uber, Baidu provided maps for Didi’s app, and Alipay processed the company’s payments. The third key partner was Tencent, China’s largest internet company, which also owned the largest social media platform and the number one messaging service in China (WeChat). Didi users could hail cars with the near-ubiquitous WeChat app and pay with WePay (also from within the app). Unlike Uber’s app, which assigned drivers to passengers’ requests, Didi’s app relied on drivers to respond to passenger requests. Drivers had the freedom to choose which ride requests to accept and which to refuse. To entice drivers into accepting shorter, less lucrative trips, consumers could add a tip as part of the request. As of 2016, Didi Chuxing logged more than 10 million trips per day and boasted a value of $36 billion.5 Yidao A second Chinese company, Yidao, focused exclusively on its customized chauffeuring service and avoided competing on the basis of price. Yidao partnered with the largest car rental companies in China with the goal of building a platform for rental companies to interface with passengers. Unlike Didi Chuxing’s and Uber’s services, Yidao passengers submitted a request on the app, which then returned a list of drivers who had accepted the order. Passengers then chose a driver based on the detailed information about the driver that the app provided. As of October 2015, Yidao covered 101 cities (24 outside of China), completed more than 40,000 daily chauffeur-driven rides, and had over 4 million active users, with a value of about $1 billion.6 This document is authorized for use only in Lawrence Potter's Integrated Business Experience 1 - Q1 course at Western Sydney University, from January 2018 to April 2018. 4 U b e r C h i n a KE1032 K e l l o g g S C h o o l o f M a n a g e M e n t The Sale On August 1, 2016, after spending more than $2 billion (13 billion Chinese yuan) of the $11 billion it had raised globally, Uber sold its Chinese operation to Didi Chuxing. Two years earlier, Travis Kalanick, Uber’s CEO, had sought to invest in Didi, but Cheng Weng, the Beijing-based CEO, spurned the offer. Weng predicted even then that Didi could outmaneuver Uber in China and even unseat it as the leading ride-share company in the world. The sale involved a share-swap deal whereby Uber and outside investors in Uber China received 20% of the merged company. Through Didi’s ownership stake, the deal also gave Uber an ownership stake in Lyft, its largest U.S. competitor,
Answered Same DayFeb 26, 2020

Answer To: KE1032 October 31, 2017 ©2017 by the Kellogg School of Management at Northwestern University. This...

Shashank answered on Feb 28 2020
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1. What made the Chinese market attractive to Uber? Do you believe that Uber can succeed in the Chinese market?
With huge population struggling to find a good source of public transport, there existed a gap which was needed to be filled. Though the local comp
etitors captured some of the chunks of the taxi market, there were major areas which were yet to capitalized. Hence, there existed an opportunity for Uber. The company aggressively sought for untapped market which helped them creating a customer base in short span of time.
Uber customized its taxi ride experience to make the Chinese people feel like it is one of their own company. This was done by tying up with the payment app Alipay which avoided any credit card validation before opening an account. Another was partnering with Baidu which helped Uber overcoming the shortcomings that Google Maps was facing due to Chinese regulations in their cities. Investment was made on the local servers which connected the apps to navigate to avoid any disruptions that may be caused due to notorious Chinese firewalls. [1] The taxis’ interior was designed like local cabs that were plying in China. In one of the complements UBER was stated better than other companies which came from Silicon Valley and more agile than companies like Google. [2]
The initial success of Uber came from the driving in the gray zone of the Chinese markets. The taxi market in China was largely unregulated. There might exist a scenario that each city has their own regulatory requirements. They followed the path of many other private companies which realized very early that success can be achieved quite easily in those areas where there is lack of government or regulations do not exist. This shows the progress of this kind of startup largely depends on local variance and gray zones.
The problem might arise if regulations which are supposed to be written under new regulatory scheme start moderating the cab renting business. The regulations could handcuff the business of Uber and even create problems for other players in the industry. Apart from fierce competition from local players, another challenge that will arise for Uber is complying to the strict regulations that government has enforced. This implies government interference in every layer of implementation of business. This creates even bigger problems because Uber will be subjected to more regulations than its local competitors. [1]
For Uber to achieve success in the Chinese market, the strategy must have revolved around tackling the challenges that government regulations have created for the company and the industry. The competition from the local player then become next level challenge for the ride hailing app from US. Considering the local competition is more comfortable with the regulations laid by provinces and central government, the chances of Uber beating Didi and Yidau becomes very meek.

2. What market forces did Uber China fail to identify, underestimate or consider in relation to its market entry?
According to a research [4], when various ba
iers to entry were considered and ranked, cost advantage and capital...

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