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Uber’s Expansion into China

Uber’s Expansion into China

Uber’s Expansion into China

Introduction

In 2013, Uber, a car-hailing mobile app company founded in the United States entered the Chinese market. The decision was motivated by the firm’s desire to serve the huge Chinese market as per its global expansion agenda. By the time, the taxi company had a strong footing in 41 countries around the world. However, the Chinese market was not easy to set up as the company had expected. Uber faced fierce competition from other players operating in the country. Most of the rivals were locally owned and comprised of Tencent-sponsored Didi and Alibaba-sponsored Kuaidi. Uber adjusted its services to the preferences of the Chinese customers as a localization strategy. It adopted low costs as a marketing and competing strategy, allowing its customers to enjoy better discounts on fares. The firm also offered subsidies to its drivers to expand its market share. The strategies Uber used failed and it was forced to sell its stake to Didi and exit the Chinese market.

The Merger of Uber-Didi

After enduring stiff competition from local taxi companies for long, Uber realized that its low-cost strategy was not rewarding. The company was forced to dispose of its stake and exit the new market two years later. Before Uber’s entry into China, Didi and Kuaidi were working hard to attract riders and drivers (Reddy, Zheng, Dong, and Mathur n.p). These companies utilized attractive discounts and subsidies to increase their market share. However, after entering China, Uber built a strategic collaboration with Baidu, one of the country’s largest Internet providers in an effort to compete with the two local competitors. Thereafter, Didi and Kuaidi formed a monopolistic merger that became a formidable rival to Uber. Moreover, the new firm controlled more than 95 per cent of the ride-hailing business in China (Reddy et al. n.p.). After investing billions of dollars to change the status quo, Uber discovered that its efforts were futile. In August 2016, the company opted to merge with its competitor Didi, which had acquired Kuaidi a few years earlier. Although the strategy seemed unorthodox, Uber had no choice.

Government Regulations

Uber worked in an environment characterized by tough regulations against foreign firms.  In addition, the country did not have clear laws governing the taxi services, especially those relating to foreign-owned firms (Hook n.p). Uber’s chief executives in the country spent a lot of time to get the necessary operating permits. Coincidentally, Beijing was working on some regulations intended to govern the taxi sector. The focus of the new policies was the different types of taxi service products such as ride-sharing. Some of the earliest drafts of the regulations proposed to prohibit ride-sharing in privately-owned cars (Hook n.p). The lack of clear regulations governing taxi operations in the country made taxicabs and their drivers susceptible to impounding and arrests. In fact, many Chinese drivers offering services to the company believed that Uber was illegally operating in the country (Hook n.p). As a result, most of the company’s drivers avoided routes they expected to meet the police. Its drivers were frequently sharing information regarding new traffic-police checkpoints to avert possible confrontations. The drivers could even force passengers to alight before reaching their destinations whenever they spotted traffic police. In addition, the police could take advantage of the lack of clear policies relating to taxi service sector and the unofficial registration of Uber in the country to raid the company’s offices and frustrate its staff. Some of the company’s drivers arrested by the police were forced to pay large sums of money to regain their freedom. The experiences of some of the customers with the company’s drivers and the widespread belief that its operations were illegal in the country made the taxi service provider lose a huge number of potential customers. Nevertheless, the company was not officially barred from operating in the country. However, some of these experiences discouraged Chinese drivers to work with the firm. The situation was different for Didi and Kuaidi despite the lack of regulatory measures. In fact, the two firms merged and started a similar service in April 2015 (Timmons, n.p.). There was no law that Uber could refer to claim entitlement to this taxi service product.

Market Challenges

Uber’s future in China seemed bleak from the start. The taxi service provider encountered stiff competition from local firms. The situation was made more complicated by the pricing regimes in the country’s taxi industry. Taxi drivers were paid a percentage of the customers’ fares by all firms. However, the commissions Uber offered to its drivers were higher compared to its rivals. The company took 25 per cent of a client’s fare and gave the rest to the driver (Hook, n.d). For this reason, it paid its drivers multiple earnings thereby reducing its profitability. Moreover, it charged its customers less compared to other taxi operators. As a result, it was making losses throughout its operations. In fact, it was losing more than US$1 billion annually in the new market (Wang n.p.). Due to the persistently stiff competition, the company was forced to keep the costs low yet it was making a lot of infrastructure investments (Wang, n.p.). Therefore, it was hard for the company to fund market studies and its operations. The continued competition and losses forced the firm to sell its stake and withdraw from China in August 2016.

Uber late entry to China placed it at a disadvantageous position. At the time of the entry, its rival Didi already had an extensive presence in most of the country’s cities. After settling in the new market, Uber relied on Google maps, which were not effective in China. It later switched to the more effective Baidu maps but it was too late. At the same time, the taxi operator relied on a credit-card-based payment system that was unpopular in China (Hook n.d). The local competitor Didi provided clients with several payment systems including cash and WeChat. These factors show that Uber had not done enough feasibility studies in the new market and was bound to fail in its endeavors to serve the Chinese market.

Uber had challenges accessing internet service providers in the new market. China’s internet sector is different from that of other countries around the world. The complex system made it challenging for western firms to operate in the nation. eBay failed to withstand, Google withdrew, while Amazon has not succeeded in gaining footage in the country. The experiences of these companies indicate that operating in China is almost impossible for western firms. On that note, the expectation was that Uber would eventually be unsuccessful in the nation. In addition, the internet providers’ preference for local firms made the situation worse for Uber. The company also suffered from the challenge of fraud. China accounts for the most sophisticated scams in the ride-hailing industry. Taxi drivers and hackers in the country collaborate to steal from foreign firms. Consequently, Uber suffered huge losses after paying drivers fraudulently.

Conclusion

Uber experienced many challenges in its quest to penetrate the Chinese taxi market. The firm found well established and performing local providers such as Didi and Kuaidi. In response, Uber entered the market and used low-cost services to its customers and paying its drivers huge bonuses. The commissions paid were not based on the money generated by offering services. The losses increased because of fraudulent drivers who collaborated with hackers to manipulate the firm’s phone application. Rivalry increased significantly after Dudi and Kuaidi merged to form a monopolistic company. Uber’s operations were also hampered by the lack of a reliable Internet provider. It was also unable to work with the complicated Chinese internet system. The challenge Uber faced resonated to that of eBay, Amazon, and Google. In addition, the map application the firm used was not operational in China. China also lacked legislation and rules which could facilitate Uber operations in the nation. Therefore, the company was not legally recognized in the country, which made potential clients and service providers cautious. Even after investing a huge sum of money in China and adopting all possible measures to survive in the market, Uber was unsuccessful. Consequently, the company opted to merge with its main competitor Didi in August 2016, ending its operation in China.

Works Cited

Hook, Leslie. Uber’s battle for China. FT Weekend Magazine, June 2016, https://ig.ft.com/sites/uber-in-china/. Accessed 14 April 2019.

Reddy, Srinivas K, Zheng Zack Wang, Dong Deckie He, and Mathur Sarita. Taxi Wars: Uber in China. Center for Management Practice, 2019.

Timmons, Heather. All the things that went wrong for Uber in China. Quarts, 1 August, 2016, ttps://qz.com/746990/all-the-things-that-went-wrong-for-uber-in-china/. Accessed 14 April 2019.

Wang, Helen H. Three lessons from Uber’s defeat in China. Forbes, 12 August 2016, https://www.forbes.com/sites/helenwang/2016/08/12/3-lessons-from-ubers-defeat-in-china/#20de50cc69cb. Accessed 14 April 2019.

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