PROVIDE A DETAILED SWOT ANALYSIS OF UBER IN CHINA FROM THE FOLLOWING CASE STUDY
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Question
PROVIDE A DETAILED SWOT ANALYSIS OF UBER IN CHINA FROM THE FOLLOWING CASE STUDY
Uber in China: Driving in the Gray Zone (B)
“Fast forward to today and Uber China—in just two years—has exceeded even my wildest dreams. We’ve grown super fast and are now doing more than 150 million trips a month. This is no small feat given that most U.S technology companies struggle to crack the code there. That’s why I’m so proud of what our amazing China
team has accomplished.” —Travis Kalanick, announcing Uber China’s merger with Didi Chuxing, August 2016
On August 1, 2016, Uber shocked the global ridesharing industry when it announced that it would sell its operations in China to its competitor, Didi Chuxing.1 As part of the deal, Uber would receive a 20% stake in Didi, while Didi would invest $1 billion in Uber. In the announcement, Travis Kalanick complimented Uber's "amazing China team" and declared that he had "no doubt that Uber China and Didi Chuxing will be stronger together”.
For two years Uber had fought an intense, costly battle for China’s ridesharing market. Although Uber had made China central to its future growth strategy, the company faced unanticipated competition from agile, well-financed, and well-connected domestic Chinese competitors. During this time, Uber also had to respond to an ever-shifting regulatory landscape. It was only on July 28, 2016, that China’s State Council released the first national level guidelines for regulating online
ridesharing services and “recommendations” for improving the existing taxi industry. While the new regulations granted legal status to ridesharing services like Uber and Didi Chuxing, local governments were also given the discretionary power to ban ride-sharing subsidies and implement governmentguided pricing as necessary.
Given the competition from domestic rivals and the uncertainties of government regulation, was the decision to exit China the right one for Uber? What does this latest reconfiguration of the market mean for China's burgeoning ridesharing industry? What lessons could other tech companies learn from Uber’s experiences in China?
The Making of China’s Ridesharing Regulations
Like elsewhere in the world, ridesharing companies in China had difficult relationships with regulatory authorities. In Beijing, the central government struggled to strike a balance between creating regulations that would address the concerns of public, local taxi companies, and taxi drivers and maintaining support for burgeoning entrepreneurship in the country’s online economy.
After much debate, the finalized “Provisional Measures on the Administration of Online Ridesharing Services” was released by the Ministry of Transportation on July 28, 2016 and was set to take effect on November 1, 2016. Highlighting the complexity of the regulatory environment in China, before the regulation could be enacted, it had to be signed off by seven separate ministries and agencies, each one touching some aspect of the ridesharing industry’s operating environment. At the same time, the State Council issued the “Recommendations for Deepening Reform and Promoting Orderly Development of the Taxi Industry”, which aimed to provide guidance for the future direction of China’s taxi industry.
Though the new regulations were thought to be more lenient than the earlier draft version, they did leave many concerns for the ridesharing industry. The good news for ridesharing companies and their drivers was that they could now obtain legal status by applying for “License for Online Ridesharing Service" and “Transport Certificate for Online Ridesharing Service” from local governments. Contracts between ridesharing companies and drivers were also allowed to vary based on the work
time of drivers.
However, there were also new limitations. Ridesharing companies would be required to pay taxes and buy insurance for all passengers. Vehicles used by drivers would be required to have GPS tracking and security alarms installed, and would be retired after accumulating 600,000 kilometers or
8 years of service. Drivers would need to register with local authorities and be subject to criminal background checks. All ridesharing companies in China would need to store data in Mainland China for at least two years and would be prohibited from transmitting this data outside of China unless
permitted by other laws or regulations.
The “Provisional Measures” also left many things open to the interpretation of local governments, which included the authority to regulate prices. While the market was specified as the main mechanism in determining pricing, local governments were allowed to step in and direct prices when they deemed necessary. Subsidies to undercut market prices would be banned.
Meanwhile, the “Recommendations” released by the State Council called for more reform and innovation in the existing taxi industry, including better use of internet technology to facilitate online booking and the gradual elimination of franchising fees. It also called for the encouragement of private
carpooling as a way to reduce traffic congestions. The "Recommendations" also hinted at the desirability of having taxi companies with online-booking services to merge with online ridesharing companies to promote “integrated development”.
While both Uber China and Didi Chuxing welcomed the new national regulations, exactly how they would impact the industry would remain unclear until local governments adopted more specific policies in different cities.
The Merger between Uber China and Didi Chuxing
“Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there. Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term.” —Travis Kalanick, announcing Uber China’s merger with Didi Chuxing, August 2016
While a central part of Uber’s growth strategy in China was to expand into more than 100 new cities in 2016, the subsidy wars it waged against Didi Chuxing ultimately failed to grow its China presence. Estimates of Uber's overall market share in the ridesharing market ranged from 11% to 30%. By the
time of the merger, Uber had a presence in 60 cities in China, operating roughly 40 million rides per week. In contrast, its rival Didi Chuxing was operating almost 100 million rides per week across 400 cities.
The cost of the subsidies also prevented both companies from turning a profit. The successes both companies experienced in raising funds throughout 2016 also meant that both had enough capital to sustain the costly subsidy war for an undesirable amount of time. The enactment of new ridesharing regulations which prevented firms from undercutting market prices further limited Uber’s maneuverability by taking away one of its main tools for growing market shares.
Faced with the inability to grow its market share, the sale of Uber’s China operations to Didi Chuxing seemed then a viable avenue for maintaining a limited presence in China. For the sale Uber received a 20% economic interest and ~5.9% voting stake in Didi worth approximately $7 billion in
addition to a $1 billion investment from Didi. Uber CEO Kalanick was granted a seat on Didi’s board, with the same privilege accorded to Didi CEO Cheng Wei at Uber. The deal raised Uber's valuation to $68 billion. As a part of the deal, Didi Chuxing would assume control over Uber China's business operations and data, while allowing Uber China to continue to operate on its own platform during the transitional period in order to prevent service disruptions.
Letting go of the Chinese market would also help Uber stem the more than $1 billion annual loss the company was making in China. In the past Uber had claimed that its operations in some parts of the U.S. and other developed markets were already profitable. Cutting huge losses from China would help Uber remove a major obstacle on its way to an IPO. It would also help free up resources for opening new markets and fighting off competition in other parts of the world. Just two weeks after the merger with Didi, Uber announced its plans to enter the self-driving car market as well as hopes to produce a line of diver-less semi-trucks through its acquisition of San Francisco based truckmanufacturer Otto.
Post-Merger Prospects and Uncertainties
Even after Uber China and Didi Chuxing came together to announce the successful negotiation of their merger, drama surrounding the two was just beginning. On September 2, 2016, China’s Ministry of Commerce (MOFCOM) condemned Uber and Didi for not filing intent of the planned merger with the regulatory authorities and launched a monopoly investigation. This move did not come as a complete surprise since the new Didi Chuxing would control over 90% of the ridesharing market in China. Moreover, anti-monopoly lawsuits had previously been filed by Didi’s competitors when the company merged with Kuaidi on Valentine’s Day 2015.
The outcomes of the investigation remained uncertain since MOFCOM had generally adopted a hands-off approach in governing the mergers and acquisitions of internet companies in the past. Historically, out of the 1,700 anti-monopoly cases MOFCOM had investigated, only two were rejected and 27 were allowed to go ahead with additional conditions.
New local regulations that had been enacted since the release of the national guidelines for the ridesharing industry had also not been kind to the new Didi Chuxing. The megacities of Beijing, Shanghai, and Shenzhen each imposed new restrictions on ridesharing service providers, limiting driver eligibility to individuals holding local residency permits and requiring their cars to meet size restrictions. Allowing only local residency permit holders to drive would severely limit Didi's driver pool. For example, Didi claimed that only 2.4% of its drivers in Shanghai held Shanghai residency permits. Limiting the minimum wheelbase width of cars could also cut 80% of Didi’s cars in Shanghai.
Didi released public statements which criticized the new policies and stated that the company would lobby the governments to change them. During an entrepreneurship conference in Shenzhen in October 2016, Tencent Chairman and Didi ally Pony Ma appealed directly to Premier Li Keqiang to help roll back some of the recent local regulations on ridesharing. Li reportedly replied that he will ask the relevant cities to do more research into the policies. If not addressed, the prospects of further regulatory tightening and the continuing MOFCOM investigation would cast shadows over Didi Chuxing‘s plans for an IPO.
In addition to regulatory troubles, the post-merger operations for Uber China had also not gone smoothly. Two months into the merger, Uber China Vice President (and de facto CEO) Liu Zhen resigned, prompting fears of mass internal discontent. There also appeared to be potentially organized attempts to disrupt Uber's platform in the transition period as "ghost cars” that never showed up to pick up passengers began appearing on the app. There were also reports of false charges and fake trips that began and ended before a car ever arrived.
Meanwhile, it was reported that since the merger fare rates had risen in several cities possibly due to investor and regulatory pressures to reduce subsidies. Drivers began reporting decreases in demand and began to worry about their future livelihoods. Despite these reports Didi Chuxing released statements saying that it would not eliminate subsidies overnight. It was also not immediately clear whether, when, and how local governments would start to enforce the no subsidies provision in the national regulations.
Despite these setbacks, Didi Chuxing was able to address many other challenges. On the security front, Didi formed a partnership with Qihoo 360 to use ride tracking and facial recognition technology to verify the identities of drivers.27 Didi also planned to add features to its platform that would allow riders to share itineraries and request help during rides. These measures would help Didi comply with some of the passenger safety provisions in the latest national regulations.
Didi also worked to improve its relationship with local governments. For example, in the central city of Wuhan, Didi claimed that it had helped employ over 7,000 steelworkers who had either left the Wuhan Iron and Steel Corp (WISCO) voluntarily due to pay cuts or were laid off altogether due to the company’s need to cut production capacity. In fact, a report commissioned by Didi showed that the company had created some 3.9 million jobs across 17 provinces that had been ordered by the central government to cut industrial capacity. Of these, one million were filled by workers leaving troubled
industries. Doubtlessly, Didi hoped these numbers would help endear the company to both local and national authorities trying to limit unemployment and social discontent caused by the restructuring of the economy.
Lessons Learned?
“Uber is a great company. They have the best strategy in China among all the Silicon Valley companies. They are more agile than Google. They aren’t like this in other parts of the world, but in China they’ve learned to show goodwill. They are not like a usual foreign company in China, but more like a startup, full of passion, feeling like
they are fighting for themselves.” —Cheng Wei, CEO of Didi Chuxing, from interview with Bloomberg Businessweek
Though Uber’s saga in China may be over (pending regulatory approval of the merger), the growing number of China's mobile device savvy middle class consumers will doubtlessly attract more ambitious companies to enter. What did Uber do right and wrong? Did it “lose" in China? Can foreign tech companies learn to adapt to China's unique regulatory conditions or is the vast Chinese online market only meant to be conquered by better attuned and better connected native firms? How can Didi Chuxing successfully navigate the ever changing ridesharing industry landscape and regulatory environment in China while trying to turn a profit? What should Uber and Didi do if the merger is blocked by regulatory authorities? What does the future hold for Uber outside of China and the ridesharing
industry around the world as a whole?
Explanation / Answer
Uber took a bold step by expanding its operations in China. China offers a huge market potential for Uber, and it made perfect business sense for Uber to enter the Chinese market. However, China as a market has its own complexity and challenges that needs to be addressed. The 'Strength, Weakness, Threats and Opportunities' (SWOT) analysis of Uber China has been presented below.
Strength
Uber's expertise in the ridesharing industry gained through its global presence was its major strength in China as well. To enter China's market, Uber adopted the intensive market capturing strategy through expensive subsidies. Uber China was supported by the cash flows coming from Uber's profitable business in other parts of the world. This allows Uber China to fight the subsidy war with its local rival, which ultimately paid off in terms of increase market valuation of Uber China. Uber was able to capture a significant share of ridesharing market in China.
Weakness
Although Uber was facing regulatory issues in other parts of the world as well, the regulatory issues in China were dynamic and unpredictable. Uber was certainly weaker than its local competitors when it comes to regulatory issues. From the business point of view of a global company like Uber, Uber had little incentive to develop its expertise with local regulatory issues of China as compared to the opportunity its global presence presents. The only weak front for Uber in China was the local regulatory front. When the governments decided to tighten the regulations, it made perfect sense to plan an exit.
Opportunity
Expensive subsidy war in China was restricting Uber's initiatives in other parts of the world. The freed capital from China's market is being used to expand to other markets and develop new business capabilities of the Uber. This certainly opens the new opportunities for Uber. In this sense, Uber's decision to exit from China can be called a right decision.
Threat
The ambiguities regarding regulatory compliances in China offered a significant threat to Uber. Uber China had been burning capital to fight subsidy war with its rival and the last thing Uber would want is to get stuck in lawsuits related to regulatory compliances. In order to mitigate this threat, Uber would need to work and invest in improving its relationship with the local authorities which can prove very costly with high-risk scenarios.
Concluding remarks
Uber didn't lose in China, it made a strategic exit! Considering the SWOT analysis, it makes perfect business sense to plan an exit when the weak front (complexities and unpredictabilities regarding regulatory compliances) was getting complex. On the other hand, Didi Chuxing was confident of its success in lobbying local authorities to relax regulations concerning ridesharing industry. Therefore, it made perfect sense for them as well to buy off its biggest rival - Uber China. The exit from China's market offers new possibilities for uber to expand its operations in other parts of the world and find new business possibilities from introducing diverless vehicles.
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