Case Study of Entry of Uber in China Market

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Table of Contents

Introduction
Analysis of the Problem
Recommendation
Reference

Introduction

Uber faces some challenges with its entry into the Chinese market that were not previously present with its entry into alternative markets in the United States and other countries. The first major challenge that Uber faces is stiff competition from companies such as Didi Kuaidi, which offers similar services to Uber, and Yidao, primarily an application for booking chauffeurs. The permeability of these applications and their inherent relations with Chinese users makes them a significant challenge to the success of Uber in China. The second challenge is the ubiquitous attitude that the government has toward ride-sharing apps such as Uber and Didi (Xu et al., 2015).

The applications operate in a grey zone with no clarity on whether they are legal or illegal. The third challenge for Uber is to find a customizable and profitable platform on which it can base its Chinese operations because, as the corporation stands in China, it is consistently making losses due to price wars with the major competitors.

Analysis of the Problem

Competition

The first major problem for Uber is the stiff competition it faces from ride-sharing companies already established in Chinese cities. Uber entered the Chinese market in July 2014 with a plan to outcompete the existing ride-sharing apps and become the primary taxi service in Chinese cities. The company tested the market first with Uber Black in Chinese. Uber Black is a luxury offering granted to individuals willing to pay more. The reason for opting for sedans was that the company could work directly with car-hire services and avoid the regulatory frameworks surrounding private individuals using their cars as taxis (Xu et al., 2015). However, the fare for an Uber Black was higher than a regular taxi, which dissuaded individuals who were simply looking to get a cheap ride from one point to another.

For this reason, Uber decided to slash the prices by fifty percent on base fares and thirty percent on per-kilometer fares. To truly make a dent in the Chinese market, Uber created the ‘People’s Uber’, hailed as a not-for-profit sort of Uber. The company did not make any money from the drivers, but the drivers themselves would keep all the financial revenues they gathered from their trip. Uber raised about $2.4 billion for developing the Chinese and Asian markets, meaning it was not profitable the entire time (Xu et al., 2015).

Most of these funds went into giving first-time riders coupons and extending financial favors to the drivers based on the number of rides they booked via the ‘People’s Uber’ (Xu et al., 2015). Uber slashed the ‘People’s Uber’ prices by 20-30 percent depending on the Chinese city (Xu et al., 2015). The set of actions taken in the approach was to slash prices far below the competition and hold most of the Chinese market. However, this approach failed catastrophically, and Uber did not clinch the percentage of the Chinese market they hoped to acquire.

By April 2015, Didi Kuaidi, including Didi Chauffeur and Chauffeur One, had captured 78.3% of China’s online chauffeur marketplace (Xu et al., 2015). It is where Uber was hoping to gain more profits through the provision of Uber Black, their only revenue-generating platform at the time in the Chinese market. The second application that followed Didi Kuaidi was Yidao, with a 10.9% market share (Xu et al., 2015).

Uber came a distant third with only 8.4% market capitalization in the Chinese market. The overall interpretation is that Uber could not actively compete with other companies, especially Didi Kuaidi. Didi Kuaidi was formed via a merger of two ride-sharing companies, Didi and Kuaidi. Both companies were founded in 2012 as high-tech startups and taxi-hailing applications. Kuaidi launched in 2012 with the support of Baidu maps to gain better knowledge of the terrain. Didi launched in 2012 with the support of We Chat, the most common direct messenger service in China. The application used WeChat Pay, which made it much more convenient for users to pay for their rides. The merger between Didi and Kuaidi occurred on Valentine’s Day in 2015 (Xu et al., 2015).

Through this action, Uber met a giant competitor who owns most of the ride-sharing and chauffeur market in China and has a more sustainable business model than offering rides at the lowest prices. Yidao offers executive rides to the clients and allows the clients, rather than the drivers, to choose their rides. Yidao placed relatively fixed prices on its offerings and never entered a price war. Due to this, Yidao has a more economically sustainable business platform as opposed to Uber.

The Government

The government has yet to fully define the legality of ride-sharing applications such as Uber, Didi Kuaidi, and Yidao. The companies operate in a grey zone, and the drivers initially avoided roads with checkpoints to avoid getting fined or detained (Xu et al., 2015). Different municipalities have tried to take the lead in addressing the legalities of ride-sharing applications like Uber. Shanghai’s managerial database of ride-sharing applications was recently announced and developed. A similar move is in place in Beijing. However, uncertainty remains as to the legal repercussions of ride-sharing applications in China.

Potential Solutions

One of the main potential solutions for Uber is to exit the Chinese market due to its low market penetration rate. Uber has spent billions of dollars attempting to penetrate the Chinese market in an economically viable way. Its main profit-making ride-sharing platform, Uber Black, had not permeated China to the extent the company hoped when it started promoting its services therein. The ‘People’s Uber’, its most popular outfit, does not make any financial remuneration for Uber (Xu et al., 2015). The lack of profitability would lead to the idea that Uber should cut its losses and pull out of the Chinese market.

The second solution would be to eliminate the not-for-profit aspect of the ‘People’s Uber’ and raise the rates for the taxi-hailing service. The main advantage stemming from this action is that Uber would have an economically viable platform that has widespread use in mainland China. Making the ‘People’s Uber’ a profitable avenue would include raising the prices so that the company can take a percentage of the earnings. The price raise should be commensurate with the commissions the organization aims to get from the drivers.

Recommendation

The recommended solution from the two options would be to pull out of the Chinese market. The size and nature of the competition, coupled with general Chinese attitudes towards external companies, would lend itself more to the idea that Uber should pull out of the market. The Chinese government tends to favor Chinese businesses in offering permits and awarding contracts. For instance, the Shanghai Taxi Information Service Center, initiated by the Shanghai Committee of Transport, is co-sponsored by four major Chinese taxi companies and Didi Kuaidi (Xu et al., 2015).

Further, Didi Kuaidi controls most of the Chinese market, and its exclusive use of We Chat Pay, which stems from China’s most popular connectivity application, means it is unlikely to waiver in its market dominance. The combination of Didi and Kuaidi means that Uber can no longer compete via a price war. Consequently, further investments into the Chinese market would not be viable, and the organization should start working on a viable exit strategy.

Reference

Xu, X. C., Wang, X. S., & Bendle, N. (2015). Uber: Managing a ride in China. Richard Ivey School of Business Foundation.

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