4.

ENTRY MODE

4.1. Entry motivation and business environment

- Uber's determination to conquer the Chinese market came directly from

Travis Kalanick, then Uber's CEO and co-founder.

- In 2015, Kalanick spent nearly one in five year in China, close to 70 days.
In the other locations that Uber operates in, the company hires local chief
executives, but in China Kalanick maintains a hands-on role as chief
executive of Uber China.

- The global ride-hailing industry is a lucrative one, valued at $36 billion in

2017, and projected to increase to $285 billion by 2030.

- China, with a projection of 221 cities containing a population of one million

or more, was a highly attractive market for any internationally-minded taxi
company. In 2014, for every 1000 people, there were 113 cars in China.
Even with efficient public transport systems, this indicated there existed an
extremely high demand for private-hire cars for business or leisure rides.

 From this point-of-view, China's ride- hailing market is significant and

full of potential. Uber was thus enticed by this potential market to tap
into, and was determined to be the first foreign ride-hailing provider to
establish itself in China. Moreover, entering difficult markets wasn't a
novel experience for Uber, since it had previously successfully
navigated diverse markets in the UK, India, and South Africa.

4.2. Entry Strategy and Process

- Prior to entering the China market in 2013, Uber formulated a unique

strategy that it hadn't employed elsewhere.( Strategic Alliance: Joint
venture)

- At the time of its inception into China, China's ride-hailing industry was
locked in intense competition between two local powerhouses, Didi Dache
and Kuaidi Dache, who were competing for market dominance.

- Both Didi and Kuaidi were backed by their parent companies, Tencent and
Alibaba respectively, both of which are conglomerate giants, allowing Didi
and Kuaidi to engage in all-out price wars in terms of subsidiaries and
incentives. => This initially allowed Uber to sneak in under their
 competitive radar, and increase its market share from 1% to 35% over a
period of 8 months.

4.3. Local Operation Subsidiary Management

- Uber was initially targeted at foreigners and expats living in China, offering
an English ride-hailing service in contrast to the traditional Chinese-
speaking taxi services offered. However, this resulted in Uber having a
smaller market share, which is why it decided to expand further into the
local scene.
- When Didi Dache and Kuaidi Dache merged to become Didi Kuaidi,
combined they boasted more than one million drivers in 360 cities in
China, whereas Uber only had about 100,000 drivers in 20 cities.

- Originally, to open an Uber China account, customers had to first validate

their credit card information. This however, presented a major obstacle for
many potential Chinese users, due to the differences in banking systems
employed; Uber offered a credit-card based payment system, while most
people in China do not use credit cards.

 Uber China also installed servers in China itself, aside from its global
networks, to bypass China's notorious firewall.

 Despite a more appealing core product, Uber still had to invest heavily
to produce incentives locals to use their app, both as customers and
drivers. Discount codes and coupons were offered to new users for
their first trip, often equivalent to the full cost of the ride. Similarly,
drivers were encouraged to join the service by offering subsidies and
bonus pay. In Chengdu, Uber drivers numbered 42,000, nearly the
 same as the number of Uber drivers in London, Paris, and San
Francisco combined.

4.4. Analysis and Comparison

4.4.1. Analysis: Uber's failure in China can be mainly attributed to

multiple factors.

- For starters, the business environment in China is very insular and

protectionist, which makes it extremely challenging for foreign firms to
establish a foothold.

- On the physical aspect, China's infrastructure, financial markets, and

banking systems are very different from those employed elsewhere in the
world. Uber found it hard to leverage on the local Chinese infrastructure,
which made setting up their business and developing their app difficult.

- On the social/cultural aspect, China's political scene, legal system, and

regulations are complex and tough to navigate.

- For Western companies expanding to China, it is often important to identify

the right local business partners as they typically have a better situational
understanding about the cultural, economic, and political environment, and
can help foreign firms navigate the full set of risks they face.

- In Uber's case, they managed to attract the support of local investors such
as China Minsheng Banking Corp, real estate developer China Vanke Co
Ltd and China Broadband Capital. On the other hand however, Uber's
competitor Didi was a local company, which gave it a homefield
advantage.

- The nationalization of the transportation industry's regulation was bad

news for a start-up that depended on the local variance in ride-hailing
practises and legal grey zones.

*/ China Grants Legal Status to Ride-Hailing Services:

- Xinhua news released on July 28, 2016: "China Grants Legal Status to Ride-
Hailing Services". This legal status in China that is referred to while provides
legitimacy to ride-hailing companies, in also shackles the way they operate.

- As under the new regulations, the data collected by Uber would come under the
jurisdiction of the government.
- Companies would no longer be able to influence pricing through subsidies,
rather prices would be determined by the free market, unless as the regulations
state, "when municipal government officials believe it is necessary to implement
government-guided pricing."

- Uber would have to get both provincial and national regulatory approval for its
activities anywhere in China, which would curtail its plans for expansion, giving
the amount of paperwork they would have to go through each time they want to
expand to a new city.

- Online and offline services would be regulated separately, which would prove
taxing for Uber given that it effectively already has to manage two distinct
markets: the rest of the world, and China.

- Foreign companies like Uber would be subject to even more regulations than
their competitors. Even though Uber had been registered as a local company in
the form of Uber China, its national platform would now be handled differently.
And despite this supposed standardization of the industry, local governments
would have the final say on issuing "ride-hailing service driver's licenses" and
determining who is eligible to be a driver and what kinds of cars can be driven.
Such governments would naturally favour local businesses over what they
perceive as guailo intruders, which puts Uber at a disadvantage.

 Internationally, Uber does its best to flout or bypass local legislation and
taxation in the countries it operates in). This is apparent from its
development of its "Greyball" software in 2014, a specially commissioned
shadow program that allows Uber to evade local law enforcement while
offering its services illegally without detection.

 2016's data breach is another example of dishonesty

 Uber intentionally hid from not just the public, but its own employees, that
company servers had been breached and the personal information of 57
million users and drivers were stolen. Uber tried to cover up the issue by
paying USD100,000 for the hackers' silence

 This incident exemplified the company's "end justifying means" culture that
was nurtured under the leadership of ex-CEO and founder, Travis
Kalanick, which would have alarmed investors and government officials in
China, seeing as Kalanick was the face of Uber in China.

4.4.2. Comparision:
 4.4.2.1. About Didi in genneral:

- China's competitor, Didi, was founded in 2012 and has everything Uber
needs: large-scale, Chinese priority design and government support. While
Uber operates by breaking the taxi monopoly in every new city it joins, Didi
is much more backward — it only connects passengers with existing
licensed taxi drivers.

- So instead of inciting chaos and even violence like Uber, Didi has sided
with the authorities — even helping to manage more than 1,300 traffic
lights in partnership with the city government.

- In 2015, Didi became the only company in the world backed by all three
Chinese tech giants: Baidu, Alibaba and Tencent. Apple and China's
sovereign wealth fund also invested around that time.

4.4.2.2. Uber vs. Didi in China:

Factor 1: The users in China did not seriously take the brands of ride-
hailing services into account despite Uber’s strong brand recognition in the
Chinese market.
- A survey in 2016 (when both platforms were competing) about users’
preference to ride-hailing software in China showed that 77.2% of
passengers said that they heard about the brand name of Uber China,
while 91.7% of passengers already knew the brand Didi Chuxing.
Relatively higher user awareness of Didi’s brand naturally led to more
referrals to friends. Furthermore, unique usage patterns of Chinese users
explain that the brand loyalty of Uber is 45.3%, the brand preferred rate is
21.9%, and the brand preference accounts for 22.4%.
 Brand Comparision between Didi Chuxing and Uber China

- In terms of the coverage of service regions, the number of active users, the
growth rate, etc., Didi was able to rapidly establish inherent advantage as
a local company and made the most of Chinese population density and
local partners. Didi was more than 10 times bigger than that of Uber China.
Although Uber steadily occupied some portion of market segments with its
own technological skills, especially in the high-end services (e.g., ride-
hailing with luxury vehicles) and the carpooling services. On the other
hand, Didi kept higher market penetration in the many segments (even
including the high-end) and elicited active user penetration there.
According to data from iResearch (2015), the user coverage in the high-
end in Didi app record is as high as 88.4%.

Factor 2: The larger regional coverage of Didi than that of Uber would
significantly helped the market penetration and complemented the
disadvantage that Didi had as a follower.

- In October 2015, Uber China’s order volume (i.e., the number of service
requests) in Chengdu surpassed that of New York, making Chengdu the
largest city in terms of the service requests on earth.

Coverage of Didi Chuxing and Uber China

- Table shows that Uber ran its business in less than 40 cities until the
second quarter of 2016. On the other hand, Didi had a large number of
user base and operated its service in more than 400 cities in the same
period.
- Starting with its initial service offering of taxi-hailing, Didi leveraged
subsidies to foster various services provisioned through its calling platform.
At the same time, Didi cooperated with taxi drivers and companies in many
cities, which made Didi quickly expand its coverage to more than 400
cities. As a result, the number of active users per month reached 58.86
million in 2016.
 A survey report released in March 2016 (IResearch, 2016) revealed that it
was Didi’s ride-hailing app that provided the most comprehensive service
contents in the area of Chinese mobile transportation service category. On
the top of the ride-hailing services, Didi also provisioned travel-related
services which provide passengers with a rich travel information. The goal
of Didi’s app strategy is to improve and expand the business ecosystem
thereby enhancing users’ stickiness to the platform and positioning itself as
a comprehensive transportation service provider. (Accordingly, we present
that these differences in service offerings resulted in different outcomes to
both platforms. )

Factor 3: Didi’s richer service offerings appealed to Chinese users more

attractive than Uber’s strategy of focusing position.

- In some classes, both platforms compete over the same market segments.
Since both platforms were interested in high-end special car services or
premium service class, for example, they provisioned similar service
offerings and fiercely competed.
- In particular, Uber China put much efforts into this service class and
provided new type of ride-hailing services (e.g., ride-hailing with private
cars), while ignoring some portion of the service categories or the market
segments such as the long-distance carpool, taxis, and designated driving,
which were included in the service offerings of Didi.
- In fact, Didi provided wider service offerings than Uber, and targeted
almost every market segments from low-end to highend. Didi is still
pursuing all types of users with various income levels and provides a
variety of ride-hailing services to meet diverse needs from many segments.
‘Didi Express,’ which Didi launched to compete UberX in the same
category presented cheaper ridehailing service with slightly lower price
than daily taxi charge for Chinese low and middle-income users who are
highly price sensitive.
 Service Class and Service Offering of Didi Chuxing & Uber China

- When assessing the Chinese ride-hailing market, Uber’s expectation and

prediction was not successful in designing and implementing its marketing
strategy.

- For example, there seemed to be a mismatch in the service offerings like

‘Uber Black’ and its knowledge on the high-end segment. Although Uber
offered quite a wide range of service classes as shown in Table 2, Uber
Black took a position that represented company’s unique competitive
advantage. Uber seemed to assess that this category would be more
profitable than the ride-sharing service class. On the other hand, the
(potential) high-end users in the Chinese market are big enough to
accommodate multiple platforms.

- According to a consulting report in China, there were about 300 million

passengers and more than 10 million drivers registered in the ride-hailing
platforms by the end of 2015. The active users were growing at an average
monthly rate of 13%. 83.2% of these active participants in the private-car
ride-hailing market chose Didi and 16.2% for Uber China. Furthermore,
80% of the drivers registered in Uber China actually worked for the ride-
hailing services only in part-time basis. In fact, these potential users or
drivers belonged to Chinese uppermiddle class and took advantage of
Uber platform for social networking to make friends rather than for real
use.

 In sum, Uber China’s efforts to foster advanced services have been

misplaced.

Factor 4: Didi’s target segments and service offerings were better matched than
those of Uber’s.
- As shown in the following table, however, the number of requests of below
the economy class services accounted for 92% of the total service orders.
Indeed, it is the services in these categories (e.g., Didi Express and
People’s Uber) that get the most benefits from the network externalities.
 While Uber’s market share is small in these categories, its most revenue
(more than 90%) came from these services.

Daily Order Requests (million) by Service Offering Classes

- Like any other business, the pricing scheme constitutes one of core value
propositions of the ride-hailing platforms. The pricing scheme is also a key
strategic tool for creating the installed-base of the platforms, thereby
capturing customer value. Compared with other B2C ride-hailing platforms,
Didi and Uber both employ P2P (Peer-to-Peer) business model, which
requires competitive advantage in designing the pricing scheme.

Factor 5: A slightly different approach to passengers between Didi and Uber

made a big difference in overall scale of their service operations.
- Table compares the pricing schemes (for users) of Didi and Uber for each
service class. In the premium service class, both Didi and Uber charged
20% of driver’s fares as platform fees. In other service classes, however,
two platforms’ pricing schemes are different. For the carpool service like
Didi Express & Hitch, Didi charged 5% of driver’s fare as platform fee,
while Uber provided its compatible service (People’s Uber) for free to
users. Considering the nature of the carpool market as a complementary
option for public transportations in big cities in China, Didi’s 5% charge
was not a big difference from Uber’s free-of-charge. On the other hand, for
the economy class services (Didi Express and UberX), Didi charged only
5% as its platform fee, compared with Uber’s 20%.

Comparisons of Platform Service Fees

- Uber’s pricing strategy totally failed in leveraging the indirect network
externalities between the users (passengers) and the suppliers (drivers).
When subsidies were reduced and eliminated due to some government
regulations and the growth of the ride-hailing services, Uber’s mistake in
pricing strategy weakened its competitive capability and made it harder to
recover the losses.
- Didi, on the other hand, appropriately adopted a pricing strategy that is well
suited to the two-sided markets and aggressively exploited the user side
by providing higher subsidies and other incentives to the passenger in the
early stage of cultivating user needs and expanding markets. Didi was also
stick to its own strict service quality standard, and took advantage of rapid
growth of urban expansions. Thus, it could achieved huge market share
and developed comprehensive business ecosystem in many local markets.
Didi established a clear position, and it has now the advantage of network
effects.