Executive Summary
Uber entered the Chinese market in February 2014, and the company’s CEO had a lot of hopes that he would succeed in cracking the Chinese market that other Western foreign tech firms had not succeeded. The company’s CEO made numerous trips immediately before and after the launch of Uber in China with a hope of developing business relationships which are considered essential aspects of China that influences business success. However, Uber faced a myriad of problems in China that were mostly caused by lack of supporting IT infrastructure in China. Additionally, Uber was not able to integrate Chinese culture into its operations, and this caused the company to lose over 70 percent of customers it had acquired by the end of 2015 to its main rival Didi Chuxing.
The problem was threatening not only the company’s survival in China but across the globe since it was spending profits generated in other markets to sustain Uber in China. Uber in the end had to merge its business in August 2015 to Didi Chuxing and had to settle for a 20 percent stake in the Chinese firm. Uber would have managed the problem if it had prioritised integrating the concept of guanxi and other aspects of Chinse culture in its operations from the beginning. By recruiting a Chinese employee to develop and encourage guanxi for Uber, the company would have had been successful.
Table of Contents
Executive Summary 2
Introduction 4
Operational Problem faced by Uber in China 5
Strategies that Uber should have implemented to manage the problem 7
Conclusion 9
References 10
Introduction
On February 2014, Uber was formally launched in China where it introduced luxury car services in Shanghai, Guangzhou and Shenzhen. However, the company started facing numerous challenges from the beginning such as the inability to access Google Maps. Unlike in the other markets where the company had already begun operations, Uber could not access Google Maps where it is used to locate drivers and passengers. The company had to modify its software to consider this new reality (Abboud & Wagstaff, 2015). In the autumn of 2014, Uber had started to offer a cut-price service with the intention of growing its market share in China.
Uber’s efforts to take up the Chinese ride-sharing market had managed to yield a 1 percent by the end of 2014. The rest of the market was being shared by two locally-owned companies, Didi and Kuaidi (Hook, 2016). Hence, Uber was entering a market that was already being dominated by others, and this meant that it had to apply unique, different strategies if it was to succeed. The future prospects in China for Uber were uncertain from the very beginning considering that Didi and Kuaidi were involved in a fierce competition that led them to have unhealthy subsidy wars.
The stiff competition in the Chinese market saw Uber lose over $1 billion by the end of 2015, resulting in financing its operations in China with profits made in other countries (Clover, 2016). Furthermore, the company continued to make losses in 2016, and the battle for market share with Didi Chuxing continued to intensify. In August 2016, Uber gave up the fight in China resulting in selling its operations to its rival (Waters, 2016). This report aims to identify and analyse the operational problem that led to Uber’s failure in China and suggest strategies to Uber where it would have used to manage the problem.
Operational Problem faced by Uber in China
The CEO of Uber had a lot of positive expectations for China, and he often said that this was his most important market. It is estimated that he spent one of his five days in China in 2014, trying to come up with strategies that would have enabled his company to win the battle for the market share (Manjoo, 2016). However, China had proved to have a more operational problem than all the other markets Uber had started its operations.
The first operational problem of Uber had in China was associated with the requirement for the company’s customers to validate their credit card information before they could even open an account with the Uber’s app. Many potential customers of the company did not have credit cards, and this meant that they could not open an account (Makinen, 2015). However, the problem was quickly recognised by Uber, and its app was redesigned so that it would allow the customers to pay fare through Alipay.
Another operational problem that the company had to deal with in China was the use of Google Maps to locate the drivers and passengers. The extent of the Google Maps coverage in the cities where the company was operating was very low and highly inaccurate making it difficult. This made it challenging for the company to locate and match the drivers to passengers who were waiting for Uber, and this affected the company’s performance in the whole of 2014. However, the problem was considered solved in December of that year when the company entered into a strategic relationship with Baidu (Kirby, 2016). The partnership was very crucial for Uber considering the business, and the political connection of Baidu have in China. Business and political connections in China are essential for any foreign companies that want to succeed in the Chinese market (Li, 2012). The CEO of Uber, Kalanick, seemed to recognise this reality of the Chinese market and made numerous trips to create close relationships with politicians and businesspeople, as well as with the drivers. He made numerous trips prior to the launch of the company, Uber in China. In China, all these supporting systems are not as developed as it is seen in the Western countries.
Additionally, the political, legal and regulatory environments are significantly different, and many western managers can find them complicated and troublesome. Furthermore, it is also difficult to differentiate between the business relationships and personal relationships in China, and this is very different from the western market where businesses often value the transactional relationships with their customers (Lope, 2016). Hence, Uber needed to come up with a strategy that would help the company to overcome all the obstacles they faced in China. Instead, the decision to operate in the Chinese market turned out to be the riskiest venture the company had ever taken in its short life (Salomon, 2016). The operations in China even risked sinking the entire business by investing the profits which were made in the other markets.
The operational problem that led Uber to sell its operations to its competitor Didi Chuxing was a massive decrease in the market share. By the end of 2015, Uber’s market share in China was estimated to range between 30 percent and 35 percent, but the company had started to lose its customers to its rivals at a very high rate at the beginning of 2016 (Tyagi, 2016). The company was losing its market share at an unprecedented rate and was reported that the value of the company had remained with only 8 percent by August 2016 when it decided to sell its business operations to Didi Chuxing. Experts argued that Uber would still have created a profitable and sustainable business with an 8 percent market share considering the size of the Chinese market. However, the company’s management was worried that if they had stayed longer in the Chinese market, the market share would continue to decline, and in result would have a negative impact on the value of shareholders and also affect the operations of the company in other foreign markets (Jacobs, 2017). Uber’s main rival Didi Chuxing, a locally-owned business and operated by Chinese knew the importance of guanxi in its business and was developing further by using a popular social media in China called WeChat. Hence, Didi Chuxing was using WeChat to promote its services, and this made it very popular among users of this social media network (Jacobs, 2017). Conversely, Uber did not have such a platform to promote its services to customers, and this led to massive decline in the company’s market share with a very short time.
Strategies that Uber should have implemented to manage the problem
The most notable mistake that Uber had made in China was trying to bring American culture to China and hope that the people in China would accept it. Even though Uber knew that the two sets of culture have vast differences in them that had caused the other western companies to fail in the past, Uber was in so much hurry to launch its operations in the Chinese market that it did not consider the issues they would be facing properly. However, Uber was successful in growing its market share for the first two years to 35 percent, but it could not maintain the momentum because of its strategies not being aligned to the lifestyles of the customers. The company wanted the customers to embrace its culture rather than modifying its culture to be in harmony with that of the potential customers. Uber was supposed to integrate Chinese culture into its operations to ensure that the people felt that it was part of them. One of the essential aspects of the Chinese culture that the company Uber should have integrated into its operations is a low level of strictness with detail (Li, 2012). In China, People are not very strict with instructions, and this may present a problem with North Americans who are used to precise and direct instructions (Zhang, 2017). Uber had faced many issues with this aspect of culture because it required its drivers as well as passengers to follow strict time schedules. The drivers and passengers would take offence in this kind of arrangement because it was making them feel as if they were being micromanaged by the company.
Uber was also supposed to ensure that guanxi was fully integrated into its business both for its relationship with the customers and their business partners. Without a proper system for applying guanxi in its business, Uber could not effectively build relationships and network in the Chinese market. The concept of guanxi entails even exchanging favours and should be done voluntarily and regularly. By ignoring this aspect of the Chinese culture while doing business in China, it can lead to numerous disappointment, frustrations and risks. It is very difficult to be competitive in China without incorporating guanxi as a part of the business to operate in China. It is the network to build using this concept that helps to establish a solid network of people to exchange favours (Leverage China, 2011). Uber was competing with a company that had invested more time and resources in nurturing its guanxi with its customers. Conversely, Uber entered the market and started to promote its services using conventional marketing channels. In fact, the company had started to approach Chinese business partners only after it had already launched its operations within the Chinese market. Uber was entering into strategic partnerships with these firms after realising that it could not succeed in the Chinese market by doing it alone. Therefore, Uber should have included the concept of guanxi in its operations before launching into the Chinese market.
The CEO of the Uber company spent most of its time in China trying to develop relationships with all those whom he had felt would influence his business in the Chinese market. His efforts can be said to have succeeded to a certain extent especially with regard to the launch of Uber in China and the growth of market share to 35 percent within the first two years. However, he was not able to maintain its guanxi that he created, and this led to the company’s downfall in 2016. Given his busy schedules with operations elsewhere, Kalanick would not be able to continue building relationships in China.
Moreover, the company had also not identified a native-born Chinese employee who would have helped the company to maintain the existing networks and add new ones. The company was supposed to identify a person who would solely be responsible for developing and maintaining guanxi (Gog & Sullivan, 2011). A native Chinese public relations officer would have been the best person to help the company establish a connection with its customers, business partners and government officials.
Conclusion
China is turning out to be the most challenging market for the Western companies that want to start up business in the Chinese market. Google and Facebook which are the Global tech giants have also failed to make a significant impact on the Chinese market despite their huge success in markets around the globe. Uber is the latest victim of the Chinese harsh business territory. The problems started almost immediately after Uber launched its operations in February 2014. The company started with the problems of registration of riders as its app did not allow the option for the popular payments methods in China and unreliability of Google maps to connect drivers with the passengers. Even after resolving most of the problems that had occurred, Uber still made a massive loss of $1 billion in 2015. The company hoped that the situation would improve in 2016 since its market share dropped to 8 percent by the time the management decided to sell the company to its rival, Didi Chuxing. The primary cause for the market share to be declined was due to the lack of integration of aspect of Chinese business culture in the company’s operations. Therefore, the problem could have been managed if the company had considered differences in cultures between the western countries and China in its operations.