Uber: Competing as a Market Leader in the USA vs Being a Distant

Second in China
Jochen Wirtz and Christopher S. Tang

Uber allows people to book and share rides in private cars via their smart phones. With its
headquarters in the United States, it operates in 60 countries and has a strong presence in the Asia-
Pacific region. This case study explores Uber’s development and growth in the United States as well
as its global expansion and subsequent foray into China. Despite enjoying international success with
deep penetration in major cities, Uber flopped in the Chinese market. What were the reasons for its
failure in China, given its spectacular performance in many other countries?

Uber’s commercial: https://youtu.be/NiVXmLkcOiA ; https://youtu.be/ASfhYIyzTQQ

Lyft’s commercial: https://youtu.be/v8nyGzOLsdw ; https://youtu.be/2pcUvTQKoZw

Didi’s commercial: https://youtu.be/ualOF-Ew1HM ; https://youtu.be/_id3NtXyagk

Introduction
Uber was founded in 2009 by Travis Kalanick (the current CEO) and Garrett Camp in San Francisco.
Its business model rested on the use of an app to call for a driver at any time and location (Exhibit 1).
Uber managed to build a spectacular network of drivers and passengers in just three years. It thrives
on what some people call an “instant-gratification economy,” powered by the smart phone as the
remote control for life. “If we can get you a car in five minutes, we can get you anything in five
minutes,” Kalanick said.1

Expanding outside the United States, Uber became a threat to taxi services in Europe and Asia,
triggering protests in France, Germany, and India. Despite resulting government scrutiny, tighter
regulations, and disputes with local taxi companies, Uber’s disruptive business model successfully
posed an effective challenge to taxi monopolies in the countries it operated in. As of August 2015,
Uber has clinched the title of the most valuable start-up in the world, valued at $51 billion.

Enjoying first-mover advantage in app-enabled transporta- tion services and ride sharing, Uber was
far more successful in its number of users and drivers than its main American competitor, Lyft. Lyft
positioned itself as a more informal, community-centered way to travel. Drivers and shotgun-riding
passengers were expected to strike up a conversation during the ride. However, entering the market
three years after Uber, Lyft managed to commence operations in only 65 American cities by the end
of 2015. In contrast, Uber had been operating in a total of 300 large cities in 60 countries. Both
companies offered a myriad of services at different price points (Exhibit 2).

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. Uber pioneered its taxi service in
Shanghai in 2013. Entering difficult markets was not new to Uber, which had already successfully
navigated diverse markets in the United Kingdom, India, and South Africa. Nevertheless, Uber
encountered unique roadblocks in China—strong competitors, existing low-cost taxi services, and a
lack of know-how to navigate around local regulations and even corrupt officials. Uber also faced
tough competition from a much larger local player, Didi- Kuaidi (known locally as 滴滴打车). Didi
boasted more than one million drivers in 360 cities in China, whereas Uber only had about 100,000
drivers in 20 cities.

Uber’s Growth
The first conceptualization of Uber’s business model started in Paris in 2008, when founders Kalanick
and Camp could not get a cab while returning from a conference. The two discussed the idea of
solving the problem with a mobile app—push a button and get a car.

In 2009, UberCab was born. After downloading its app, registering, and entering credit-card
information, customers could summon a car with the press of a button. G.P.S. took care of the
location, and the cost (including tips) was automatically charged to the customer’s credit card. It did
not take long for the company to run into regulatory issues. The San Francisco Municipal
Transportation Agency objected to the use of “cab” in UberCab’s name a few months after its launch,
given its operation without a taxi license.

After changing its name to Uber, things went on an upward trajectory. Valued at $60 million after only
six months of operation, Uber received support not only from angel investors and venture capitalists
but also from prominent celebrities like Ashton Kutcher (founder of A-Grade Investments), Jay Z (co-
founder of Roc-A-Fella Records), and Jeff Bezos (founder of Amazon).

Uber faced many obstacles and criticism in its early years. One criticism was directed at the “surge-
pricing” model, which referred to the practice of charging customers higher prices at peak hours. It
garnered a lot of attention during a snowstorm in New York in December 2013, when rates increased
up to eight times the company’s standard rates, attracting a flood of negative publicity. Kalanick
defended this practice with economics—it reflected demand and supply at any given point in time and
effectively allocated capacity to customers who were willing to pay even during super-peak periods.
To ameliorate public outrage, Uber eventually tweaked its pricing model and limited fare hikes to a
maximum of 2.8-times the normal fares in the face of snowstorms in New York. 2 Uber proudly
announced in January 2015 that it had more than 160,000 active drivers in the United States who
provided more than a million rides a day.

Uber’s operations covered 75% of the U.S. population, and even as it set its sights on international
markets, it remained focused on growth at home. Its efforts were mainly channeled toward building a
strong network of drivers and improving service for consumers. These efforts soon paid off. Forty
thousand U.S. drivers joined Uber in December 2014 alone. Service efficiency saw improvements
with 91% of UberX rides arriving in less than 10 minutes in Philadelphia. Moreover, the demand for
Uber peaked when people celebrated and consumed alcohol, testifying to Uber’s position as a “better
late-night option.” Uber also started to pay more attention to corporate social responsibility. For
example, its program UberMILITARY led to the hiring of 10,000 veterans—ex-military personnel—as
drivers. In addition, it was calculated that the use of UberPOOL saved more than 13,000 gallons of
fuel each month in San Francisco alone.3 By stretching its network of drivers to different demographic
segments in society, offering alternative ride-sharing options, and reducing waiting time, Uber was
able to build on network effects for drivers and loyalty among consumers, making it difficult for
competitors to enter and grow in its markets.

Lyft’s rise and rivalry

Lyft was launched in 2012 by John Zimmer and Logan Green, primarily as a low-cost competitor to
Uber. Its focus was on short, urban rides. Lyft logged an impressive 2.2 million rides in December
2014, with revenues for that year estimated at $130 million. In May 2015, Lyft was valued at $2.5
billion,4 its promising growth bolstered by estimates of 2015 revenues to be $796 million, an
impressive 512% jump from 2014.

While Uber touted its iconic black cars to differentiate its luxury services for professionals (Exhibit 2),
Lyft adorned its cars with a pink moustache (Exhibit 3), which became an identifying factor for the
company in the streets of San Francisco.5 This was accompanied by the greeting of all Lyft
passengers with a fist bump. While these tongue-in- cheek communications were successful in
positioning Lyft differently, Lyft’s top management announced plans to tone down the “carstache” and
scrap the fist-bump practice in January 2015. This decision was made with the realization that what
worked in the West Coast would not necessarily be compatible with Lyft’s plans to expand to other
cities in the United States or even internationally.
Despite toning down its practices, Lyft still prided itself on its friendliness and laid back driving
experience when compared to Uber. An internal presentation from March 2015 that was leaked to
Bloomberg revealed its criticisms of Uber’s “top- down model,” “exclusive mentality,” and “anti-social
culture.”6 On the other hand, Lyft claimed its growth to be bottom- up and led by drivers (32% of whom
were female) through positive word-of-mouth marketing. All in all, Lyft believed itself to be a “trusted
brand” delivering a “social experience” with memorable quirks—the carstache being one of them.

Apart from its more relaxed brand image, Lyft mainly positioned itself as a lower-cost alternative to
Uber. In 2014, thecompanyannouncedbigpricecuts—20%inearly2014 and an additional 10% in May. 7
Lyft also used a surge-pricing model. However, to ward off potential criticism, it provided discounts of
10%–15% during off-peak hours. While both companies engaged in aggressive price-cutting
strategies whenever they operated in the same city, Lyft drivers typically charged—and earned—less
than Uber drivers (Exhibit 4).

While Lyft enjoyed strong branding and was expected to spend a generous 60.5% of its revenue on
marketing in December 2015, its operations were not as entrenched as those of Uber. One example
can be seen in its attempts to break into New York’s tight network of taxis in July 2014. Uber had
already been operating in New York for three years. A public exposé occurred just days before Lyft
planned to commence operations in the city. The company was issued a cease-and-desist letter by
the New York State Department of Financial Services for non-compliance with safety requirements
and licensing criteria.8 Uber also aggressively cut the price of its UberX service by 20% the week
before Lyft entered the market. The bottom line was that Uber enjoyed a first-mover advantage and,
having established a presence in major cities beforehand, benefited from network effects and
sufficient margins. This allowed it to cut prices when needed, erect barriers to entry, and slow down
the growth of competitors. Uber’s significantly higher market valuation also helped to raise more
capital in each funding round. It raised $1 billion in July 2015, while Lyft raised only half the amount in
the same year. This helped sustain any losses in operations in an era of price cuts.

Finally, Lyft tried to expand fast—it raised $250 million in 2014 and another $530 million by March
2015. Its main goal was to expand internationally and enter less competitive markets without already-
entrenched competitors.

Didi
In China, Uber found itself in the position of the much smaller late entrant. Here, Didi was the clear
leader. Didi- Kuaidi, referred to as Didi by the public, was the product of a merger between Didi Dache
and Kuaidi Dache, two of China’s leading taxi-hailing apps. In February 2015, the merged entity was
valued at $6 billion, and it doubled to $12 billion by September in the same year. 9 Didi’s services
covered 80% of China’s huge market of 800 million city dwellers (Exhibit 5). It was a wealthy and
dominant player reaping the network-leveraging dividends of having drivers and customers hooked on
to its product early.

Didi was also far more successful than Uber in the aspect of legal legitimacy, which it acquired from
its local connections.10 Didi enjoyed the backing of powerful Chinese government investors, the most
notable one being the China Investment Corporation, China’s sovereign fund in charge of managing
foreign exchange reserves. These well-connected investors opened up opportunities for Didi (such as
the advantage of working with regulators) at the expense of its competitors. Didi tasted its first
success in October 2015, when it became the first car-hailing app to be awarded an official license in
Shanghai. This authorization was hailed as a landmark decision, allowing Didi to operate its ride-
hailing business in the city without any fear of legal infringements. 11 It assuaged concerns among taxi
drivers, such as the one revealed by a driver in September 2015, “I worry all the time about being
caught and fined by the government. My biggest concern is policy uncertainties.” With this formal
recognition, more drivers were sure to sign on with Didi vis-à-vis its competitors, which could not
provide the same level of regulatory security.

From the beginning, Didi pursued an aggressive strategy to lure as many drivers to its app as
possible. It spent $700 million on rewards to taxi drivers between 2013 and 2014. Monetary incentives
were used not only to attract new drivers but also to encourage drivers from existing taxi companies to
switch to Didi. The sales team in Didi even went to the streets to promote their app to cabbies. By
allowing taxi drivers to use its mobile apps as an additional channel to attract more passengers, Didi
sought to persuade these drivers to work for them exclusively during peak hours. All these measures
allowed Didi to swiftly convert a large number of taxi drivers and scale its operations in other cities.
They also highlight the main difference between the business models of Didi and Uber. Didi started
out by encouraging taxi drivers to adopt its app before adding non- traditional transport services to its
portfolio. In contrast, Uber started out with the intention of disrupting the taxi industry by replacing its
services altogether.

Part of Didi’s fast growth was also due to the company’s practice of tweaking and expanding its
business model to meet unique local demands. For example, urban dwellers frequently looked for a
compromise between overcrowded public transportation and the high cost of driving to work. This led
Didi to introduce a new service offering in its app called Hitch, which allowed groups to share rides
along pre- set routes. Hitch was for casual drivers who wanted to recoup some gas money and toll
fees on their daily commute. Once the drivers entered their start and end points into the app, Hitch
connected them with nearby passengers heading in the same direction, allowing them to share the
ride. This was different from the more traditional taxi-type service, as drivers had control over where
the ride ended. Moreover, they did not make a profit off the service—passengers only paid for the cost
of gas and tolls. This allowed for fares that were 30%–40% lower than those of regular taxis. Hitch
encouraged consumers to try Didi’s services at a low cost, thereby opening a pathway for them to
convert to the more expensive for-profit taxi service eventually.

Clearly, Didi understood the local market’s needs well enough to carry out effective customer
segmentation and target the differentiated needs in its product development. This allowed for the
building of customer loyalty to the main corporate brand and the greater willingness to try and switch
between Didi’s various services, depending on the occasion of travel.

Uber’s response to Didi’s multiple service offerings

Uber had prioritized China as a key market for expansion, and it was befuddling to the company to be
in a distantly second position. Uber was to Didi in China what Lyft was to Uber in the United States. In
a cruel twist of fate, Didi invested $100 million in Lyft in September 2015, forming an international
ride-sharing partnership.

Uber managed to capture only 11.5% of the Chinese market, but experts did not find it surprising in
the context of China’s unique institutional structures. Greg Tarr, partner at CrossPacific Capital,
commented, “When you have great technology and a great business model but don’t understand
some of those local business premises . . . West Coast aggressiveness will only get you so far. China
is such a different animal in terms of dealing with the local culture, the protectionism and the fact that
you don’t have local investors.” This demonstrated the need for Uber to better understand the
Chinese market instead of merely transplanting its San Francisco model of attracting American drivers
and dealing with local regulations. Uber thus attempted to work closely with China’s Ministry of
Transport. It set up servers in China in an effort to obtain an internet-service company license by
sharing data with local transport authorities.

Reformation in Uber’s marketing strategy in China was a priority, and steps were taken to set up local
teams to determine logistics, including language and support services. At consumers’ requests, Uber
strategically partnered with the Chinese search giant Baidu. It ditched Google Maps and incorporated
Baidu Maps into its app. In turn, Baidu advertised Uber on its main page and incorporated a
prominent “Get a Car” button that linked the website to Uber’s app. Partnerships with Alibaba also
allowed Uber to use the simpler and non-credit-card-based payment mechanism of Alipay. 12 This was
important, as many Chinese residents did not own credit cards.

Uber and Didi competed vigorously on many other fronts to attract drivers to sign on with their
respective companies. Both offered bonuses for drivers who hit ride targets in a bid to extend
geographical coverage and reduce wait times. This was based on an industry-wide understanding that
spending cash and leveraging on economies of scale to build an operational base as quickly as
possible was the only way to win in China. As Didi’s President, Jean Liu, revealed, “By using
subsidies to get more cars on the road . . . waiting times were shortened, fares became cheaper,
more users were drawn on to the platform and drivers on the platform. We have already created such
a virtuous circle of increased orders, customer retention.”13

To try and respond more effectively to Didi’s diversification of services, Uber looked beyond its typical
car-ordering model that had worked so well in other international markets. In August 2014, Uber
announced the implementation of People’s Uber. This incentive allowed drivers to offer “non- profit”
rides to carpooling passengers, who only paid for the cost of gas and maintenance. It was Uber’s
version of Didi’s Hitch, competing directly to attract people who wanted low-cost rides.

Uber seemed to be playing catch-up rather than setting trends in the Chinese market. The race to
grab market share was critical, because it was understood that whoever got ahead first would remain
the dominant player for a long time. Uber had to decide how to effectively compete with a much larger
competitor, where to side-step competition and innovate new services, and where and how to go
head-on with Didi.
Study Questions
1. How can Uber retain its dominant position in the U.S. market? Are there services and/or
geographic niche markets where Uber should accommodate Lyft?
2. How can Uber effectively compete with Didi? Should it compete head-on in China, or should it
side-step competition by focusing on niche markets through service innovation and
geographic expansion within the country?

3. What if Uber wants to enter Vietnam’s market, who are its competitors? What strategies should
Uber apply to gain market share?

4. Can you draw positioning maps of Uber in the three markets: the USA, China and Vietnam?

Endnotes
1. Vanity Fair covered an interview with Travis Kalanick in December 2014; this article’s insights
can be found throughout the Uber case study: http://www.vanityfair. com/news/2014/12/uber-
travis-kalanick-controversy.

2. The Guardian covered the revision in surge pricing by Uber in

http://www.theguardian.com/technology/2015/ jan/26/uber-surge-pricing-new-york-snowstorm.

3. Uber Expansion, not officially affiliated with Uber, provides a range of statistics pertaining to
Uber’s expansion in this page: http://uberexpansion.com/2015-uber-data-stats.

4. The Business Insider website reported on the $2.5 billion valuation on 15 May 2015; the
whole article can be found here: http://www.businessinsider.sg/carl-icahn-invests- 150-million-
in-lyft-2015-5/#.VicRavkrLIV.

5. The magazine Wired reports on the changing of Lyft’s most prominent quirks in January 2015,
with reasons: http://www. wired.com/2015/01/lyft-finally-ditching-furry-pink-mustache.

6. Eric Newcomer and Leslie Picker, “Leaked Lyft Document Reveals a Costly Battle
with Uber,” Bloomberg Businessweek (2015). Retrieved from http://
www.bloomberg.com/news/articles/2015-04-30/ leaked-lyft-document-reveals-a-costly-
battle-with-uber.
7. Vator talks about Lyft’s model with respect to prices and Uber’s response in two articles
written in 2014: http:// vator.tv/news/2014-04-24-lyft-takes-off-hits-24-new- cities-in-one-day
and http://vator.tv/news/2014-03-18- lyft-counters-surge-pricing-by-reducing-off-peak-fares
8. To follow Lyft’s saga in New York City in July 2014 and the time period during which it
decided to offer its services in Hong Kong, read Bloomberg Businessweek’s exposé on the
issue: http://www.bloomberg.com/news/articles/2014-07-10/ lyft-not-authorized-for-new-york-
days-before-start-due.
9. Gerry Shih, “China Taxi Apps Didi Dache and Kuaidi Dache Announce $6 Billion Tie-Up,”
Reuters (2015). Retrieved from http://www.reuters.com/article/2015/02/14/ us-china-taxi-
merger-idUSKBN0LI04420150214
10. Deborah Findling, “What Stands between Uber and Success in China?” CNBC (2015).
Retrieved from http:// www.cnbc.com/2015/09/15/what-stands-between-uber- and-success-in-
china.htm.
11. Wall Street Journal, “In the Race for Legal Legitimacy,” (2015). Retrieved from
http://www.wsj.com/articles/ chinas-didi-kuaidi-gets-license-to-ride-in-shanghai-
1444288510?alg=y.
12. The Market Mogul covers Didi’s triumph over Uber in the Chinese market in a short read:
http://themarketmogul. com/didi-kuaidi-crushes-uber-in-the-chinese-market.
13. Financial Times reports on the intensive cash burning on subsidies in the China market by
Didi and Uber in http://www.ft.com/intl/cms/s/0/e85cc5fa-5473-11e5- 8642-
453585f2cfcd.html#axzz3oPUktNrd.