A DRIV­ING FORCE?

Ride- hail­ing firm Uber plans to spend $ 1 bil­lion to ex­pand in China, but it faces big chal­lenges

Los Angeles Times - - FRONT PAGE - By Julie Maki­nen

BEI­JING — From 7 p. m. un­til dawn, Zhou Xi­uquan plies the streets of Bei­jing, pick­ing up fares in his yel­low- and- blue Hyundai taxi, shut­tling peo­ple home from work, out to bars and to the air­port for early- morn­ing f lights. But at 7 a. m., he parks his cab, hops into his per­sonal Kia, fires up his Uber app and starts driv­ing for what he calls “real money.”

“Ev­ery week, I’m mak­ing 5,000 kuai [$ 800] with Uber — that’s as much as I make all month in my cab,” Zhou says. “They’re of­fer­ing a lot of bonuses and sub­si­dies, try­ing to build cus­tomers and en­ter the Chi­nese mar­ket. A rider might pay 20 kuai, even less than they’d pay in a cab, but I get 60.”

Still, Zhou, who’s been a cab­bie for 20 years, isn’t giv­ing up on his taxi yet. “I’m keep­ing the taxi, be­cause I’m wor­ried the gov­ern­ment might shut down Uber. If that hap­pens, I want to have the taxi to fall back on.”

Since f irst dip­ping its toe in the China mar­ket in 2013, Uber’s peer- to- peer ride busi­ness has faced gov­ern­ment raids, po­lice crack­downs, protests from ir­ri­tated cab­bies and in­tense com­pe­ti­tion from Chi­nese taxi- hail­ing and ride- shar­ing apps backed by some of China’s largest In­ter­net com­pa­nies, in­clud­ing Alibaba and Ten­cent.

Still, the San Fran­cisco com­pany has fought its way into nine Chi­nese cities — with four more in the process of launch­ing — and Uber spokes­woman Xue Huang says the com­pany is pro­vid­ing close to 1 mil­lion rides a day in China. Now, Uber ap­pears poised to mount a busi­ness bat­tle royale in the world’s most pop­u­lous coun­try.

“Com­pe­ti­tion in China is strong,” said Minyuan Zhao, as­so­ciate pro­fes­sor of man­age­ment at the Whar­ton School of the Univer­sity of Penn­syl­va­nia. “Throw­ing cur­rent

in­cum­bents off the throne will be a big chal­lenge.”

For Uber, suc­cess in China is cru­cial. In­vest­ments in the startup im­ply a mar­ket val­u­a­tion that tops $ 40 bil­lion. “China is crit­i­cal to their cur­rent val­u­a­tion,” Zhao said. A stum­ble there would take “a big chunk from their cur­rent $ 40bil­lion val­u­a­tion.”

In a re­cent email to in­vestors, f irst dis­closed in the Fi­nan­cial Times, Uber Chief Ex­ec­u­tive Travis Kalan­ick said the com­pany planned to “dou­ble down” on China and ex­pand into 50 cities within the next year and in­vest $ 1 bil­lion in the mar­ket in 2015 alone. “China is the # 1 pri­or­ity for Uber’s global team,” he wrote.

It’s a dar­ing move in a mar­ket known for its cut­throat com­pe­ti­tion and murky reg­u­la­tory land­scape, not to men­tion aver­sion to some for­eign tech and e- com­merce com­pa­nies.

Uber has a for­mi­da­ble ri­val in the form of Didi Kuaidi, which started out in the taxi- hail­ing app busi­ness and is mov­ing into the pri­vate- ride mar­ket — and could easily draw on its mas­sive data­base of mil­lions of cab riders in hun­dreds of cities.

Grow­ing de­mand for trans­porta­tion is in­trin­sic to eco­nomic ex­pan­sion, and China’s con­gested and pol­lu­tion- choked cities are des­per­ate for so­lu­tions. “The de­mand for a ride is far out­strip­ping peo­ple’s abil­i­ties to buy cars and it’s out­strip­ping other trans­porta­tion in­fra­struc­ture,” said Julie Ask, prin­ci­pal an­a­lyst at For­rester Re­search.

Cabs are of­ten in short sup­ply, and even if you want to buy your own car or mo­tor­cy­cle, me­trop­o­lises like Bei­jing is­sue only a cer­tain num­ber of li­cense plates per year, ra­tioning them through a lottery sys­tem.

To cut traf­fic and smog, Bei­jing also has a ro­tat­ing sched­ule of “no drive” days based on your li­cense plate num­ber; driv­ers are f ined if they’re caught on the road on their black­out day.

That may spell op­por­tu­nity for Uber.

“Round One was taxi- hail­ing, and Uber got knocked down, but not out,” said Jeffrey Tow­son, a pro­fes­sor of in­vest­ment at Pek­ing Univer­sity and au­thor of “The 1 Hour China Con­sumer Book.” “Round Two will be p- 2- p ride shar­ing. That fight will be mostly about us­ing cap­i­tal to buy cus­tomers. Uber’s $ 1 bil­lion for China looks for­mi­da­ble.”

Still, he said, “this de­pends on gov­ern­ment ap­proval of p- 2- p ride shar­ing, which is still mostly illegal in China.”

Just as Uber has en­coun­tered dif­fer­ences in reg­u­la­tions state by state in the U. S., so it has in China. In Jan­uary, Bei­jing ’s Trans­porta­tion Com­mis­sion de­clared “spe­cial ser­vices” of Uber and sim­i­lar providers illegal. In April, Guangzhou’s po­lice and Trans­porta­tion Com­mis­sion cracked down on Uber, con­fis­cat­ing 1,000 iPhones, ac­cord­ing to re­ports in state- run media.

Uber did not re­spond to a re­quest for com­ment on the le­gal­ity of its ser­vices in China.

Some lo­cal­i­ties have couched their con­cerns as a safety is­sue, but in other cases the in­ves­ti­ga­tions look to be more f inan­cially mo­ti­vated, as lo­cal in­ter­est groups, in­clud­ing state- run taxi com­pa­nies, are up­set that ser­vices such as Ub- er are en­croach­ing on their turf and prof­its. Guangzhou’s Trans­porta­tion Com­mit­tee even un­veiled a ser­vice that di­rectly com­petes with Uber a week af­ter its raid on Uber’s of­fice.

But a change in tone lately from author­i­ties may sig­nal a shift. Dai Dongchang, act­ing vice min­is­ter of Trans­port, said this month that reg­u­la­tors are study­ing car- on- de­mand apps and pre­par­ing to draft reg­u­la­tions.

“The new trends are the re­sults of open­ness and in­no­va­tion,” he told state- run China Daily. “For reg­u­la­tors, the ul­ti­mate goal is to pro­mote bet­ter de­vel­op­ment within the in­dus­try.”

Uber be­gan trial oper­a­tions in the ex­pa­tri­ate- heavy me­trop­o­lis of Shang­hai in 2013.

De­spite ini­tially of­fer­ing only an English- lan­guage app and re­ly­ing on Google Maps, which are less ac­cu­rate in China than they are state­side, it found a base of clients.

Uber im­proved its ser­vice by switch­ing map providers and in­tro­duc­ing a Chi­nese- lan­guage app ( the ser­vice is called You- bu, or “ex­cel­lent step” in Man­darin).

Uber also signed a part­ner­ship with Chi­nese search en­gine gi­ant Baidu, giv­ing Uber ac­cess to Baidu’s map­ping and search ser­vices.

As it has sought to crack the mar­ket, Uber has been try­ing to set it­self apart with high- qual­ity cars, a stream­lined in­ter­face, and head­line- grab­bing spe­cial events much like the ones the com­pany is known for in the United States. Dur­ing Chi­nese New Year 2014, for in­stance, Uber cus­tomers could or­der a lion dance team to per­form at their home or of­fice; the day the iPhone 6 went on sale, users could have Uber buy and de­liver one of the much- cov­eted de­vices for them.

Uber even tried out a puppy- de­liv­ery day, bring­ing cute dogs to cus­tomers’ of­fices for 15 min­utes of play­time. This month, it de­liv­ered lunches.

But now, Uber seems to be spend­ing like there’s no to­mor­row to at­tract cus­tomers and driv­ers. In Shang­hai, for in­stance, Uber driv­ers in­ter­viewed last week said they are be­ing paid two to three times the fare the cus­tomer pays dur­ing rush hour and are re­ceiv­ing ad­di­tional bonuses for work­ing a cer­tain num­ber of hours.

And fares in Shang­hai of late have been even cheaper than cabs — a 2.9- mile ride last week taken via “Peo­ple’s Uber,” the low­est level of ser­vice, cost just $ 2.12. Peo­ple’s Uber is op­er­ated on a not- for- profit ba­sis, mean­ing Uber gets no cut of those fares.

Be­sides the low fares, Uber users say they ap­pre­ci­ate the fact that Uber driv­ers do not refuse rides based on a rider’s des­ti­na­tion ( a com­mon prac­tice among Chi­nese taxi driv­ers) and are, in the words of one cus­tomer, “more ed­u­cated and rea­son­able” than cab­bies.

“My ex­pe­ri­ence with Uber has been good — the driv­ers haven’t re­jected me and never will,” said Lin Yang, a 39- year- old sales rep­re­sen­ta­tive in Shang­hai.

“Yesterday, my daugh­ter was sick and it was pour­ing rain. I knew it would take for­ever to get a taxi, and we would prob­a­bly be wet by the time we got one. So we got an Uber. We paid ex­tra fees, but it was worth it. My daugh­ter got treated in time and we avoided lots of stress.”

As­sum­ing the gov­ern­ment starts to re­lax its re­stric­tions on ride- hail­ing apps, Tow­son said, in the near- term, Chi­nese con­sumers are in for a bo­nanza as Uber and Didi Kuaidi look to be gear­ing up for a sub­sidy war. “It’s go­ing to be great for us; we are go­ing to get lots of free rides.”

But if Didi Kuaidi can quickly lever­age its taxi cus­tomers into pri­vate- ride users, the war might not last long. “That, plus their big fund­ing, could be dev­as­tat­ing for Uber,” he said.

Fur­ther out, other big ques­tions re­main, in­clud­ing defin­ing the monetization strat­egy and de­ter­min­ing the ul­ti­mate price point. Chi­nese con­sumers have a well­doc­u­mented history of tak­ing ad­van­tage of pro­mo­tions and free­bies, then aban­don­ing a brand when the dis­counts dry up.

A part- time Uber driver in Shang­hai, who asked to be iden­ti­fied only by his sur­name, Wang, be­cause he feared sour­ing his re­la­tion­ship with the com­pany, said that if Uber cuts its ex­tra pay­ments, it will have to raise fares or f ig­ure out some other way to keep his in­come up. “Oth­er­wise, why would I con­tinue driv­ing?”

Huang said Uber’s in­cen­tives per trip are lower in China than in other global mar­kets, and that the busi­ness “con­tin­ues to grow at a very healthy rate even as we have been re­duc­ing in­cen­tives.”

But Tow­son said more time is needed be­fore Uber can de­clare it’s on solid ground in China. Be­sides clar­i­fy­ing the le­gal sta­tus of Uber, “the ques­tion is, what hap­pens when the sub­si­dies are over?” he asked. “Will users and driv­ers just stop?”

I slet Liang Color China Photo/ As­so­ci­ated Press

DRIV­ERS of Didi Kuaidi, Uber’s big­gest ri­val in China, protest an at­tempt to ar­rest a fel­low driver in Guangzhou on June 10. Uber has faced gov­ern­ment raids, po­lice crack­downs and cab driver protests.

Greg Baker AFP/ Getty I mages

UBER CEO Travis Kalan­ick, shown in Bei­jing in De­cem­ber, said in a re­cent email to in­vestors that the com­pany planned to “dou­ble down” on China and ex­pand into 50 cities within the next year and in­vest $ 1 bil­lion in the mar­ket in 2015 alone.

ChinaFotoPress/ Getty I mages

CHINA’S eco­nomic ex­pan­sion is fu­el­ing de­mand for trans­porta­tion, and its con­gested and pol­lu­tion- choked cities are des­per­ate for so­lu­tions. Uber pro­vides about 1 mil­lion rides a day in China.

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