The Organisations Motivation for Entering the Chinese Market - UBER - Case Study Example

Uber in China

Uber in China

Uber made its first internationalisation efforts through a debut into the Paris service car app market in 2011. Expanding outside the United States, Uber has made progress expanding its taxi services to Europe, Africa, and Asia. Uber made a strategic entry into China, which is estimated to have a population of approximately 1.36 billion by 2015 and over 221 cities and made it a remarkably feasible market for any internationally-minded taxi company. Its pioneer entry location in China was in Shanghai in 2013, which proved to be a very challenging market to enter given the unique roadblocks encountered such as insufficient understanding of the local navigation, prevalence of low-cost taxi services, intense competition and corruption (Batra, 2015). The greatest motivation is market seeking strategy triggered by the need to expand its services globally (Ramanna, 2014). The company utilized non-equity modes to enter into the Chinese mark”ets and directly compete with the local taxi operators. This entry mode is informed by Dunning’s Eclectic Theory that posits that foreign domestic investment is achieved upon ensuring ownership advantages, internalizing advantages and location advantages. This paper seeks to explore the internationalisation of Uber into the Chinese Market by focusing on its motivation to internationalise and the market entry strategy used in its efforts as well as the opportunities and risks faced in the process.

The Organisation’s Motivation for Entering the Chinese Market

Uber’s internationalisation efforts are triggered by the need to reach a strategic target goal of expanding its services globally and attaining the leading market position in the Taxi business globally. There are various theories that can be used to explain Uber’s globalisation strategy in China. The first theory is Ghemawat’s theory that is composed of three components, Adaptation, Aggregation, and Arbitrage. In regards to Adaptation Uber incorporated the locals in terms of management due to cultural differences. Aggregation for Uber meant that the company had to use cars the Chinese used and the drivers were also from China. Arbitrage for Uber in China can be illustrated by the fact that the company took advantage of the low cost labour that characterizes China, therefore, the services were the same but labour was different in comparison with America.

Uber’s internationalisation strategy can also be explained by the born global theory, especially in its operation in China. Born-global firm is a venture initiated to exploit a global niche from the initial tie of operations. The main characteristic that can be used to best describe Uber’s internationalisation strategy is the fact that it leveraged on enhanced information and communication technology (ICT) (Cavusgil and Knight, 2009). The mobile application that Uber uses, epitomises how the company leverages on ICT since it has customized the application in different languages to suit the culture and language of the locals.

China is also an emerging market where the international clientele from developed countries is increasingly tapping it as a potential investment hub. With the increase in international visitors to China, many foreign companies have established restaurants and ventured into the hospitality industry. This provides opportunity for Uber to complement the hospitality industry by serving the incoming visitors from some markets where the company is already established such as the United States, the UK, India, Germany, and South Africa among others.

The market seeking motivation of Uber to enter the Chinese market is also inspired by the cheap domestic labour, which is largely the country’s international competitiveness (Kirby et al., 2016). With the huge and rapidly growing population, most of the Chinese population makes up part of the cheap labour, which is utilised by many international companies investing in China. Given that Uber’s business model uses the local drivers in their operation, the cheap labour allows the company to increase its profit margin by reducing its transaction costs (Steinmetz, 2015).

Uber’s Market Entry Strategy

Entry Mode

Uber’s choice of entry mode in China is crucial to its success and survival since China is a new foreign market with characteristic differences from its primary market in the United States. Uber is highly profitable in the United States and Canada, and boasts of attaining its goals. This is because the business environment at home is conducive to their services and they do not have fierce competitors. In the United States, Uber enjoys the leading market position with other competitors following. However, this does not mean that the company is making money in all its markets. In China, the company faces intense competition from an already established company Didi, which results in the company losing over $ 1 billion a year (Xu et al., 2015). This trend can be explored by examining the market entry strategy adopted by the company.

In China, Uber utilizes non-equity modes of entry. This strategy involves exporting of services from the United States to China and enjoying the economies of scale derived from operating in the new country (Hill, 2010). Uber can effectively adopt this entry mode due to the vast knowledge and experience of foreign market, which enhances its internationalisation success. Through licencing from the Chinese authorities, Uber is permitted access to the Chinese market where it operates at relatively low costs (Farris et al., 2014).

The non-equity modes of entry to China have exposed Uber to a wide range of challenges, especially due to the stiff competition from Didi-Kuaidi, an already established taxi company in China, which is also a merger between two of China’s leading taxi-hailing apps: Kuaidi Dache and Didi Dache (Farris et al., 2014). Despite the innovative business model and the pioneering technology, Uber only managed to capture 11.5% of the Chinese market, forcing Uber to adapt to the local business premises to make this entry mode work in China (Christensen et al., 2015). A VRIO analysis reveals that the company has value in its innovation as it has pioneering technology, and a strong financial position due to its profitability back in the United States. However, such resources are not inimitable in a way that gives the company sustained competitive advantage. Due to its non-equity entry mode the company has had difficulty in exploiting its brand image and garnering consumer loyalty, hence the challenge of attaining a huge market share (Appendix 1).

Uber adopted the localisation strategy in the effort to reform its marketing strategy to adapt to the local culture, given that they did not have a local investor (Davies and Ibe, 2009). Understanding a local business culture, rather than transplanting its San Francisco model of operation was a demonstration of its ability to internationalise. The company sought to share data with the Chinese transport authorities by working with the local regulations and the Ministry of Transport for purposes of procuring an internet service company license. Uber also took steps to establish local teams for localisation of its logistics including support services and language. The company also moved away from Google Maps and partnered with Chinese Giant Baidu maps which led to Baidu’s extensive advertisement of Uber on its main page. Moreover, it partnered with Alibaba to appeal to the local population.

Dunning’s Eclectic Theory

Uber’s scope and patterns of internationalisation in China can further be explained through the eclectic paradigm developed by Dunning (2001). This theory describes the company’s internationalisation activity from the three perspectives: ownership advantages, internalizing advantages and location advantages. This theory posits that the FDI will occur when the ownership, internalizing and location advantages conditions are met (Dunning, 2001).

Uber possesses competitive advantages over most of the taxi companies in China giving it ownership advantage. Uber invests heavily in R&D with a focus on turning research breakthrough into building a sustainable ecology for innovation and enhancing its marketability for the future (Walker-Smith, 2016). Despite the stiff competition from China’s leading taxi-hailing app Didi Kuaidi, Uber has proven its competitive advantage in the possession of technology, capital, information management and organisational skills required to generate brand loyalty in the midst of intense competition. This has triggered the company to grow its market share progressively. For instance, despite Lyft, (Uber’s main competitor in the United States) merging with Didi Kuaidi (Uber’s main competitor in China), Uber was able to raise $1 billion in capital in July 2015 while Lyft was only able to raise $500 million in capital (Horpedahl, 2015).

Uber possesses an internalising advantage in the Chinese market as it believes that its ownership advantage should be retained in the company to enhance its competitive advantage and ensure that its competitive assets are not exposed to its competitors. Most companies choose to enter new markets through the equity modes such as joint ventures and mergers (Dunning & Lundan, 2008). These types of entry modes allows for sharing of technology, local knowledge, and expertise, which exposes individual companies to loss of valuable information, market share and property rights when such information leaks to the competitors (Xu et al., 2015). Choosing to utilise non-equity modes of entry into China, Uber derives the internalising advantages by reducing transaction or information costs.

China provides Uber with the location advantage given it has a population over a billion providing a vast market for Uber, along with easy access to cheap labour. Moreover, the lenient regulations regarding investment control allow for Uber to enter the Chinese market quickly (Guo and N’Diaye, 2009). The success of Uber’s entry into the Chinese market is based on market situation as shown by Porter’s Five Forces analysis. In China, there is a high entry barrier for new firms in the industry, as new firms must form strong distribution networks. Moreover, new entrants in the market perform at a lower level compared to already established local companies like Didi due to intense rivalry. This explains why the company is still struggling to gain market share in China (Appendix).

Review of Dunning’s Eclectic Theory in Uber’s Internationalisation Strategy

Advantages

The main advantage of Uber’s internationalising using Dunning’s Eclectic Theory is the fact that a business can expand its market. When a company has an expanded market, it has a potential growth in terms of profitability and market share (Luo and Tung, 2007). Post-globalization era has seen a tremendous era in emerging markets such as China as well as the growth of FDI in such countries. Dunning et al. (2008) indicate that the motives of firms that use internationalisation strategy such as Uber are motivated by the market and resources as well as augmenting FDI.

Disadvantages

A concept liability of foreignness implies the main obstacle that impacts Uber’s internationalisation efforts in China (Johanson and Vahlne, 2009). Liability of foreignness is the uncertainty in relation to the foreign markets in psychic distance. It is a common practice in China that most companies that are in mainland China always opt to form a joint venture with foreign companies or they can choose to license a foreign firm’s technology (Rosen and Hanemann, 2014). When a firm decides to internationalise through the cooperation with a foreign firm it will increase the Chinese company’s information of international practices, and this will enhance the company’s future international competitiveness by reducing the liability of foreignness (Moon, 2015). The aforesaid is a significant disadvantage to Uber especially since it entered the market late in China after companies like Didi, and the only way that Uber can overcome this disadvantage is by utilising its brand effectively. Brand image is a very strong tool that can help a company to overcome the liability of foreignness and latecomer shortcomings (Zaheer, 1995). Uber’s brand in the United States is highly established and popular and replicating and relying on this in China will allow it to overcome challenges to improve its market share.

Opportunities

Uber’s great opportunity in China is its business resources including technology and huge pool of capital, which makes the company have competitive advantage in it’s home country. Dunning et al. (2008) posits that the survival of the company in the home market presents major opportunities for the company to seek market expansion in other markets as in the case of Uber in China. Since China allows for easy entry of foreign companies into the Chinese market, Uber has an opportunity of making a successful entry into the market by incorporating the Chinese culture into its brand. Moreover, China does not pose stringent restraining policies and regulation that limits Uber’s operation in China, hence, Uber has great opportunity to grow its marketshare by localising its services especially with it’s sufficient capital and operational and technical know-how (Buckley et al., 2009).

Risk

The major risk that Uber faces is stiff competition from other similar taxi operators such as Didi. In China, Uber was not the first to enter the market, which implies a scenario of late entrant. Didi was the leader in this market segment, and at the time Uber was entering this market it was the leading taxi-hailing app in China, placing Uber as a latecomer company at a great disadvantage in competing with the existing local companies (Arnott, 1996).

Legal and regulation issues are another aspect that can be regarded as a risk in Uber’s internationalisation model, primarily as regulation in the taxi market segment is dynamic and is prone to change from time to time. Some of the taxi markets are unregulated and Uber’s entry into such market is viewed as a threat by the locals (Arnott, 1996). Uber is a taxi service that is very different from the old taxi operation model, and therefore from regulatory point of view, Uber is not a car and a driver but rather a network that links a willing rider to a willing, ready driver for a fee that is pre-arranged. Therefore, the company is at risk if the regulation is reviewed (Feeney, 2015).

Conclusion and Lessons and Implications for Future Internationalisation Strategies

The analysis of Uber’s internationalisation strategy in China provides important insights that Uber should consider when expanding its operations to other foreign markets. Since Uber entered the Chinese markets through direct investment other than equity modes, it has had major challenges regardless of its localisation strategy that sought to incorporate the Chinese culture into its business operation. It would be prudent for Uber in its subsequent efforts to recognise that every internationalisation strategy poses some benefits as well as challenges, hence it should focus on ensuring that the choice of the strategy fits the company’s goals of increasing its market share, profitability, and enhance its brand image while at the same time appealing to the local people. It may be prudent in future for Uber to consider entering foreign markets through equity modes such as franchising or mergers to promote positive market reception.