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1. How is Uber’s business model characterized? How is it different from non-platform businesses?

2. What are the differences between the Chinese market and other markets in which Uber operates? What are the challenges that Uber faces in China?

3. Is there a national market for Uber in China?

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HBS Professor William C. Kirby, Research Associate Joycelyn W. Eby, and Doctoral Students Shuang L. Frost and Adam K. Frost (Harvard University) prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

W I L L I A M C . K I R B Y

J O Y C E L Y N W . E B Y

S H U A N G L . F R O S T

A D A M K . F R O S T

Uber in China: Driving in the Gray Zone

For the China entrepreneur, competing is not for the faint of heart. . . . We at Uber pride ourselves on being fierce and principled competitors—we plan to succeed by continuing to win the hearts and minds of riders and drivers with a superior product experience.

— Travis Kalanick, Letter to Investors, June 2015

On September 23, 2015, a group of the world’s wealthiest technology industry leaders gathered in Seattle, Washington, to shake hands with the President of China. The event, the 8th US-China Internet Industry Forum, was a way for President Xi Jinping to demonstrate publicly the Chinese government’s support for firms that were revolutionizing traditional industries with Internet technologies.a After the meeting, a group photograph was taken of President Xi surrounded by 30 CEOs, whose companies had a combined market capitalization of $2.5 trillion. This “$2.5 trillion photo” included not only industry heavyweights such as Satya Nadella, CEO of Microsoft; Virginia Rometty, Chairman of IBM; and Jack Ma, Executive Chairman of Alibaba, but also leaders of some of the most prominent “sharing economy” companies, such as Brian Chesky, CEO of Airbnb and Cheng Wei, CEO of Didi-Kuaidi, China’s leading taxi- and private car-hailing app. However, there were also a handful of players conspicuously absent from the photo: chief among them was Travis Kalanick, the CEO of Uber.1b

This did not bode well for Uber’s future in China. Travis Kalanick had steered his company through five years of remarkable growth, its valuation greatly surpassing that of Facebook in Facebook’s early years. What began as a local limousine rental service in 2010 had, by 2015, grown into a transnational business empire stretching across 374 cities in 68 countries. In December 2015, Uber sought its single largest round of venture capital: $2.1 billion. This funding would bring Uber’s market valuation up to $62.5 billion, more than five times the total annual revenue of the US taxi and limousine industry in 2014. However, the future success of the firm depended in part on its ability to continue to expand in developing markets. And no market was larger or growing more quickly than that of China.


a This visit, part of Xi Jinping’s first state visit to the United States as President of the People’s Republic of China, bolstered China’s new the “Internet Plus” policy announced by Li Keqiang in March, 2015.

b Although Uber reported that Kalanick did attend several events during Xi’s visit, Uber’s CEO did not appear in the group photograph, nor was his name on the invitation lists.

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Since early 2015, China’s 800 million-person urban transportation market had been the site of Uber’s fiercest battles. Kalanick had led a strategy of aggressive expansion in China, but his company had encountered numerous challenges, including fierce competition from domestic rivals, incompatibilities with local market demands, rampant fraud, and uphill regulatory struggles. Despite the obstacles, Kalanick remained personally dedicated to advancing Uber’s position in China; he once jokingly commented that he had stayed in the country for so long that someone had suggested he apply for Chinese citizenship.2

Despite Kalanick’s sustained efforts in 2015, Uber failed to gain the kind of dominant market share in China that it enjoyed in other markets around the world. Estimates of the company’s total share of the Chinese ride-hailing market ranged from 11 to 30 percent. The majority of business had been captured by native firms, which had entered the market before Uber and offered a wider array of transportation services. Yet even with its comparatively weak market position, four out of Uber’s top ten cities by the number of rides hailed per day were already in China, including its top city in the world, Chengdu. A central part of the firm’s 2016 growth strategy was to expand into more than 100 new Chinese cities.

China was too important for Uber to lose. But doing business in the country also brought with it unique difficulties in terms of product localization, competition, and regulation. “China is so different from the rest of the world,” Kalanick explained.3 “You must come in humble if you are not from China.” Kalanick knew that the battle for Chinese markets would do much to determine the future shape of the company. But how could Uber successfully negotiate its legal position with both the central and local governments? Would Uber, a company used to operating with the advantages of early market entry and superior technology, be able to overcome competition from strong domestic rivals?

The Founding and Growth of Uber

The idea for Uber was born in the winter of 2008, when Travis Kalanick and his friend Garret Camp were waiting in the snow outside of Paris, trying unsuccessfully to hail a taxi into the city. Cold and frustrated, they swore that together they would solve this problem. They made a pact to create an app that would revolutionize on-demand transportation by fundamentally restructuring the way people interact with taxis. Their idea was simple: tap a button, get a cab.

This was no idle fantasy. Kalanick and Camp were experienced entrepreneurs on a warpath. Camp had just sold StumbleUpon, a major web-discovery engine he had built from the ground up, to Ebay for $75 million, while Kalanick had sold his content delivery platform Red Swoosh to Akamai Technologies for $20 million. Kalanick and Camp used these payouts to found their new company: Ubercab, later shortened to Uber.

In June 2010, the Uber app was first launched in San Francisco. Though initially its services cost 50% more than traditional taxis, it quickly gained popularity because of its ease of use.4 A few months later, Kalanick and Camp successfully raised $1.25 million in funding from angel investors. In 2013, Google Ventures invested $258 million in Uber’s Series C funding round, which pushed the company’s valuation up to $3.76 billion. After closing a $1 billion round of new funding in 2015, Uber surpassed Xiaomi, China’s largest smart-phone company valued at $45 billion, and reclaimed its position as the most valuable start-up in the world. (See Exhibit 1 for a chart of Uber’s fundraising rounds and major investors.)

Steady increases in funding allowed Uber to expand both the geographic reach and the nature of its services (see Exhibit 2 for a timeline of Uber’s expansion across the world). In May 2011, Uber launched

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its platform in New York City. In December of that year it moved into Paris, and by July 2012 it offered rides in London. Around that time, Uber unveiled its most ground-breaking and controversial product: “UberX.” Whereas Uber’s initial services had been provided by black cars (luxury vehicles with drivers specially licensed to provide chauffeur services), this new product allowed ordinary drivers to pick up customers with their private vehicles. UberX quickly became the fastest growing Uber offering.5 By the time of its fifth anniversary, the Uber app allowed customers to choose from a range of transportation options, including the original black cars, as well as ordinary private vehicles (UberX), SUVs, and even traditional taxis.

Along with geographic expansion came experimentation in both market-specific and global product offerings. In India, for example, Uber launched an Auto Rickshaw service (though it was later suspended). UberMoto allowed users in Bangkok to hail rides on motorbikes, Uber’s nod to one of Bangkok’s primary modes of transportation. Globally, Uber also began to offer a variety of delivery services. In April 2014, the company started UberRUSH which delivered bikes to customers in Manhattan. In January 2015, the company began a logistics operation in Hong Kong called UberCARGO. Later that year, it also launched UberEATS, a food-delivery service piloted in Los Angeles, Chicago, New York City, and Barcelona.

By December 2014, Uber had 162,037 active drivers operating in 311 cities across the globe. By its fifth anniversary in June 2015, Kalanick boasted of Uber’s 26,000 drivers in New York City, 22,000 in San Francisco, 15,000 in London, and 10,000 in Paris.6 In each of these major cities, the number of Uber drivers had begun to rival the total number of licensed taxis. In December 2015, Uber launched a fundraising round that placed its valuation at $62.5 billion. Still, Kalanick had no intention of taking his company public in the near future. “Uber is currently in its ‘junior high’ stage of development,” he said, and the company still needed a few more years before “going to prom.”7

A Unique Value Proposition

Uber was an Internet transportation network company (iTNC) that connected ride-seeking users with drivers through a smartphone application (app). Using a smartphone, a user would place a ride request on the GPS-enabled Uber app, which would then match her with the nearest available driver through a pairing algorithm. The app would then send the driver the user’s location and contact information, and the customer would be picked up within minutes. When the user arrived at her desired destination, a fare would be generated through a pricing algorithm and automatically charged to the user’s linked credit card.

Beyond the ease of user experience and the novelty of being able to hire a car without taking out a wallet, there were two more innovative aspects to Uber’s business model. First, Uber’s platform introduced “flexible fares” to the market for public transportation. In each of its 374 cities of operation, Uber’s rates fluctuated throughout the day according to observed changes in the local supply and demand for hired transportation. During peak-hour traffic, holidays, bouts of inclement weather, or other times of excessive demand for rides, Uber’s pricing algorithm invoked ‘price surges’ (which could be up 8 times the standard rate) to stimulate driver supply. By using price surging, Uber sought to adjust urban transportation markets to their equilibrium states. For the first time since rentable hackney carriages appeared on London streets in the 17th century, the tradition of fixed fares for taxis and taxi- like urban transportation was challenged by the idea of using changing market signals, now computer- generated.

The second revolutionary aspect of Uber’s business model was that it depended on replacing organized and regulated transportation providers with private, on-demand labor. Uber’s platform allowed individuals with privately-owned vehicles to act as ad-hoc taxi service providers. Without a

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formal contract or special type of certification, any licensed driver could sign up with the company, download the Uber app, and earn money by taking orders. Uber drivers earned 80% of the total fares they fulfilled; the other 20% went to Uber. Because of this relatively high rate of return, large numbers of taxi drivers opted to operate their own vehicles as full-time Uber drivers rather than continue to pay the fees associated with traditional taxi operation. Many individuals who had previously been uninvolved with the transportation industry became part-time Uber drivers to supplement their primary income; the complete flexibility of hours allowed them to choose exactly when, and for how long, they wished to work each week.

A Regulatory System Struggling to Keep Up

While Uber expanded its global market, local and national governments struggled to adapt legal frameworks to regulate this new form of economic activity. Ride-sharing services led to the development of new consumer safety and worker protection laws while also calling into question the (often legally privileged) positions of taxi companies. Just a few years after its founding, Uber faced legal challenges around the world.

Public safety One key question for governments was whether it was safe to integrate fleets of untrained citizens driving uninspected cars into urban transportation systems; for many cities and countries, taxi industry regulations were based on the assumption that it was not. To mitigate personal safety concerns, Uber performed what it claimed were stringent background checks on all driver- partners and vehicles. Even so, there were still a number of high-profile cases about individuals with serious criminal records passing the checks and being allowed to drive, some of whom committed further criminal acts as Uber drivers. In the winter of 2014-2015, Uber drivers in Boston were implicated in several instances of assault.8 At the same time, Uber was banned from operation in New Delhi after a driver was accused of raping a passenger.9 In February 2016, an Uber driver in Kalamazoo, Michigan went on a shooting rampage, picking up and dropping off passengers between shootings.10 Concerned for public safety, some municipal governments began to take proactive approaches against Uber. The city of Portland Oregon, for example, sued Uber three days after its launch, asking it to cease operations until it was “in compliance with the city’s safety, health and consumer protection rules.”11

Labor regulation Controversy also surrounded Uber’s treatment of its “driver-partners.” Labor unions and legal experts contested the company’s refusal to classify drivers as employees rather than independent contractors. While many drivers enjoyed the flexibility of the on-demand work model, their transitory status deprived them of many benefits and protections provided to workers legally classified as employees. In August 2013, Shannon Liss-Riordan, a labor lawyer based in Massachusetts, filed a class action lawsuit against Uber on this matter. Liss-Riordan argued that it was unfair and illegal for Uber to classify its driver-partners as contractors while at the same time controlling many aspects of their work, monitoring their movements in real time, and maintaining the managerial ability to fire them. The class action suit was settled in April 2016 for a payout of $84 million and a possible additional $16 million should Uber go public and achieve a valuation of over $93.75 billion within a year of its IPO. As part of the settlement, Uber also agreed to changes in its driver deactivation policy that would make it more difficult for Uber to terminate drivers at will.12 In a separate case, the California Labor Commission ruled that Uber driver Barbara Ann Berwick was an employee of the company, not a private contractor. Such cases threatened to seriously compromise the flexibility and cheapness of labor that was central to Uber’s business model.

Legal gray areas Part of the difficulty governments faced in regulating Uber was simply determining how to classify the company and its stakeholders. When faced with legal challenges that addressed Uber as a transportation company, Uber representatives often claimed that because the firm

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did not own its own fleet of vehicles, it could not be classified as a transportation company. Rather, should be treated as an internet company and not subjected to transportation sector regulations.13 Another gray area in classification was whether Uber drivers provided “hailed” or “pre-arranged” rides, which were often governed by different regulations. The lack of clarity about where Uber fit in to the existing regulatory framework allowed Uber to fight government claims against Uber’s purported violation of taxi licensing laws and fair competition.

In December 2014, Uber’s operations faced legal challenges relating to licensing and pricing in Spain and Thailand, and it faced heightened government scrutiny in numerous other locations. As of October 2015, UberPop, the European equivalent of the American version of UberX,c was banned in Spain, German, Italy, and France. From October 2012 to October 2015, Uber faced over 170 lawsuits in the United States alone.14 Yet even while Uber was embroiled in legal disputes with governments around the globe, it continued to be the world’s most highly valued start-up.

Uber in China

By 2015, Uber had identified China as the major battleground for its future. That year, there were 2.62 million licensed taxi drivers operating in major Chinese cities, more than ten times the 240,000 licensed taxi drivers in the all of the United States. As of 2014, New York City had 13,437 licensed taxis—Shanghai had more than 50,000 taxis and over 90,000 licensed taxi drivers.15 Countless more unregulated private cars operated as taxis in virtually every Chinese city, town, and village. The number of Mainland taxi app users reached 18 million by 2013, and rose to around 45 million by the end of 2015. Moreover, by 2015, the number of smartphone users in the Mainland was estimated to be over 900 million—more than all the users in the U.S., Brazil, and Indonesia, combined.16 As Kalanick noted in a letter to investors in June 2015, “China represents one of the largest untapped opportunities for Uber, potentially larger than the US.”

Slow and Steady Market Development

Uber began building its corporate presence in Shanghai in the summer of 2013. For more than a half a year the local team did not begin formal operations, but instead ran small pilots, preparing for a limited launch in February 2014 in Shanghai, Guangzhou, Beijing, and Shenzhen. When Uber finally rolled out its first advertising campaign, it restricted its business to black car rentals operated in partnership with third-party car rental companies, much like its original product offering in 2010. With fares significantly higher than those of traditional taxis, Uber was a niche service-provider, catering to foreign business and Chinese elites. From late 2013 to mid-2014, when the domestic ride-hailing companies such as Didi and Kuaidi were engaged in a fierce subsidy war, each trying to seize as much territory as possible, Uber remained conspicuously uninvolved. As late as summer 2014, few Chinese taxi drivers had even heard of Uber.

That changed in August 2014, when the company launched “People’s Uber,” the localized equivalent of UberX in the United States (see Exhibit 3 for a comparison of the prices of Uber products in major Chinese cities and in the United States). Drawing upon overtly Communist rhetoric and images, People’s Uber was advertised as a non-profit ridesharing project. In promoting the product, Uber China explained that it would only be acting as a network facilitator, providing its platform to the public free of charge. Although Uber waived its normal 20% cut, in other ways this “ridesharing”


c In the United States, UberX drivers did not have any special form of licensing beyond a driver’s license. In Europe, however, UberX services were provided by specially licensed minicab drivers.

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service was not significantly different from UberX. People’s Uber was used by the company to build brand recognition and attract a critical mass of drivers to its platform. Uber China also offered substantial subsidies to encourage drivers to join.

The financial incentives proved extremely effective. At the fifth-anniversary celebration of the founding of Uber, Kalanick boasted that after a five-month campaign in China, Uber had recruited 42,000 drivers in Chengdu alone—just slightly less than the total number of Uber drivers in London, Paris, and San Francisco combined. Christened as Uber’s “number one city in the world” in September 2015, Chengdu was the first Uber location to offer UberCOMMUTE, a new product that allowed drivers to choose to offer rides to passengers headed in similar directions as the drivers themselves. This was the first time that Uber had performed an initial product launch in a market outside of the United States.17

Uber’s rapid growth was not limited to Chengdu. Hangzhou drivers reported tens of thousands of Uber users in their city. According to local media in Guangzhou, over 15,000 private vehicles registered with Uber operate in the city daily. In May 2015, Uber claimed that it created 60,000 jobs in China in that month alone.18 Uber’s statistics for China were on an entirely different scale than those for Europe or America. “You’re not going to find a country with 80-plus cities over five million people anywhere else,” said Kalanick in an interview with The Wall Street Journal. “The vastness of the opportunities really isn’t matched in any other market.”19 Uber planned to enter 100 new Chinese cities in 2016, roughly one-fourth of the total number of cities in which they operated around the globe (see Exhibit 4 for the locations of and services offered by Uber in China as of January 2016).

Product Localization

Uber had been able to achieve such rapid, global scale in part because of the broad demand for its product (reasonably priced, on-demand, urban transportation) and the ease with which its services could be offered in new locations with relatively few changes. However, Uber had been designed for American users. Although the demand for convenient transportation was strong in China, several of the Uber platform’s features that made it so convenient for Americans conversely made Uber less convenient in China. For the first time in four years of rapid, global expansion, Uber had to make changes to its core product for a new market.20

When Uber first began operating in Shanghai, it relied exclusively on credit card payments for service. In order for customers to place an order on their smartphone, or even create an Uber account, they had to first provide valid credit card information. This presented a major obstacle for many potential Chinese users. Although by 2015, China had an estimated 1.3 billion unique mobile phone users, 68% of whom used smartphones, credit card use was less common, particularly outside of major urban centers.21 Uber’s online billing system therefore limited its users to a minority of the urban elite. Uber China recognized this disadvantage in its business approach and, just in time for the limited launch in February 2014, added the option of payment through Alipay.d22

Even after Uber’s limited launch in February 2014, it continued to use Google Maps to locate and match customers with drivers, as it did in all of its other locations. Not only was Google Maps’ coverage of China extremely limited (and notoriously inaccurate), it was also unfamiliar to most Chinese customers. In contrast to its dominance in the U.S. market, by 2012, Google Maps was only the sixth


d Similar to PayPal, Alipay was a mobile wallet system developed by Chinese e-commerce giant Alibaba. By 2014, Alipay had 300 million registered users, including 100 million mobile users. (John Heggestuen, “Alipay Overtakes PayPal as the Largest Mobile Payments Platform in the World,” Business Insider, February 11, 2014, overtakes-paypal-as-the-largest-mobile-payments-platform-in-the-world-2014-2, accessed January 2016.)

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most popular mapping application among Chinese users. 23 Instead, Chinese users preferred the mapping technology of Baidu, a technology company founded in Beijing in 2000 that offered many products and services similar to those of Google. With one of the significant strengths of its product— ease of connection between users and drivers—severely diminished by the weak position of Google Maps in China, Uber China entered into a strategic partnership with Baidu on December 17, 2014.24 This allowed Uber to use Baidu Maps for its China services, and brought the politically connected and economically powerful Baidu into its inner circle of investors. In order to keep its operations from being delayed by passing computing traffic over China’s notorious firewall, Uber China installed a new server on Chinese soil.

In addition to these product changes, Uber implemented targeted, localized marketing campaigns. Uber’s basic strategy for global expansion started with the assignment of a three-person core team for each new city it entered. This team included a city manager, a manager of marketing, and a manager of operations, who worked together to develop marketing strategies particular to the cities in which they were based. In Guangzhou, one such campaign allowed users to press a special button to send an attractive Uber driver (handpicked by the local Uber team) to pick up one of their single friends on Chinese Valentine’s Day. In Hangzhou, visitors could hail UberBOATs to visit scenic destinations across the famous West Lake. In Shanghai, Uber users could book 30-minute helicopter rides to experience the metropolis from a bird’s-eye view. While none of these services offered the company significant revenue, they helped to popularize the app and build Uber’s image in China.

Subsidies and Subversion

In addition to making its core product more attractive to the Chinese user base, Uber spent massively on subsidies to attract Chinese drivers and customers. New users were attracted to the platform by large discounts on their first trip, often equivalent to the full cost of the ride. Many were enticed to continue using the service, as in most cities the fares they received were well below the standard rates for taxis. Similarly, drivers were encouraged to join Uber because they earned up to three times the amount that customers paid for each trip.25 By providing these substantial financial incentives, Uber successfully brought large numbers of urban residents over to its platform. However, the company’s capital investment also had an unintended consequence: it gave rise to a huge illicit economy of drivers faking trips for their personal gain.

As soon as Uber began offering subsidies, some individuals realized they could profit by exploiting loopholes in the company’s software. Though the methods used by drivers to fake trips evolved in step with changes to the structure of subsidies or upgrades to Uber’s platform, there was a general pattern. First, the driver would locate a fake customer—a friend, a family member, another driver, or a professional fake customer—and have them request a car at her exact location. Uber’s system would then automatically pair her up with this fake customer based on their spatial proximity. The driver would drive the distance that would maximize the subsidy earned, and then end the trip. After the trip was completed, the driver paid back the amount of fare paid by the fake customer, plus a small commission. The driver then reaped the difference between the fare and the subsidy awarded by Uber.

Though simple in its approach, trip-faking involved a large and diversified group of illicit actors. In online chatrooms and forums, drivers sought partners to place fake orders for them when they were either unable to get orders on Uber’s platform (during less busy times of day or when they were located in remote suburban areas) or when they wanted to go to a specific place (e.g. home) and still receive a fare. Professional fake customers, referred to in online forums as ‘nurses’, specialized in placing fake orders and matching the request to the driver; these individuals were called nurses because the location pin on Uber’s interface looked like a needle, and nurses gave a ‘shots’ to drivers by matching the pin

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with their exact location. Software developers, also operating in these online communities, helped refine this process by producing and selling software and hardware that facilitated trip-faking, such as devices that could manipulate GPS tracking.

Uber responded by creating systems for identifying fraudulent orders and blocking drivers who were strongly suspected of engaging in subsidy manipulation. Drivers, however, continued to develop more sophisticated methods of trip-faking, and shared information with each other about how to avoid Uber’s detection system. According to one investor, some 30 to 40 percent of all billed rides for Uber China were actually faked trips.26

A Competitive Sector

Uber had to rely on large, often-manipulated subsidies because by the time Uber had entered the Chinese market, it was already dominated by other ride-hailing companies. Unlike other global markets in which Uber was either the undisputed leader or had easily edged out local competition (see Exhibit 5 for a chart of Uber and its competition in different locations), by the time Uber entered the Chinese market in 2014, there were already well-established competitors. By 2014, two domestic giants emerged as the unquestioned leaders of the Chinese taxi-hailing app market: Didi and Kuaidi.

Didi, Kuaidi, and Didi-Kuaidi

Didi Dache, a taxi-calling app developed by Xiaoju Technologies in Beijing, was an early market entrant that received its initial $15 million investment from the internet giant Tencent in April 2013. With Tencent’s backing, Didi experienced rapid growth—its user-base almost tripled, growing from 0.69 million to 1.9 million between April and May 2013 alone—and went on to collect an additional $100 million in a second round of venture capital funding the following year.27 Kuaidi Dache, created by Kuaizhi Technologies in Hangzhou, experienced a parallel developmental trajectory after it was bankrolled by Alibaba. In the first half of 2014, the two companies engaged in a massive war for market share. Offering monetary incentives to attract new customers and drivers, Didi and Kuaidi together burned through an estimated 2.4 billion yuan (roughly US $400 million) in the span of six months. Both companies emerged from the promotional battle significantly poorer, though together they had captured the entire mobile ride-hailing market: as of late 2014, each firm controlled roughly half of the ride-sharing market, with Didi the slightly larger of the two. They had expanded the market as well. By the end of 2014, the combined user-base of Didi and Kuadi was double what it had been at the beginning of that year.28

Didi and Kuaidi differed from Uber in a number of important ways. First, both Chinese firms amassed their initial user-base by providing networking services for certified taxi drivers. By using their mobile apps, customers could hail regular taxis without waiting in queues at taxi stands or attempting to wave down cabs at curbsides. By cooperating with local governments and the incumbent taxi industry, Didi and Kuaidi skirted most regulatory controversies, won popular support, and scaled up much more rapidly than Uber China during early phases of expansion. Only after building up these government and consumer relationships did both companies begin to add zhuanche [private car] products equivalent to UberX in the U.S. and People’s Uber in China.

Second, Didi and Kuaidi provided more diversified services than Uber. After launching their respective zhuanche products, Didi and Kuaidi continued to promote official taxis as an important component of their service. Additionally, they also developed a “chauffeur service,” through which a customer could hire a chauffeur to drive the customer home in the customer’s own car, as well as bus services and carpooling. Whereas Uber had had to adjust its core product to fit the China market, Didi

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and Kuaidi were built to serve the China market. Both used Baidu maps as their primary mapping tools, and both offered a variety of payment options, such as Alipay, WeChat payments,e and even cash.

Almost exactly one year after Uber’s launch in China, on February 14, 2015, Didi and Kuaidi announced an agreement to merge, with both companies maintaining their independent brands and leadership teams.29 This Valentine’s Day marriage of Didi and Kuaidi, two formerly fierce rivals, immediately raised the concern of industry monopoly. Shortly thereafter, another emerging player in taxi app market, Yidao Yongche, filed a lawsuit against the merger, accusing it of violating anti-trust laws. In early 2016, the lawsuit was still pending, but many predicted that the verdict would be in favor of Didi-Kuaidi, because prior to the merger the two firms were not yet profitable.

Whatever the court’s decision, the merger already had over 10 months to reshape the dynamics of China’s ride-hailing market. The newly united Didi-Kuaidi poured cash into maintaining its market share, reporting a loss of over $500 million in the first five months of 2015, three times the company’s revenue.30 Uber, meanwhile, provided drivers with subsidies of up to 130% of the customer’s fare in order to attract drivers to the platform.31 Both companies saw recruiting drivers as key to achieving market dominance. Customers, on the other hand, were attracted to both platforms because of their convenience and, often, their lower-than-taxi fares.

By 2016, Didi-Kuaidi was valued at $16.5 billion and commanded a pool of 1.35 million drivers in more than 360 cities in China. According to company reports in 2015, Didi-Kuaidi booked up to 7 million rides per day, roughly seven times Uber China’s average rides per day, and more than Uber’s daily count globally. Between 40 and 50 percent of Didi-Kuaidi rides were in private cars (similar to UberX).32 Even Uber’s most positive estimate placed its own share of the private car ride-hailing market at 30%, while others projected its share to be closer to 11.5%. Didi-Kuaidi claimed that it controlled a full 80% of the market.33

Enemies on Multiple Fronts

While Uber continued its fight to gain market share, it also faced increasingly savvy attempts by Didi-Kuaidi to weaken it, both in China and globally. Within China, lines were drawn between Didi- Kuaidi and Uber not only because the companies themselves were in competition, but also because their main investors (Tencent for Didi, Alibaba for Kuaidi, and Baidu for Uber China) were themselves in fierce competition with one another. Each of these investors operated one of the three technologies that undergirded the successful operation of both Didi-Kuaidi and Uber, with Baidu responsible for Baidu Maps, Alibaba for Alipay, and Tencent for WeChat, the messaging application that drivers overwhelmingly used to communicate with customers and that both companies used to advertise promotions. In March 2015, Uber claimed that Tencent blocked all Uber-related WeChat accounts, cutting Uber off from this major customer support tool.34

In addition to attacks from the tech world in China, Uber also found itself engaged in increasingly fierce battles for territory outside of China, competing against rivals funded by Didi-Kuaidi. In September 2015, Didi-Kuaidi invested $100 million in Lyft, Uber’s biggest competitor on its home turf. Beyond the investment, Didi-Kuaidi formed a strategic partnership would allow users Lyft to use Didi- Kuaidi in China, and Lyft elsewhere, over a shared platform. In December 2015, Didi-Kuaidi and Lyft expanded their partnership to include Ola, the biggest ride-sharing company in India, and GrabTaxi,


e WeChat, a popular mobile messaging platform in some ways similar to WhatsApp, owned by Tencent, offered an integrated mobile payment platform through which WeChat users could link bankcards to their chat accounts and send payments to individuals or various e-commerce platforms through the WeChat app.

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316-135 Uber in China: Driving in the Gray Zone


an iTNC valued in excess of $1billion that provided service in six countries in Southeast Asia. With these moves, a global “Anti-Uber Alliance” was born.

Regulatory Challenges

In addition to facing fierce competition from Chinese rivals, Uber generated increased opposition from entrenched powers in China’s taxi industry, and it faced uphill regulatory battles in cities across China. When Uber first launched, it skirted issues of legality by working with car-and-driver rental companies to allow users to book licensed chauffeurs through its UberBLACK product. However, when it introduced People’s Uber, Uber crossed into a gray legal zone. In January 2015, Beijing’s traffic enforcement unit director announced that it was illegal for internet apps to facilitate the hailing of unlicensed taxis.35 As in many other parts of the world, Uber began to play a game of cat and mouse with the government: it continued to operate its services while the government struggled to develop regulation that balanced the demands of entrenched interests, consumer safety concerns, and urban China’s strong demand for new modes of transportation.

Opposition from Entrenched, Local Players

Uber and Didi-Kuaidi had entered into a sector in which existing stakeholders were already dissatisfied. For many years, the average monthly income of taxi drivers remained stagnant in the face of a rapidly increasing urban cost of living and high fees owed to taxi companies. The arrival of Didi- Kuaidi and Uber, which were higher paying, especially as they fought for market share by offering driver subsidies and bonuses, led some drivers exclusively to serve taxi customers sourced through an app, or to operate private vehicles.

To other taxi drivers, however, the new dominant forces in the urban transport market were a lightning rod for preexisting discontent. As in many other countries, licensed taxi operators in China complained that Uber and Didi-Kuaidi promoted unfair competition by enabling their users to evade local taxation and regulations. (Both companies often offered fares significantly lower than standard taxi fares set by the local government.) Taxi drivers in Tianjin, Chengdu, Hangzhou, and Shenzhen organized major protests against ride-hailing apps like Uber. Others actively petitioned local governments to reinstate a level playing field.

Still others became law-enforcing vigilantes seeking to expose drivers operating private cars for profit. They posed as Uber and Didi-Kuaidi customers, using the mobile app to book rides, only to alert the police and have the private drivers arrested for offering taxi services without a license. Police officers in Guangzhou, Hangzhou, and Wuhan similar approaches, booking rides using Uber’s app and either issuing large fines to the drivers who come to pick them up or impounding their vehicles. In response, groups of Uber drivers in several Chinese cities blockaded major streets, protesting of the seizure of private vehicles. Such a protest of entrapment in Guangzhou in June 2015 brought traffic on a major road to a standstill for hours.

Drivers were not the only Uber stakeholders facing seizure of property. On April 30, 2015, Chinese authorities raided Uber’s Guangzhou office, seizing equipment and smartphones. Officials in the Office of Industry and Commerce and the Guangzhou Transportation Commission announced that the company was under investigation for “organizing private drivers to provide unlicensed business” and “operating black cars.” The local government later released a statement that Uber “was not properly registered…, does not have the official qualifications to operate in transportation industry, and was involved in using private cars for commercial purposes.”36 Employees of Uber Guangzhou claimed that the reported raid was actually a routine check-up and that their platform remained operational.37

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Uber in China: Driving in the Gray Zone 316-135


A week later another raid was carried out on the offices of Uber Chengdu. Days later, Didi-Kuaidi offices in Luoyang faced a similar raid.38

In response to these mounting tensions, municipal governments began to issue clearer regulations regarding the status of iTNCs and the practice of private taxi services. Shanghai’s transportation department developed a certification for “Internet-based taxi platforms.” The certificate officially sanctioned private drivers to work for an iTNC if they passed a series of inspections and safety requirements.

National Regulation

Two days after Shanghai announced its certification process, the Ministry of Transportation issued a draft set of guidelines for reforming China’s taxi industry. In the policy document, the central government stated its support of using the Internet to facilitate transportation services, in line with President Xi Jinping and Premier Li Keqiang’s “Internet Plus” policy.39f However, the document also stated that the transition should be gradual, and municipal governments should not abandon their traditional taxi firms.

In conjunction with the guidelines, the central government also released a draft of a new law entitled, “The Operation, Service, and Management of Internet-based Taxi Companies” (See Exhibit 6 for highlights from this policy document). Under the proposed laws iTNCs would be required to conduct background checks on their drivers and turn their personal information over to local governments. Furthermore, iTNCs would have to sign labor contracts with drivers and provide them with commercial insurance. Private drivers, in turn, would only be allowed to work for a single iTNC, rather than split their time between multiple platforms.

Other items in the document were of particular concern to Uber and its future in China. One proposed measure would require iTNCs to “fix and clarify” their prices, seemingly prohibiting Uber’s price-surging algorithms. Another measure stated that firms would not be allowed to artificially lower their prices (through the heavy subsidizing of rides) in order to undercut their rivals. Such a restriction might limit Uber’s ability to use its enormous capital base to capture market-share.

Both proposed drafts were promulgated online by the central government to collect public opinion. Public opinion was fiercely divided; scholars at Peking University weighed in publicly on both sides of the issue. Comments on the draft law were closed on November 9, 2015, and at the National People’s Congress meeting in March 2016, Minister of Transport Yang Chuantang reaffirmed the government’s commitment to legalize and regulate ride-hailing apps. Still, by the end of that legislative session, the final law had yet to be announced.

Good Steps into the Future?

We’re still number two, so we still have a long way to go. There are a lot of things we don’t know about China, but what an interesting problem to solve.

— Travis Kalanick40

On October 8, 2015, Didi-Kuaidi obtained Shanghai’s first “certificate” for an Internet-based Transportation Company in China. While Kalanick had repeatedly proven the tenacity of his company and its ability to operate in a legal gray zone, this important recognition of an unusually strong local

f On March 5, 2015, Premier Li Keqiang presented the “Internet Plus” action plan, which sought to promote and strengthen the role of the Internet in the economy across a wide variety of industries, including e-commerce and banking.

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316-135 Uber in China: Driving in the Gray Zone


competitor was a significant blow. Moreover, if, as some observers suggested, the granting of this certificate signaled the local government’s allegiance to and favoring of domestic technology firms, Uber could be facing a future more akin to that of Google and Facebook, both of which were blocked by Chinese authorities.

Kalanick did not retreat from his push into China, and began a shell-game strategy of founding new companies even as existing ones came under threat. The day that Didi-Kuaidi received its permit from Shanghai, Uber announced the establishment of a new company, Shanghai Wubo Information Technology Co., Ltd., in the Shanghai Free Trade Zone.41 The establishment of this company, together with the establishment of China-based data and operating centers, represented Uber’s first independent operation in a foreign country. Uber had generally pursued global expansion by setting up subsidiary companies in the various locations to which it had expanded outside the United States. These subsidiary companies operated under the parent company, Uber Technologies. Shanghai Wubo Information Technology, on the other hand, was registered as an independent company in Shanghai in January 2015 with Uber (Hong Kong), Limited, as a shareholder and registered capital of $150,000.42 Uber subsequently registered two more independent companies in Shanghai, Wubu Information Technology Co., Ltd., and Wubu Software Technology Co., Ltd., both with Uber China Head of Strategy Liu Zhen as legal representative.43 The legal representative of Wubo was initially Uber Vice President Axel Martinez before being transferred to Eric Alexander, Uber’s Head of Business, Asia, in October 2015.

In June, the registered capital of Wubo was increased to almost $320 million.44 When the company was formally announced in October, Uber added that it intended to invest an additional $950 million in the company in the future. Later that month, Uber announced the investment of approximately $9.5 million to build an operations center in Wuhan. The center represented Uber’s first major operating center outside of North America, and would provide data analysis, research and product development, as well as customer support.

In addition to strengthening its own corporate presence in China, Uber also continued to seek out local partners who, like its early investor Baidu, would help it gain the political support critical for its expansion. In December 2015, less than one year after its office was raided by Guangzhou municipal officials, Uber China received an undisclosed amount of investment from Guangzhou Automobile Group in exchange for promoting Guangzhou Autos to its drivers. 45 In January 2016, Kalanick announced that tourism, aviation, and shipping conglomerate HNA Group had also launched a strategic partnership with Uber and had invested an undisclosed amount. 46 , g But would greater corporate flexibility, increased investment, and new partnerships be enough to win in the Chinese market? With $1.2 billion in funding raised on the assertion that Uber would grow to serve 100 more Chinese cities by the end of 2016 and a letter to investors that all but staked the future of the company on its China performance, Kalanick needed these big bets to translate into market share, and soon.

Kalanick admitted in February 2016 that Uber was losing over $1 billion annually in its battle for market share in China. How long could Uber’s global operations continue to absorb that scale of losses? Would Uber’s attempts at localization—and its heavy subsidies for drivers and riders—be enough to win permanently the “hearts and minds of riders and drivers”? What could Kalanick do to ensure that municipal and national law at least continued to allow Uber to operate in the gray zone, if not give it outright legal standing? At the end of the day, could an American technology company succeed against an agile, well-financed, well-connected Chinese competitor in the Chinese market?


g For more about the HNA Group’s own push to expand into the global marketplace, see William C. Kirby, F. Warren McFarlan, and Joycelyn W. Eby, “HNA Group: Global Excellence with Chinese Characteristics,” HBS. No. 316-013 (Boston: Harvard Business School Publishing, 2016).

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Uber in China: Driving in the Gray Zone 316-135


Exhibit 1 Uber Technologies Investment Rounds and Disclosed Investors, 2009–2015

Date Round Amount Raised Publicly Disclosed Investors

August 1, 2009 Seed $200,000 Garrett Camp, Travis Kalanick

October 15, 2010 Angel $1.25 million First Round (lead investor), Alfred Lin, Babak Nivi,

Cyan Banister, Founder Collective, Jason Calacanis,

Jason Port, Josh Spear, Lowercase Capital, Mike

Walsh, Mitchell Kapor, Naval Ravikant, Oren Michels,

Scott Banister, Shawn Fanning, Techstars Ventures

February 14, 2011 Series A $11 million Benchmark (lead investor), Alfred Lin, First Round,

Innovation Endeavors, Lowercase Capital, Scott


December 7, 2011 Series B $37 million Menlo Ventures (lead investor), Benchmark, Bobby

Yazdani, CrunchFund, Data Collective, Goldman

Sachs, Jeff Bezos, Nihal Mehta, Signatures Capital,

Summit Action Fund, Troy Carter, Tusk Ventures

August 23, 2013 Series C $258 million GV (lead investor), Benchmark, TPG Growth

June 6, 2014 Series D $1.2 billion Fidelity Investments (lead investor), BlackRock, GV,

Kleiner Perkins Caufield & Byers, Menlo Ventures,

Sherpa Capital, Summit Partners, Wellington


December 4, 2014 Series E $1.2 billion Lone Pine Capital, New Enterprise Associates, Qatar

Investment Authority, Sherpa Capital, Valiant Capital


December 16, 2014 Series E $600 million Baidu

January 21, 2015 Debt Financing $1.6 billion Goldman Sachs

February 18, 2015 Series E $1 billion Accelerate IT Ventures, Foundation Capital, HDS

Capital, Times Internet

July 31, 2015 Series F $1 billion Bennett Coleman and Co., Ltd., Microsoft,

Microsoft Corporation-Strategic Investments

August 19, 2015 Private Equity $100 million Tata Opportunities Fund

September 7, 2015 Private Equitya $1.2 billion Baidu (lead investor)b

January 12, 2016 Private Equitya <$2 billion HNA Group, Guangzhou Automobile Group Co. Ltd.,

Citic Securities, China Taiping Insurance, China Life


Source: Compiled by casewriter from CrunchBase website, rounds, accessed January 12, 2016; Hannah Kuchler and James Kynge, “Uber Raises $1.2bn for Chinese Unit, in Round that Includes Baidu,” Financial Times, September 7, 2015, a28b-50226830d644.html#axzz3wvqEAJRy, accessed January 12, 2016; and Paul Carsten and Engen Tham, “Uber China Closes $1 billion Fundraising Round: Sources,” Reuters, August 28, 2015, uber-china-idUSKCN0QW1XE20150828 accessed January 8, 2016; Xiaojing Liu, Feng Ding, Limin An, and Yunxu Qu, “Uber’s Kalanick Says His Firm Has the Support of Chinese Investors,” Caixin, January 14, 2016,, accessed January 14, 2016.

a This round of funding supported Uber China, a separate entity, valued at US $7 billion.

b Anonymous sources quoted by Reuters reported that other investors included China CITIC Bank and China Life Insurance, but this remained unconfirmed.


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316-135 Uber in China: Driving in the Gray Zone


Exhibit 2 Timeline of the Growth of Uber, 2010-2014


Source: Semil Shah, “The Summer of Uber: Aggressive Expansion,” August 23, 2014, post on blog “Haywire,”, accessed January 12, 2016.


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Uber in China: Driving in the Gray Zone 316-135


Exhibit 3 Costs of Typical Uber Products (in USD)

City Product Base Fare Per Minute Per Mile Other Fees

Boston UberX 2 0.20 1.24 1.15 (Safe Ride)

UberBLACK 7 0.45 3.95 —

Taxi Cab 2.60a — 2.80b 28 per hour for idling

or waiting

Beijing UberPeople’s 0 0.04 0.37 —

UberBLACK or


2.73 0.11 0.93 —

UberX 2.27 0.06 0.56 —

Taxi Cab


1.97c — 0.56 0.07 per minute for

waiting/speeds under

7.5 miles per hour

Source: Compiled by casewriter from Uber Boston Website,, accessed January 12, 2016; Boston Police Department Website,, accessed January 12, 2016; Uber Beijing Website,, accessed January 12, 2016; and Travel China Guide: Beijing website,, accessed January 12, 2016.

a Fee charged for first 1/7 mile.

b Charged by the 1/7 mile.

c Includes first 1.86 miles.


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316-135 Uber in China: Driving in the Gray Zone


Exhibit 4 Uber Locations and Products in Mainland China, January 2016


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Uber in China: Driving in the Gray Zone 316-135


Exhibit 4 (continued)

Product Name Product Description Offered in

UberBLACK Commercially registered, luxury vehicles driven

by livery-licensed drivers

Beijing, Chengdu, Foshan,

Guangzhou, Hangzhou, Qingdao,

Shanghai, Shenzhen, Suzhou,

UberX For-profit rides offered by both professional

drivers who are affiliated with car rental

companies and non-professional drivers without

special licensing or credentials; vehicles are

slightly nicer than those used for People’s Uber

Beijing, Changsha, Chongqing,

Dalian, Guangzhou, Hangzhou,

Shanghai, Shenzhen, Tianjin,

Wuhan, Xi’an, Xiamen

People’s Uber Rides provided by drivers without special

licensing or credentials; passengers pay no

base fare and lower cost per mile

Beijing, Changsha, Dalian,

Guiyang, Jinan, Nanjing, Ningbo,

Qingdao, Suzhou, Tianjin, Wuhan,

Xi’an, Xiamen, Yantai

People’s Uber+ Similar to UberPOOL in the U.S, drivers pick up

multiple passengers going similar directions at

the same time; passengers pay fixed fares

Chengdu, Guangzhou, Hangzhou,

Shanghai, Shenzhen

UberCOMMUTE Similar to People’s Uber+ but with a set route,

drivers who drive a designated route every day

can pick up passengers headed in similar

directions in exchange for a fixed fare set in



UberXL Larger vehicles, seating up to six passengers Beijing, Guangzhou, Shanghai,

UberENGLISH Rides given only by English-speaking drivers Shanghai

Tesla Rides given in a Tesla Tianjin

Source: Compiled by casewriter from Uber Technologies Website,, accessed January 12, 2016.

Note: Cities shown in the map and chart above are those listed on Uber’s website as of January 10, 2016, and in the official registration documents of Shanghai Wubo Information Technology Co., Ltd. Other Uber products might be available beyond what was listed on the website.


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