PARIS/SINGAPORE – Uber Inc’s aggressive global expansion is looking costlier and riskier than ever as the company struggles with regulatory and competitive obstacles in major markets.
Just last week, the company faced a police raid on its European headquarters in the Netherlands, a criminal trial of two top executives in France, a ban on its services in Rio de Janeiro and proposed new regulations in London and Toronto that could cripple its services in those cities.
The Uber Pop service, known as Uber X in the U.S., which enables people to offer rides in private cars, is now banned outright in most of Western Europe. In Australia, Uber is popular but mostly illegal, with several big court challenges looming.
Meanwhile, in China and other Asian countries Uber faces increasingly powerful competitors and idiosyncratic local transportation markets. Uber has in some cases responded by moving into businesses like car rental – which could be viewed as a nimble response to local conditions or a risky move into a low-margin, capital intensive business.
That’s on top of the challenge to its business model that Uber faces in its home state of California, where a class action lawsuit could force the company to treat its contract drivers as employees.
Taken together, Uber’s recent troubles raise the question of whether the firm’s headlong drive for global market share, underwritten by more than $7 billion in venture capital investment, is a prudent strategy.
It has moved far more quickly in its global expansion than any company in memory–it’s now in 60 countries after being founded in 2009 –and the cost and complexity of so many legal wars and subsidizing millions of rides in countries like China could tax even a company as wealthy as Uber.
In the U.S. alone, Uber has been involved in at least 173 U.S. lawsuits since October 2012, a review of Westlaw dockets shows, while rival Lyft has been involved in 66 and lodging service Airbnb has been a party to just 20.
As a private company Uber discloses little about its spending but one indicator of the scale is its $1.2 billion funding for its China unit in September. Leaked financial documents show Uber overall lost more than $100 million in the 2nd quarter of 2014.
“Uber is adopting the shock and awe strategy,” said Aswath Damodaran, a finance professor at NYU’s Stern School of Business. “I think it’s a very high risk strategy.”
Uber executives and investors counter that its many battles are the price of taking on an entrenched taxi industry–and happily point out that controversy is great marketing and spurs downloads of the Uber app.
In the U.S., Uber has maneuvered to generate consumer enthusiasm for its service and then bring pressure on local politicians to develop rules that allow it to operate.
It’s using a similar playbook overseas: reports of the pending new regulations in London, for example, immediately brought an email blast to Uber customers that the city was about to destroy “the Uber you know and love.”
Company spokesmen stress that Uber is playing a long-term game and view individual regulatory setbacks as inevitable–and temporary–phenomena.
Bill Gurley of Benchmark, a key investor in Uber who sits on the company’s board, said in an email that he has no doubts about the strategy.
“Uber moved faster than any other company going international. And because of money that is earmarked for foreign clones of successful U.S. companies, if you don’t move quickly, the clones will pop up fast. So it’s a fact of life. I would NOT have advised going slower.
“In terms of challenges, we have faced them our whole life. You are forgetting that we faced challenges in Chicago, DC, Portland, Houston, Vegas and many many more cities here in the U.S. But we eventually worked through the regulatory hurdles in those cities as the elected officials came to realize that job growth, a reduction in DUIs, enablement for mass transit, and a higher level of safety and transparency (vs taxi) are all good things.”
Banned in France
Uber’s troubles in Europe, where heavy regulation is a way of life and workers are primed to fight for their rights, are not a big surprise. Uber Pop is now banned in France, Germany, Italy and Spain, and the company is appealing pending bans in the Netherlands and Belgium.
Uber’s exposure in Europe is still limited: in France, the company disclosed in court Wednesday, 2014 revenue was just 6 million euros ($6.7 million), with a profit of 500,000 euros. The company is running the black car service and hoping that the European Court of Justice will establish more liberal continent-wide regulations when it rules next year on a lawsuit brought against Uber in Spain.
“You need to have a strong appetite for risk to break down protectionist barriers and cozy networks that have existed for decades in Europe,” said Mark MacGann, Uber’s head of public policy for EMEA.
Hot competition in Asia
The mega-cities of Asia present a whole different set of challenges for Uber. In Indonesia, a market that’s among the most social-media-savvy in the world, Uber’s main rival is a motorcycle taxi service call Go-Jek.
“Ojeks” are a traditional feature of Indonesian life: motorbikes that ferry commuters from the main roads to their homes, and sometimes farther. By providing helmets, jackets and training, Go-Jek has added a professional layer to an informal sector, and the Go-Jek app removes much of the hassle of finding a driver and negotiating fares.
Go-Jek’s CTO Sheran Gunasekera says his company also has an edge over Uber because it takes cash payments and offers a mobile “wallet” for electronic payments instead of credit cards, which aren’t widely used in Indonesia. In cities like Jakarta, with some of the worst traffic jams in the world, only a motorbike ride can get people where there want to go in a hurry–and they’re cheaper too.
In Singapore, by contrast, the government strictly controls the number of cars on the road–and thus Uber’s problem is not too many cars, but too few. So it has set up a subsidiary in Singapore that buys used, permitted cars and rents them out to people who will use them to drive for Uber.
Uber declined to share details, but Adrian Lee, founder of cars.sg, a car rental aggregator, reckons that Lion City Rentals, the Uber subsidiary, had about 300 cars as of six months ago. He expects that within two to three years it will be by far the biggest car rental company in Singapore.
Still, car rental is not an obvious direction for a company that has studiously avoided owning cars and directly employing drivers.
“Uber is smart to have this flexibility in different markets and not have the same features everywhere,” said Jan Dawson, an Uber analyst with Jackdaw Research. “The downside is that it is very costly.”
The big prize is China, where Uber has set up a separate unit. The company said last month it had raised $1.2 billion for the China business, and a Financial Times report recently said the total could be as much as $2.5 billion. Uber declined to comment on the fundrasing.
Uber is offering huge subsidies for Chinese riders and drivers as it competes head-on with Didi Chuxing, which dominates the ride-hailing market and is backed by China’s two biggest Internet firms as well as the nation’s sovereign wealth fund.
The subsidies have created a cottage industry of drivers who game the system, giving one another rides and pocketing the hefty portion of the fare–said by drivers to be about 30 percent–that is subsidized by Uber.
Mark Natkin, managing director of the Beijing-based Marbridge Consulting, which researches China’s tech industry, said Uber’s subsidies and promotions come at a steep cost but have spread name recognition in a market where homegrown Didi boasts 80 percent market share.
“When we go out and survey people about why they use Uber the most common response we get is, I’ll try Uber when they’re offering a promotion,” Natkin said. “It helps them gain mindshare.”
The challenge from Didi, which itself recently raised $3 billion, isn’t limited to China. The company confirmed this week that it’s taken an undisclosed stake in Ola, India’s largest domestic ride-hailing company, and it has also invested $100 million in Lyft, Uber’s U.S. arch-rival.
Lyft is shaping up as the anti-Uber at least in its approach to international expansion. It has yet to launch anywhere outside the U.S.
Uber officials like to point to Mexico City as an example of progress. The city in July became the first Latin American city to regulate ride-hailing apps, introducing a 1.5 percent ride levy, a yearly permit fee and a minimum vehicle value. Uber today has 500,000 users and more than 10,000 drivers in Mexico City, with most using Uber X.
Adverse publicity over robberies and assaults in Mexican taxis helped boost support for Uber, saidManuel Molano, deputy head of Mexican think tank IMCO.
“The social cost of the previous regulation was probably higher than in other parts of the world,” said Molano.