Case study- Uber technologies Inc.- re-entering the South Korean Taxi hailing service after the eviction PDF

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Uber technologies Inc.: re-entering the South Korean Taxi hailing service after the eviction Wiboon Kittilaksanawong and Margaux Afanyan

The eviction allowed the local giant Kakao to immediately step in and launch its own taxi-hailing application without any intervention from the local authorities (Okhyun, 2018). Supported by 37 million users of the popular messaging application KakaoTalk, KakaoTaxi had received more than 50 million calls since the launch in March 2015 (Park, 2016). The South Korean market was known to be particularly tough for foreign companies, and Uber had already experienced the toughest way in its first entry. However, in January 2016, Uber decided to fight back by re-launching Uber’s premium service, UberBLACK after spending several months working with the city government to redesign the service in compliance with local regulations.

Wiboon Kittilaksanawong is Professor at the Graduate School of Humanities and Social Sciences, Faculty of Economics, Saitama University, Saitama, Japan. Margaux Afanyan is based at the Nagoya University of Commerce and Business, Nisshin, Japan.

. Given the country’s unique demographics, transportation habits, cultures and competition, was the decision to re-enter the South Korean market justifiable? Would Uber’s new marketing strategies, including partnering with a local company, be sufficient to secure profits in the next few years? How could Uber gain more market share against its local powerful competitors?

Company overview Uber was established in March 2009 in San Francisco by Garrett Camp and Travis Kalanick. At the time, Camp was still the CEO of StumbleUpon Inc., a company he had co-founded, while Kalanick was a co-founder of Red Swoosh, a peer-to-peer file sharing company. Identifying the need for a fast and reliable transportation service in densely populated areas, the pair came up with UberCab, which was originally a luxury car timeshare company that was operated based on an iPhone application (Hitt, 2010). In their hometown of San Francisco, the high density, steep hills and many local attractions made it very difficult to park a personal vehicle, making taxis a very convenient and efficient alternative to owning a car. Yet it was very difficult to find and hail an available taxi in a timely manner. The underlying idea behind the creation of Uber was to employ non-professional drivers to use their personal vehicles to transport customers by using an

DOI 10.1108/EEMCS-04-2017-0070

This work was supported by JSPS KAKENHI Grant No. 15K03694. Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision-making. The authors may have disguised names; financial and other recognizable information to protect confidentiality.

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iPhone application that facilitated communication between the two concerned parties (e.g. the taxi driver and the passenger) (Ztreet, 2015). Historically battling with regulations around the world Shortly after the launch in San Francisco, in October 2010, UberCab encountered its first roadblocks, as the metro transit’s authority issued them a cease and desist order for operating like a taxi company without required licenses. After changing its name to just “Uber”, the company was able to get around the regulation because unlike a taxi company, Uber pre-arranged customer pickups and did not acquire curbside customers (Ztreet, 2015). By late 2011, Uber had raised US$49.5mn [2] through angel investments made by large entities across the country, including The Goldman Sachs Group, Inc. and Bezos Expeditions, LLC (founded by Jeffrey P. Bezos, the founder of Amazon.com, Inc.), while it was valued at $330mn. As of March 2016, Uber was valued at more than $50bn, making it the most valuable start-up in the world (Exhibit 1). Uber expanded internationally into Paris, France in December 2011, Vancouver, Canada in March 2012 and London, UK in July 2012 (Ztreet, 2015). Like in the USA, there was also some pushback from taxi union groups, including a violent riot on the streets of Paris in June 2015. Uber had also been banned from operating in other international cities, like Brussels, Belgium and Berlin, Germany (Exhibit 2). Despite all of the difficulties Uber was facing, the company had always focused on the original idea of achieving fast growth with more rides in more places, most of the time by undercutting the competition based on price, even at higher costs and losing money. The reason behind this aggressive strategy was its ambitious strategy to become “too big to ban” (Wohlsen, 2014). As of June 2016, Uber operated in 465 cities worldwide, in 75 different countries (Exhibit 3). Several other companies across industries had tried to emulate Uber’s peer-to-peer business model (P2P), an emerging trend commonly referred to as “Uberisation”[3]. Business model Uber’s business model was fairly simple. Uber employed non-professional drivers to drive around with their own personal vehicles, picking up pre-scheduled customers through an easy-to-use smartphone application. Having already pre-loaded their credit card information through the smartphone application, the customers digitally paid their fare once the ride was over. The total fare was calculated by combining a base fare (B) plus a rate cost (c t and cd) for both time (t) and distance (d) travelled, respectively, displayed as: Fare ⫽ B ⫹ ci ⫻ t ⫹ cd ⫻ d All of these variables were varied between the regions where they were operating. This calculating method was similar to how taxicab companies across the world operated (Wohlsen, 2014). mode of expansion Uber’s financial position had been increasingly scrutinized by investors because of its continuing fundraising (Exhibit 4) (Efrati, 2018). Unofficial reports being revealed to the public indicated that Uber’ net losses grew faster than its net revenues between 2014 and the first three quarters of 2015. In particular, its revenues increased 134 per cent, to $1.16bn, while losses grew 151 per cent, to $1.68bn (Rosoff, 2016). The increased losses were primarily a result of higher sales and marketing expenses. For instance, net revenue rose 30.8 per cent between the first and second quarters of 2015, while sales and marketing costs doubled to nearly $200mn during the same period (Efrati, 2018). The rising losses also reflected Uber’s aggressive expansion efforts in emerging markets like China and India, where the company struggled to gain market share against strong local competitors. In China, the world’s largest transport market (Shih, 2015), although Uber

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did not face major regulatory challenges (Butt, 2016), it had spent several millions to catch up with its local rival Didi through a price war. Yet Didi, which received $1bn funding from Apple Inc. in May 2015, claimed that its share of the Chinese market was still around 87 per cent (Love, 2016). However, Uber expected that older markets in developed countries would be able to generate billions of dollars in profit in the coming years. It was projected that the company could generate $14bn in profit from developed-world markets during the next four years, as more cities turned cash flow positive (Efrati, 2018). Uber was certainly not in danger of running out of money. According to the statement of cash flows, the company held $4.15bn in cash and cash equivalents as of June 30, 2015, up from $1.96bn at the end of 2014 (Exhibit 5) (Efrati, 2018). Considering the progressive saturation of the ride-hailing apps market, Uber began to diversify into other on-demand markets. It had a division called UberEverything, which was tasked with identifying opportunities outside of its rides business. In 2015, the company launched UberRush, an on-demand package delivery service for online sellers in San Francisco, Chicago, and New York. In March 2016, it launched the food delivery app UberEats (Lien, 2016). Kalanick had also revealed his plans to eventually introduce a driverless-car transportation service by 2020. Industry sources said Uber considered partnering with South Korea’s biggest automaker Hyundai Motor Company to develop this service (Won-Myung, 2016). Hyundai Motor became the first company in South Korea to receive a license from the government to test its self-driving Genesis premium sedan on real roads in March 2016 (Won-Myung, 2016).

Korean demographics Aging population South Korea was one of the nations in the world with the most rapidly aging population. By 2050, the median age of the population was projected to be 57 years, making it the most elderly nation in the world. In comparison, at present, Japan had the oldest median age at 43 years, while South Korea’s median age stood at 37 years (United Nations, 2018). Population in Seoul 2 , which represented There were about 10 million people living in Seoul in an area of 605 km 20 per cent of the country’s total population (World’s Capital Cities, 2018). The Seoul metropolitan area was the fifth largest in the world, with a population of 25.5 million, which was half of the country’s total population, in an area of 11,818 km2.

Foreigners in South Korea The number of foreign residents in South Korea had more than tripled over the past 10 years. As of January 2015, there were 1,741,919 foreign residents in South Korea, accounting for 3.4 per cent of the registered population. This number represented a three-fold increase from 537,000 foreign residents in 2006, when the government began keeping track. The figure of foreign residents had increased by 14.4 per cent each year, representing 25 times of 0.6 per cent, the rate of the increase in the country’s total population (Sung-won, 2015). Foreigners who had not attained citizenship were the majority, representing 79 per cent (1.38 million) of the total foreign residents. Foreigners who had attained citizenship and their children accounted for 9.1 (160,000) and 11.9 per cent (210,000) of the total foreign residents respectively. Most of foreign residents who had not attained citizenship were foreign workers (610,000), representing 35 per cent of the total foreign residents living in the country (Sung-won, 2015).

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There were 950,000 Chinese (including 690,000 Chinese ethnic Koreans from China), making them the biggest nationality at 54.7 per cent. Further, 63.3 per cent of total foreign residents were living in the Seoul metropolitan area (Sung-won, 2015). Tourism The number of tourists visiting Korea in 2015 was 13,231,651. The number had increased to more than double in 10 years. International tourists came primarily from nearby countries and regions in Asia, including Japan, China, Hong Kong and Taiwan, together accounted for approximately 75 per cent of the total number of international tourists (Korea Tourism Organization, 2018).

Transportation habits in Seoul Mode of transportation According to a survey carried out by the Seoul Metropolitan Government, the percentage of travelers using share modes in the form of car and taxi in Seoul had slightly decreased from 26.9 and 7.4 per cent in 2002 to 23.5 and 7.0 per cent in 2011, respectively (Exhibit 6). Conversely, the percentage of share modes in the form of subway and bus had slightly increased, following the public transportation reform in 2004 (Seoul Metropolitan Government, 2018). The effect of this reform was also an increase in the satisfaction level with the public transportation service. However, satisfaction with the taxi service had increased as well, from 4.7 in 2007 to 5.6 in 2011, on a scale of satisfaction from 0 to 10. Travel time The average travel time by taxi in South Korea had decreased slightly, from 29.8 minutes in 2000 to 25.9 minutes in 2010. For all transportation modes, taken together, business trips were the most time-consuming type of travel for South Korean people, with an average of 70 minutes per trip (Exhibit 7). The time required for travelling to work in Seoul and Incheon had been constant over the decade, 40 minutes on average (KTDB Research, 2018). Car ownership The number of registered cars per household in South Korea had increased from 0.81 in 2000 to 0.95 in 2010. Within the country, Seoul showed the lowest number, an average of 0.84 registered cars per household. There was also a decrease in the number of personal cars as a preferred mode of transportation among people in their 30s and 40s, unlike all other age groups (Exhibit 8) (KTDB Research, 2018, p. 4).

The Seoul taxi industry In Seoul, the taxi industry was regulated by the Seoul Metropolitan Government. Taxi operators were licensed to run a taxi service in the city. There were over 72,000 taxis in Seoul, of which about 23,000 and 49,000 were operated by corporate taxi operators and by individual taxi operators who drove the taxis themselves, respectively (Moo-jong, 2018). Categories Taxis in Seoul were broadly categorized into regular taxis, deluxe taxis and jumbo taxis. In addition, there was a fleet of wheelchair-accessible taxis, which were operated directly by the Seoul Metropolitan Government. These four types of taxis had different features and fare structures (Exhibit 9). Electronic payment system All taxis in Seoul were equipped with an electronic payment system to allow passengers to make payment with debit or credit cards. According to the Seoul Metropolitan Government,

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when the service was introduced in 2007, only 3.5 per cent of taxi fares were settled with credit cards. However, the usage rate of credit cards had kept rising and reached a high rate of 60 per cent in 2014 (Research Office of the Legislative Council of Hong Kong, 2015). Technology-based safety initiatives The Seoul Metropolitan Government had made concerted efforts to improve passenger safety, especially for women who took taxis at night. As such, it had made use of a wireless-based technology for sharing taxi information. Every taxi in Seoul was fitted with a data chip in the passenger seats that contained the taxi information including the driver’s name, contact and plate number. When passengers touched on the NFC chip with their mobile phones that had mobile application installed, the data in the chip was transferred wirelessly to the mobile phones. The taxi information would then be sent from the passengers’ mobile phones to their designated family or friends via text messages. The real-time location of the taxi could also be tracked during the ride (Research Office of the Legislative Council of Hong Kong, 2015). Downsizing the number of stands The government planned to cut 30 taxi stands each year over the next five years from 2016, downsizing about one-third of the existing 419 taxi stands installed throughout Seoul (Da-Sol, 2016).

Uber in South Korea A first failed attempt After three months of providing a free service to test the market, Uber quietly launched its UberBLACK service in Seoul in September 2013, this was a luxury service that was mostly used in the business world. The launch was quiet because Uber knew that the scope of its service was in theory limited by regulations in South Korea, which allowed any paid chauffeur services to only certain groups of people, such as foreigners or people with special needs. Although being aware of this limitation from the beginning, Uber figured that it was not actually observed and thus it started the operation without worrying too much (Ramirez, 2015). The operation seemed to work for a while. However, only in August 2014, when the company introduced UberX and UberTAXI, did things begin to go wrong. UberX was the most common and least expensive among Uber’s services. Unlike UberBLACK, UberX did not require drivers to own a commercial license and high-end vehicle. Anyone over 26 years old with a proper license and an insured car could be a driver. As for UberTAXI, it was much less controversial, as it was just a platform that connected users to licensed taxicabs (Ramirez, 2015). Immediately after the launch, UberX faced anger from local taxi drivers, being upset that amateur drivers were undercutting their fares. Whereas Uber did not require that its UberX drivers have any special licenses, private taxi drivers in Seoul were reportedly expected to million[4] ($60,900) for the proper documentation (Rich McCormick, pay around ⫽70 W 2014). In response to such rising anger from local taxi companies, the Seoul authorities opposed Uber’s operations. On December 24, 2014, South Korea became the first country to indict Uber on violating the Passenger Transport Service Act. As Kalanick refused to stand trial in the nation, the city passed an ordinance that would offer a reward of up to⫽1 W million ($870) for those who reported Uber’s illegal activities (Yonhap News Agency, 2014). Uber commented that the ordinance was a “predatory move”. The company even offered UberX for free in February this year to grow users’ appetite for the service while negotiating with the government. But several weeks later, the company bent to mounting pressure and shut down UberX on

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March 6, 2016, two weeks before Seoul prosecutors charged Kalanick and nearly 30 other Uber’s employees for running an illegal taxi company. UberTAXI continued operating but was quickly overtaken by a homegrown rival KakaoTaxi, which had just entered the market. Re-entry strategy After suspending UberX, Uber began working with the city and federal governments to revise the service in compliance with the law. New national and city rules that enabled the launch of KakaoTaxi Black had also allowed UberBLACK to widen its service offerings (Salmon, 2015). As a necessity at the peak of the crisis, Calvin Kang replaced the former General Manager. His new approach was softer and humbler, as if attempting to undo the damaging image of an aggressive foreign company that expected the local market to bend to its will. Some said that this new approach reflected a company-wide strategic change at Uber’s operations around the world. In November, Kang announced the relaunch of UberBLACK, provided by veteran taxi drivers and open to everyone. He said agreements had been reached with the local government, who had “recognized the ability of services like Uber to benefit citizens and provide a reliable transportation option across the city, at any time of the day” (Ramirez, 2015). Also, trying to improve Uber’s image among taxi drivers, he said: No one knows Seoul better than veteran taxi drivers, so we’re pleased to be working with them and providing Uber’s technology and service expertise in order to serve Seoul citizens and improve drivers’ livelihoods (Eun-Jee, 2018).

In relaunching the service, Uber partnered with a local carmaker Kia Motors, which offered would-be drivers a discount on its luxury K9 sedan and the Mappy navigation system developed by an affiliate company (Ramirez, 2015). The K9 price without discount was W⫽48.99 million ($42,621.3) (Salmon, 2015). As of December 2015, Kia Motors was 33.87 per cent owned by the Hyundai Motor Group (Kia Motors Corporation, 2018). “Uber’s innovative technology is absolutely aligned with our philosophy of ingenious thinking and continuously challenging new frontiers”, said Cho Yong-won, head of sales at Kia Motors (Salmon, 2015). New marketing strategy in Seoul Uber targeted three main customer segments in Korea: Foreigners. Tourists and expatriates in Korea were the first segments that Uber was trying to reach. A recent example of Uber communicating towards this segment could be found on Uber Korea’s official Facebook page, where the service was advertised with the following comment: Have you ever experienced ridiculous taxi fares in Seoul as a non-Korean speaker? The Uber app is localized to y...