Experiments in Text
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人民优步: The People's Private Driver and the Current Regulatory Environment in China
This post covers why I believe concerns about regulatory obstructionism as Uber expands into Greater China are justified but perhaps overblown. Disclaimer that I don't talk about Uber until the fifth sub-header.
Objections Over China's Regulatory Environment
The most common objection to my last post on Uber's market potential across greater mainland China was not in the revenue model's core assumptions.It was in the fact that, in a country famous for being suspicious of and hard on foreign companies, I ignored the possibility of regulatory obstruction inhibiting a company with a reputation for rubbing governments the wrong way.
Are Justified
These concerns are valid and come at an especially trying time, as the US and Chinese governments play tit-for-tat on cyber and industrial espionage accusations. Only a few months ago, Windows 8 was banned for use on Chinese government computers amid national security concerns, and now Microsoft has come under investigation for antitrust violations. We're all familiar with Google, Facebook, and Twitter's status in the country.
It's not only tech companies, either. McDonalds recently took a blow from a meat scandal, despite sourcing from a domestic supplier, and British pharmaceutical giant GlaxoSmithKline's former lead in China, Mark Reilly, is facing decades in prison on corruption charges for which many business executives could be indicted.
And Not Limited To Business
Life is already not easy for a foreign company in China. Making matters worse, particularly for a black car service, is the fact that China is currently going through arguably the largest anti-corruption campaign in modern Chinese history.
The movie-script story of Bo Xilai and decidely less sexy (but equally fascinating) downfall of Zhou Yongkang are two of the 61,703 people across 41,150 "anti-bureaucracy" cases that demonstrate the sternness with which the central government is tightening its grip over the national, provincial, and municipal apparats.
In the public sector, the nationwide crackdown is effectively causing the lower levels of government to strike. In the private sector, while there has been no reported dropoff in offical GDP numbers, the environment has certainly affected businesses that cater to Uber's would-be customers: luxury goods sales sputtered to 2.5 percent in 2013, the slowest pace since 2000, according to Bain & Co.
So Uber China's Operating Environment Looks Tough
This is the environment -- suspicious of foreigners and imprisoning high-end businessmen and politicians daily -- into which Uber is launching one of its most ambitious expansion plans to date. It seems kamikaze considering that Uber is a company that charges fares 1.5-2x normal taxi fares and that originally wanted its customers to enjoy the "I pushed a button and a car rolled up and now I'm a frickin’ pimp" experience.
An already difficult consumer culture to crack and a business poorly suited to an inconspicuous consumption regulatory environment, it looks hopeless.
After Launching in China, Uber Needed to Learn
When Uber first launched in Shanghai, it did what we all thought it would do in a market where taxis are insanely cheap and conspicuous consumption among the rich is entirely out of control: they ran a luxury black car service, and charged a ton of money for it. Rides from Shanghai PuDong Airport to downtown ran 600RMB one way, where taxis were only 150RMB.
While rich Chinese people do love other people watching them spend money and did so in a then-record-setting way following Uber Shanghai's launch, this strategy was not optimal. In a market discovery move, the company lowered prices and expanded into Guangzhou and Shenzhen.
Before It Got It Right: 人民优步
One year after test launching in Shanghai, Uber China officially launched in Beijing, its fourth Chinese city, just last month.
Competition from local apps is fierce in the Chinese taxi and ride-sharing space and Uber is a foreign company in the capital of a proud, nationalistic nation in the throes of its most serious governmental reform movement in post-imperial history.
But by now, Uber has the ground game down pat. Travis Kalanick on launching new cities:
"We have launchers that going into a city and turn nothing into something. I like to say that they drop in with parachutes and machetes and get highly involved with the...people who own cars and run car services, and really just make sure that we can launch a service that is high-quality from the start. Being local and speaking with local voice is important when you're doing transportation and means you know what's going on for the city."
人民优步: People's Uber
Listening to Beijingers talk about traffic and transportation, and recognizing their pain points and desired experiences, earlier this month, Uber did something no one expected: they launched People's Uber (人民优步), a non-profit version of UberPool specific to Beijing, the cultural epicenter of Chinese society.
There are multple strategic layers in this single move. One layer is the language. 人民 (rénmín) translates to "people" and is used to mean all common people, the proletariat. In China, the word is widespread across a variety of contexts, almost all of them positive. It's proud yet humble and very Chinese: in the same way we called the United States of America the US, China (中国) is officially The People's Republic of China (中国人民共和国).
Another layer is the non-profit business model. This is not UberPool. Riders pay drivers and that's it. Nothing is free in China, and even the Red Cross is rife with corruption. This is one area where being a foreign company will engender trust. More importantly, Uber's move to take a famously competitive for-profit industry and blow it up with a platform enabling private transactions among the people is refreshingly humanizing.
Finally, Beijing is the capital. What happens here is discussed and analyzed the country over. Currently, the corruption trials dominate the news. People who have flaunted and abused their power to amass incredible wealth for nearly thirty years in the midst of the single greatest economic development story in the history of the world are being cleansed from civil society. And then there's Uber, helping regular people do regular things. There's a bottom-up feel to Chinese politics right now, and Uber's capitalizing on it.
The list goes on. Other strategic moves by Uber Beijing around People's Uber include:
- Partnering with the Green Commuting Fund to research and promote efficient transportation models in the world's most famously polluted city.
- Publishing Driver Stories to capture the motivations, personalities, and values of early drivers in a deeply distrustful society.
- Giving free rides up to 60RMB (for a limited time) where taxi rides usually cost 15-20RMB.
But Let's Revisit Regulation
Of course, none of this really matters if the government decides it wants to protect domestic business. The good news here is that China in practice is not what it's portrayed as in Western media.
Occasionally the government will make examples of major foreign businesses in order to send a clear message to the market, as happened with GlaxoSmithKline. “There’s a Chinese saying that paraphrased is ‘You kill the chicken to scare the monkeys,’" Jeremy Gordon, consultant and author of China: Risky Business, explains in a Forbes article on how international business is affected by the crackdown. Foreign firms are the chickens. That makes sense.
But what are the odds of the government coming after Uber? Americans (and people who don't or haven't lived in China) often cite restrictions on Google, Facebook, Twitter and now Microsoft as examples of heavy handed regulation on foreign tech firms. But these are all businesses where the exchange of information (some of it potentially dangerous to the Communist Party's image and credibility) is the core product. Uber has a wealth of information, but its product is providing car rides to people. Asian business consultant David Clive Price claims that China is changing, particularly in larger cities. Intellectual property theft is down, goverment obstruction is less common. “Overall stronger corporate governance based on EU and US models is emerging,” Price says. “China is really getting with the game, although there is still some work to be done." The question is: if Uber is not threatening the credibility of the Communist Party, will the government care that it helps people get around China's traffic-clogged cities?
And Now I'll Take A Guess At The Future
I will probably be wrong, but what the heck - no harm in a bit of amateur fortune telling.
Without a doubt, regulatory obstruction by the Chinese government is concerning, and is something that Uber should be keenly aware of as it begins to expand into Greater China. Compared to other foreign companies operating in China, Uber has two key advantages that will help it avoid conflict with the government.
First is that Uber is well aware of the cultural, social, and political environment in China and is actively crafting a message specific to the Chinese marketplace around these considerations. It's not a black car service. It's a tool that empowers people to help each other.
The second advantage is that as long as Uber remains popular and continues to see high adoption and retention rates beyond its initial, free expansion of People's Uber, it will be difficult - though certainly not impossible - for the Chinese government to trump up the sort of charges that could seriously harm the company. It's not like any foreign tech company that's come before it: it acts Chinese, it's not (yet) openly combative with the Chinese government, and it doesn't provide the sort of peer-to-peer communication that could be used to organize a destabilizing protest or flash mob. At least for the moment, it's just an app for getting a ride that has a lot of promise, and that should get it pretty far with the Chinese government.
So here's my prediction: Six months to a year from now, Uber will have succeeded and the question will have become which companies have followed or will follow its model in managing the complexities of the Chinese marketplace. I'd bet a couple beers that one of them just bought a $19 billion messaging service not too long ago.
The Sleeping Giant: Uber's Expansion into Greater China
Since its last round of financing on June 3rd, Uber has rolled into 48 new cities. Of the combined 72 million people that these cities represent, 90.8% live abroad:
| Region | Country | Cities | Population |
|---|---|---|---|
| North America | United States | 27 | 5,835,000 |
| APAC | Australia, China, India, Indonesia, Vietnam | 9 | 37,260,000 |
| EMEA | Czech Republic, Germany, Lebanon, Nigeria, Turkey, Russia | 7 | 8,194,000 |
| North America | Canada & Mexico | 3 | 3,169,000 |
| South & Central America | Brazil | 2 | 17,640,000 |
In my last post, I wrote about Uber's upcoming expansion into Asia Pacific. From the chart above, it's easy to see why it's happening so quickly - 9 cities with operations and engagement teams that can reach more customers than all of the other 39 combined.
Let's unpack the expansion:
| Country | City | Population |
|---|---|---|
| India | Kolkata | 4,486,679 |
| India | Ahmedabad | 3,520,000 |
| India | Jaipur | 3,073,350 |
| India | Chandigarh | 1,054,686 |
| Australia | Perth | 1,696,000 |
| Australia | Geelong | 178,650 |
| Indonesia | Jakarta | 9,608,000 |
| Vietnam | Saigon | 7,396,000 |
| China | Hong Kong | 7,155,000 |
Surprisingly, Uber recently launched only one Chinese city - Hong Kong - in all of Asia Pacific. Adding HK to Shanghai, Beijing, Shenzhen, and Guangzhou, Uber currently provides service in five Chinese cities.
APAC Expansion Redux
Recall that APAC has both the most people and the most money of any region in the world. Three of the world's ten largest economies are there as well as 60% of the people. Uber is gearing up for a major run on APAC.
As the single largest APAC country, China alone accounts for 12.3% of global GDP and 19% of its people. With Uber already established in the standard, Westernized Chinese megalopolises, it's not surprising that an expansion into greater mainland China will be the centrepiece of the upcoming APAC growth campaign.
@Uber_Mainland
Reading the hiring tea leaves, Uber China is set to expand into 10 new cities across the mainland, adding to its five "old guard" markets.
At face value, 10 new cities over a few months is nothing impressive for a company with such a parabolic track record. But this is China, a country where fresh air is sold in cans and frogs and turtles are sold at Walmart. You can't expect the norm here and the market potential is gigantic.
To see how much mainland China could move the needle, let's do a rough sketch of what Uber's revenues might look like in the country.
Building a Revenue Model
Here's a table of the 10 mainland Chinese cities that Uber will soon launch in, including their population and the base fare for a local taxi:
| City | Metro Population | Base Fare () | City | Metro Population | Base Fare () |
|---|---|---|---|---|---|
| Chongqing | 15,294,255 | 5 | Tianjin | 11,090,314 | 8 |
| Wuhan | 10,120,000 | 8 | Chengdu | 7,123,697 | 7 |
| Nanjing | 6,852,984 | 8 | Hangzhou | 6,242,000 | 10 |
| Qingdao | 4,587,200 | 10 | Suzhou | 4,074,000 | 8 |
| Ningbo | 3,491,597 | 8 | Macau | 2,112,732 | 12 |
A napkin and some spilt ink show us that just more than 82 million people call these cities home.
Assuming that taxi riders are the closest estimation of an Uber rider in mainland China, with population and base taxi rates, we're close to being able to project revenue. The pieces we're missing are the projected number of users, the frequency of their usage, the average distance traveled, and Uber's projected market share and cut of total ride revenue.
Number of Riders
This is where it gets tricky. Data on Chinese taxis is very hard to come by on a budget so let's start with one foundational assumption: the entire taxi-riding population in urban China is 20-64.
| Age Range | % Urban Chinese Population |
|---|---|
| 20-24 | 10.6% |
| 25-29 | 8.6% |
| 30-34 | 8.4% |
| 35-39 | 9.7% |
| 40-44 | 9.5% |
| 45-49 | 8.0% |
| 50-54 | 5.8% |
| 55-59 | 5.3% |
| 60-64 | 3.9% |
| Total | 69.8% |
People aged 20-64 comprise 69.8% of the total population in urban China. Assuming that all taxis are taken by people within this age range, we can approximate the taxi riding population for a Chinese city:
Taxi Riding Population = [city_pop] x (.698) (age adj)
Uber doesn't compete for the the entire taxi customer base, though. Sam Gellman, Uber's head of Asia expansion, equates an Uber customer to one who can afford a latte at Starbucks. This means middle, upper-middle, and upper class riders. According to McKinsey, that's approximately 71% of households in urban China:
Local Uber Population = Taxi Riding Pop x Wealth Adjustment = [city_pop] x (.698) (age adj) x .71 (wealth adj)
Finally, we don't want to double-count when it comes to wealth and smartphone ownership. KPMG found that 78% of urban Chinese own smartphones. Because this number is greater than the 71% who can afford an Uber, and without better data, we assume these two fully overlap (i.e. all wealthy people own smartphones) and don't adjust our population size based on smartphone ownership.
Frequency
Second, we need to find the rate at which urban Chinese take taxis.
New Yorkers take 175 million taxi trips a year for a population of 5.187 million people between ages 20 & 64, which comes out to about 33.74 trips per person per year, or about one trip a person every 11 days.
| Age Range | % NYC Population | % Urban Chinese Population |
|---|---|---|
| 20-24 | 7.5% | 10.6% |
| 25-29 | 8.1% | 8.6% |
| 30-34 | 8.0% | 8.4% |
| 35-39 | 7.6% | 9.7% |
| 40-44 | 7.6% | 9.5% |
| 45-49 | 7.3% | 8.0% |
| 50-54 | 6.7% | 5.8% |
| 55-59 | 5.6% | 5.3% |
| 60-64 | 4.7% | 3.9% |
| Total | 63.0% | 69.8% |
As seen above, New York City and urban China are fairly similar demographically, with 20-64 year olds accounting for 6.8% more of the population in urban China than in New York. Assuming similar demographics will yield similar behavior, and adding the fact that Chinese taxis are not nearly as expensive as American taxis even when adjusted for standard of living, we can feel comfortable predicting that urban Chinese will take taxis about as often as New Yorkers. While a bit lower than some Chinese's personal estimates, 33.74 per person each year is probably within reason.
Average Distance
Those of you reading closely probably noticed that I skimmed over a key detail: base fares.
This revenue model currently assumes that every Uber ride is 3 kilometers or less, which is the standard base fare distance for a taxi in most Chinese cities. For rides farther than 3km, the fare generally increases by about 25% of the base fare per additonal kilometer.
To more accurately forecast revenue, we will assume that the average Uber trip is 5 kilometers, which results in a calculation that likely underestimates revenue were all other assumptions to hold true, but is far more realistic than the base fare assumption.
Uber-Specific Assumptions
Finally, let's take Travis Kalanick's word that Uber gets about 20% of every ride's total fare and let's also assume that an Uber is between 1.5 to 2 times the price of a taxi, like it is in Shanghai. Last, we'll assume that Uber gets 15% of the local taxi market.
Final Equation
With all of this baked in, the final equation is:
Uber Annual Revenue Per City = [city_population] x (.698) (age adjustment) x .71 (wealth adjustment) x ([base_fare]+[base_fare/2]) (distance_adjustment) x 33.74 (rides/year) x 1.75 (uber price adjustment) x .15 (market share)
= Gross Annual Revenue (RMB) x (1USD/6.15RMB) (currency exchange) = Gross Annual Revenue (USD) x .20 (Uber's cut)
Sum the revenue from each city to arrive at a final projection for the Greater China expansion.
Greater China Revenue Projection
Let's run the numbers:
| City | Uber Pop. | AUF* | U//Y* | Revenue | ||
|---|---|---|---|---|---|---|
| Chongqing | 7.6m | 13.1 | 33.7 | 503.4m | 81.9m | 16.4m |
| Chengdu | 7.0m | 18.4 | "" | 647.4m | 105.3m | 21.1m |
| Tianjin | 5.5m | 21.0 | "" | 584.1m | 95.0m | 19.0m |
| Wuhan | 5.0m | 21.0 | "" | 533.0m | 86.7m | 17.3m |
| Nanjing | 3.4m | 21.0 | "" | 360.9m | 58.7m | 11.7m |
| Hangzhou | 3.1m | 26.3 | "" | 410.9m | 66.8m | 13.4m |
| Qingdao | 2.3m | 26.3 | "" | 302.0m | 49.1m | 9.8m |
| Suzhou | 2.0m | 26.3 | "" | 268.2m | 43.6m | 8.7m |
| Ningbo | 1.7m | 21.0 | "" | 183.9m | 29.9m | 6.0m |
| Macau | 1.0m | 31.5 | "" | 166.9m | 27.1m | 5.4m |
| Totals | 38.6m | ¥3,960.7m | $644.0m | $128.8m |
Numbers in Context
So what does all this mean?
To put these numbers in context, Valleywag's leak of Uber's internal global revenue numbers from December 2013 estimated that Uber was generating an average of $20.5 million per week serving 60 cities.
Today, Uber rolls in 171 cities worldwide. Since many of Uber's domestic launches have been in smaller markets, it wouldn't be accurate to assume that Uber's weekly revenue has tripled just because there are three times as many cities. But let's say it nearly doubled and is making about $40 million per week, or about $234,000 per week per city.
According to this revenue model, each additional mainland Chinese city would add an average of $247,700 per week, summing to about $128.8 million over the course of a year for all 10 expansions.
Country Context
In themselves, these slightly above-average numbers may not be the sort of mind-blowing projection that many (including myself, prior to writing this) would expect to come out of China. But when you consider that China has over 160 cities with > 1 million people and that Uber will only be in 8% of them after this intitial expansion, the opportunity becomes more clear.
Sleeping Giant
"China is a sleeping giant. Let her sleep, for when she wakes she will shake the world."
The past thirty years have seen Napoleon's famous premonition come true. The question now in the technology world is whether Uber is the next sleeping giant.
Time will tell, but with already considerable projected revenues in the country and over 145 cities with 1 million-plus people to expand into, a well-executed initial launch into greater mainland China will certainly be an important part of how Uber's broader story plays out.
Reading the Classifieds: Uber's APAC Play
Valuations can be sketchy and Uber's might be - we'll have to wait and see - but one thing is immediately certain: Uber is growing. Fast.
198/423 New Jobs
Last week, Uber updated its job postings and the 423 listings all together screamed one thing: explosive growth. Specifically, they pointed to an unprecedented push to grow in emerging markets. 198 of the 423 jobs listed were for positions based in a developing economy, more than were listed for the entire US plus Canada.
The APAC Play
Breaking these numbers down further, it's clear that Uber is making a strong move (a pivot perhaps, Mr. Plouffe?) for the Asia Pacific region (APAC).
128 of the jobs listed are for positions in APAC countries, spanning 41 cities. Of those jobs, 34 are Community Managers, 32 Ops Managers, 25 General Managers, 3 Expansion Managers, 3 Marketing Managers, 1 Growth Manager, and a handful of legal, staffing, communication, and tax roles.
Uber is mum on the topic, but for the company to bolster staff in existing APAC cities and put boots on the ground in new ones at such an incredible pace, it can be assumed that business is going well in the region.
People () & Money ()
There are two obvious reasons why the personal driver business might be going well in APAC.
First, the region is the world's most populous.
Second, it's quickly becoming (or already is) the world's richest region, too.
For Uber - So What?
As APAC develops, increasingly affluent consumers from the region will travel, broaden their worldview, suffer from increased expectations, and become protective of their time. Uber will be there to help them.
The beauty of Uber is the simplicity of its offering. On the one hand, it compensates professional drivers at above-market rates. On the other, it simplifies the consumer travel experience. From home to work or airport to hotel, Uber is fast, easy, secure, classy. While there are unique pricing and branding issues within each community, the basic product is universally appealing. Demand exists regardless of geography.
Given the breakdown of its recent job listings, Uber appears to be seeing this within the APAC markets and is responding by ramping up its operations in the region. In terms of dollars, it's probably fair to say the company is just starting to scratch the surface of its potential throughout the region.
Bottom Line
Which brings us back to valuations.
$18 billion for a domestic taxi company might be a little steep. What about the world's first international taxi company? That would be worth a bit more. How about a giant supercomputer orchestrating the delivery of millions of people and items all over the world? Now we're talkin'.
With three of the top 10 economies and more than half the global population, APAC isn't a market that Uber needs to win in order to live up to its lofty valuation.
It needs to dominate.
If the classifieds are any indication, it looks like Uber is getting ready to do just that.