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How Uber’s trek across the US will set the course for its run in Asia

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Just over three years after it launched, a startup based in San Francisco has already become one of the most controversial companies of the mobile era. Originating as an inside joke between CEO Travis Kalanick and his co-founders, Uber has now spread to 100 cities around the world, 21 of which are located in Asia Pacific. What was once thought to be a third-rail industry – loosely-regulated commercial transportation – is steadily becoming a reality. But not everyone is ready for it.

In a nutshell, Uber is a startup that connects passengers in need of a ride with a driver. A user downloads the Uber app to their smartphone, presses some buttons, and they’re immediately referred to a nearby driver with an empty seat. The ride is confirmed, and the user tracks the current location of the vehicle through GPS.

The driver arrives, and the passenger hops in. Once the trip is over, payment is conducted entirely through the user’s credit card, which is bound to the app upon registering. Users and drivers can rate each other – this means that George’s next passenger will know that his car smells like cigarettes, and Lisa’s next driver will know she left candy wrappers on the seat.

In cities where it’s launched for several years, Uber offers three tiers of services. Its flagship UberBlack lets users hitch a ride with a professional driver in a fancy black towncar, usually for 1.5 times the local price for a taxi. UberTaxi lets users hail a city taxi through the app.

Finally, UberX connects riders with ordinary Janes and Joes who are willing to open up their back seat to strangers in exchange for money. In some cities, like Singapore, these Janes and Joes are in fact commercially licensed professional vehicle drivers who have ditched their Mercedes or yellow cab for a Corolla. In other cities, like San Francisco, these Janes and Joes are soccer moms, college students, bored commuters, or anyone else looking for extra cash

While innocent on paper, all three of these tiers seriously threaten the taxi industry as most of us understand it.

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What’s Uber’s grand scheme? Every provider of private on-demand transportation will “freelance with Uber.” That is to say, private drivers will work for themselves and assume responsibility for all licensing, vehicle upkeep fees, and taxes. But they’ll be willing to shoulder those burdens because Uber, in theory, will provide them with the best customer referral app on the market.

Cracking Asia

Uber is young in Asia – it first launched on the continent in Singapore in October 2012, and over the next year expanded rapidly across the continent. Since the company is so new and requires lots of outreach to educate consumers, few Asian cities have openly dealt with the regulatory challenges that it brings.

What are the factors that will determine Uber’s success in Asia?

1. Current market for on-demand transportation

Uber’s success in Asian countries will partially be determined by the current market for taxis.

In most major US cities, the taxi experience is nothing short of a nightmare. Passengers face expensive fares that are priced inconsistently. Cab drivers are rude. Cabs are dirty. Hailing one from the street can be a pain, especially during rush hour. City authorities, meanwhile, have long neglected to upkeep subways and buses, making public transportation options even less appealing than taxis from a quality-of-service perspective.

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VP of Xiaomi Global Hugo Barra sits in the passenger seat of Uber’s first ride in Beijing

This is not necessarily the case in Asia. Taipei, a city with a population of 2.6 million people, had over 30,000 licensed taxis operating in 2011, according to a report from TVBS. The estimated “empty cab rate” is over 30 percent. The capital of Taiwan also boasts one of the most efficient and clean metros in the world, and it continues to expand throughout the city. Chicago, meanwhile, with a population of roughly 2.7 million people, has just 6,800 taxis operating as of 2013, according to a report from Chicago Business.

Singapore has a population of 5.3 million people, but over 28,000 licensed taxis in operation as of 2012. The city of Los Angeles, meanwhile, has a population of 3.8 million, but has only 2,000 licensed taxis in operation as of 2006, according to a UCLA study.

Moving upward, New York City has a population of over 8 million people, and 13,000 taxis in operation. Seoul, meanwhile, has a population of over 9 million people, and has over 50,000 taxis in operation.

Rough estimates of “taxis per capita” in Asia only tell us so much about a city’s taxi market. But in markets with a relatively high number of taxis per capita, as is the case with many Asian capital cities, the marginal value-add of each on-demand Uber vehicle is lower than that of an Uber vehicle in a US city (assuming that consumers view the two options as equally appealing and affordable).

2. Regulatory backlash

When municipal offices go after Uber for the first time, they tend to immediately accuse Uber of operating livery services without proper licensing. “You hook up drivers with passengers. That’s what cabs do. You’re a cab company,” so say the local bureaus.

Uber counter-argues by noting that they own no vehicles of their own, and merely charges a fee for the use of software that connects drivers with customers. Every one of their partner drivers (on UberBlack and UberTaxi at least) has already obtained permission to drive a commercial vehicle, and Uber is only helping them do their jobs more effectively. They’ll repeatedly affirm that they break no laws, and perform adequate safety checks on drivers and vehicles. They’re not shying away from touting themselves as leaders of an inevitable disruptive movement.

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In Asia, thus far, two cities have made this argument against Uber. In January, the Land Transportation Franchising & Regulatory Board (LTFRB) in Manila declared that Uber was running a taxi service without a proper franchise (license). Before that, last August authorities in Seoul declared that Uber was illegal for the same reason. To date, little follow-up beyond these early declarations has surfaced.

Since the most obvious argument against Uber’s legality holds no weight, regulators will be left with options that leave little room for middle ground if they hope to delay its arrival. They can ban UberX and all like-minded firms, but that deals a blow to a city’s reputation for welcoming new technology. Or, they can acknowledge and lightly regulate UberX, as San Francisco has done. Or, they can regulate UberX out of commission, as the city of Seattle has done.

How have different cities reacted to Uber’s arrival?

It might be too early to predict the way cities in Asia might react to Uber and other so-called “ridesharing” startups. However, looking at individual case studies across the US can help give an idea of how different municipal governments might react to Uber’s disruption.

San Francisco – Best Case Scenario

Uber launched in March 2009 but didn’t start to gain widespread traction in its native San Francisco until about one year later. In September 2010, the company received a cease and desist order from San Francisco’s Public Utilities Commission. The bureau claimed that since Uber was facilitating monetary exchanges between drivers and passengers, it was in effect operating a taxi dispatch service without a proper license.

Since that first cease and desist, various regulatory bodies in San Francisco continued to issue orders and fines against Uber and other like-minded companies like Lyft and Sidecar. Ultimately, the California Public Utilities Commission drafted and passed a set of regulations that dictate how companies like Uber can operate within the confines of the law. Notably, San Francisco became the first city in the US to coin the term “Transportation Network Company” to define firms like Uber, Lyft, and Sidecar – the three leading startups of their kind in the city.The CPUC defines a TNC as “an organization whether a corporation, partnership, sole proprietor, or other form, operating in California that provides prearranged transportation services for compensation using an online-enabled application (app) or platform to connect passengers with drivers using their personal vehicles.”

The CPUC does not consider UberBlack a TNC because that service “typically” is used by professional livery drivers that do not own their own vehicles, and that use the app in conjunction with reservations obtained through their limo company.

The CPUC issued 28 rules and regulations that TNCs must comply with in order to operate. UberX and other TNCs must:

  • Obtain a license from the CPUC to operate in California;
  • Require each driver to undergo a criminal background check;
  • Establish a driver training program;
  • Refrain from picking up passengers through street hails
  • Implement a zero-tolerance policy on drugs and alcohol;
  • Hold a commercial liability insurance policy that is more stringent than the CPUC’s current requirement for limousines, requiring a minimum of $1 million per-incident coverage for incidents involving TNC vehicles and drivers in transit to or during a TNC trip, regardless of whether personal insurance allows for coverage; and,
  • Conduct a 19-point car inspection

Uber, Lyft, and Sidecar were reportedly satisfied with the set of regulations.

Chicago – Not bad

Uber launched in the city of Chicago in September 2011, after which it battled a steady stream of regulatory backlash and lawsuits from the taxi industry for the next two years. On February 5th, 2014, the mayor proposed a set of regulations. Borrowing from San Francisco, Chicago defined the startups as “Transportation Network Providers.” Noting that the companies were at the time operating in a “regulatory vacuum,” the proposed set of regulations includes:

  • All TNPs must apply for and attain a one-year city license set at $25,000 plus $25 per driver.
  • In order to attain said license, TNP companies must “ensure that all drivers maintain no disqualifying criminal and driving records through regular
    background checks and drug tests, undergo driver training, and operate vehicles that receive an annual 21-point inspection.”
  • TNP companies must “have commercial general liability insurance with limits of not less than $1,000,000 per occurrence and commercial auto liability insurance of $1,000,000.00 per occurrence.”
  • TNP vehicles must “post visible, distinctive signage and emblems while operating.”
  • TNP vehicles must track and provide GPS data from trips to City authorities
  • Individual TNP drivers “will be required to pay the City’s ground transportation tax, which will be collected by the TNPs”
  • TNP mobile apps must display drivers’ license and ID information within the mobile app before riders can enter a contract with the driver
  • TNP vehicles cannot make trips to the airport
  • TNP vehicles cannot accept street hails

These proposed regulations go a bit further in dictating the business operations of Uber and Lyft. They impose taxes on individual drivers and require TNP vehicles to display signage, which would potentially affect the brand image and UberX.

An article in Bloomberg days after the regulations were proposed quoted representatives from Uber and Lyft expressing satisfaction with the mayor’s commitment to providing a legal framework for the so-called TNPs. But neither company endorsed the proposed regulations.

To date, the proposed regulations have yet to be passed.

Seattle – Poor

Seattle has gone even further than Chicago on its proposed set of regulations on and UberX and the ridesharing firms. The city government is currently wrestling with the taxi lobby and the TNCs over a set of ordinances that include the following limitations on ridesharing (unfortunately, the original document listing the regulations appears to have been removed from Seattle’s Office of the City Clerk website):

  • TNCs (as Seattle calls them) must pay a $50,000 annual fee to obtain license to operate in the city, as part of a two-year pilot program.
  • TNCs must obtain a $1 million per-incident insurance policy
  • TNC drivers – if they are average Joes like you and me, not “professional drivers,” – must obtain a special TNC Driver’s License, which involves completing a special course.
  • TNCs must get their GPS-driven distance and time rates cleared by the state.
  • TNC drivers cannot pick up street hails
  • TNC drivers can only work with one TNC
  • Each “non-professional” TNC driver cannot drive for more than 16 hours a week
  • Each TNC will be limited to partnering with no more than 150 vehicles.

It’s those latter two regulations that effectively shut down UberX in Seattle. The company claims that it currently has close to 1,000 UberX vehicles registered in the city. Reducing that number to 150 vehicles transforms UberX from a business to an experiment that’s doomed to fail.

Seattle passed the proposal early last March, but after a petition against its enforcement passed the threshold necessary to spark a referendum, all bets are off once again. If the taxi lobby and the municipal government can’t reach an agreement with the TNC’s by the end of May, Seattle mayor has threatened to issue a cease-and-desist against the companies.

Looking forward

Uber hasn’t yet released concrete figures that indicate its growth throughout Asia, though in the past it’s singled out Shanghai and Bangkok as cities where customers have flocked to its app. Even without good statistics, it’s not crazy to assume that Uber is not yet generating much revenue in Asia. In addition to facing competitive taxi markets, the company also faces the hurdles many other startups in the continent have to leap over – namely poor payment infrastructure and low-but-growing smartphone penetration smartphone penetration. It also has to educate consumers. This means that Uber must resort to promotions and giveaways in order to lure in passengers, and even then, one can only hope that these one-time customers will become regulars. For the time being, the company is just working on “getting noticed.”

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Even if Uber doesn’t pick up traction in Asia immediately, it’s well-endowed enough to bide its time. It occupies a legal grey area when it launches in most cities, and has a growing legal team in APAC ready to defend it against lawsuits. It also tends to be better than apps offered by taxi companies: it provides rating systems for drivers and riders, data analysis for drivers, and seamless payment. That helps ensure that Uber riders and drivers stay loyal to Uber, which in turn drives word of mouth. With a valuation of $3.5 billion, Uber can afford sit back and wait for the mysterious tides of consumer technology to turn in its favor before it starts earning healthy revenues from any particular market.

Uber has proven so disruptive and controversial in the United States that the lack of controversy in surrounding the app in Asia ought to unsettle Kalanick and his team. As many writers pointed out when San Francisco authorities first issued a cease and desist against Uber, hostility from long-standing government institutions is a sign that a startup is doing something right. Only when transportation bureaus across Asia start addressing Uber and the challenges it presents for vested interests will we know that Uber has approached success in the continent.

Hugo Barra image via Uber, others via Flickr users twicepix, hyunwoosun, and alvinchen; Editing by Steven Millward

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