How Uber Lost 1.36 Billion Customers Just Like That

XiaoMi's Overtake Least Of Worries

Like any sensible person without insider knowledge of Uber’s affairs and dealings, I have my skeptical hat on. It is hard to be objective when dealing with numbers as high as $40bn without greater resolution. But for most of us, it doesn’t matter until the company chooses to issue a prospectus. Until then, we wish Uber the best of luck in 2015 while waiting for the $100bn valuation milestone.
— Business of Finance

Towards the end of 2014, Uber was fronted onto the podium when it became the most valuable startup with a private valuation of $41.2bn after it closed its 6th round of funding. We were however a little less impressed than other talking heads were plainly because we felt it was mostly smoke and mirrors when dealing with darlings of the venture capital world. It was not until a few days later, after its ordination of glittery stardom was it trusted into yet more controversial light after coming across as a crude profiteer in times of crisis. Our reservations were one step closer to being justified.

Weeks later, the inevitable occurred when Chinese tech startup XiaoMi audaciously stole Uber's crown of most valuable startup when it revealed that it was valued at $46bn after a 5th round of funding. That was to be expected of course, with so much activity going on in the venture capital and private equity space. We have got our global Central Bankers to thank for that. But that is besides our point. Our point remains flat out clear: Uber doesn't deserve a $41.2bn price tag.

 China's  XiaoMi was valued at $46bn  after receiving its  5th round of funding of $1.1bn on 29 December 2014 , putting it ahead of  Uber's $41.2bn valuation  after the crowdsourcing tech startup raised $1.2bn in its 6th round of funding on 12 December 2014, just weeks before XiaoMi stole its spot

China's XiaoMi was valued at $46bn after receiving its 5th round of funding of $1.1bn on 29 December 2014, putting it ahead of Uber's $41.2bn valuation after the crowdsourcing tech startup raised $1.2bn in its 6th round of funding on 12 December 2014, just weeks before XiaoMi stole its spot

But who are we to judge? Surely there has to be some basis to support the vaulting valuations these tech startups hold that private investors know about. Information that isn't publicly available but exists in actuality, this is something that constantly riddles individuals like us, people without skin in the money game.

I once read a smart comment posted by a gentleman on an article about how Silicon Valley was every worth the prices it still commands; it stated something about how the traditional approach of valuations based on a company's balance sheet, cash flows, and earnings (the Benjamin Graham school of "value investing", or the comparable approach as it is technically known) was not applicable for affixing price tags to startups.

We understand that valuation is science as much as it is art, so we give venture capitalists the benefit of the doubt they deserve and assume for once, that Uber is indeed worth $41.2bn. Even so, recent events have troubled the San Fransisco based company; problems that are slowly but steadily chipping away at Uber's prospects of becoming the world's leading taxi provider, what it essentially is for now.

We feel such major sticking points have not been given enough weight or presence, swept under the rug as they say. Our skepticism on Uber's future isn't cynical fairy dust; they are a culmination of multiple blows the company has sustained, and its subsequent failure to sensibly outline the ways in which it will conquer the Andes.

Most commoners would know Uber by its mobile application, would already have been on their smartphones partly due to the company's aggressive marketing and promotional campaigns in the 250 cities it operates in. Its closest competitor in the otherwise arid field is also an American based crowd sourcing technology startup called Lyft and it is roughly valued by private equity investors at one-eighth that of Uber.
The company was founded on the idea of ride sharing through real time peer-to-peer communications under a network of private users. Crowdsourcing isn't a novelty by itself, but it does seem that humans have only just begun to scratch the surface of the infinite possibilities it offers. With the advent of instantaneous communications through systems which are forever online, gathering contributions from individuals, even if on a micro scale, can be achieved with little latency and lag.

Banned From World Second Largest market

2015 was supposed to have ushered in new opportunities and a renewed sense of zest for this rising star, but it has unfortunately turned out to be another stumbling block. Juxtaposing to the XiaoMi's regionally focused strategy, Uber's global presence (or lack thereof) is shaping up to be a tale of two cities, and Uber isn't happy about that.

 Google's services including its search and email services are now  blocked in China .  Christmas Day remains a working day in Chin a, even its financial markets remain open for trading

Google's services including its search and email services are now blocked in China. Christmas Day remains a working day in China, even its financial markets remain open for trading

China does have a penchant for imposing draconian restrictions on Western interjections, especially those from America which threatens to unearth Beijing's status quo of what it envisages as the People's Republic of China. We dawdle to call this die-hard socialism, but more of protectionism; and there is ample precedent. One only has to consider the illegality of celebrating Christmas in China (calling it "Western spiritual pollution", or the Great Firewall's recent blockade of Google's Gmail services, essentially eradicating Google's presence in the Mainland.

Isn't it sheer irony,  that while on one hand the Politburo promises its people increased liberation and privatization from the once prevalent era of state-ownership, it takes away with the other access to Western "dogma"? This paradox doesn't seem to matter to China's plutocrats. Anything that elevates the homegrown gets the green light, anything which threatens its supremacy instantly gets the boot. The Chinese are deftly good at this trick, Uber should have known. It now knows. But maybe 1.3 billion customers late.

As ridiculous as it seems, this shrewd tactic has enabled Chinese corporations to quickly rise to rival their Western counterparts. Without help from the hand that feeds it, startups like XiaoMi would have never seen the glory of today.

 Bloomberg provides a clean overview of Uber's global operations. Recently, female user was raped in India when she used the company's services in India. Uber has since been banned from operating in the second most populous nation in the world.  Such events have opened inquires on the potential risks of hiring the services of unlicensed and unregulated taxi operators . Labor unions are another burgeoning hurdle to overcome. Such unions are especially strong in Europe where Germany, France, and Spain (also increasingly in the UK) have imposed restrictions

Bloomberg provides a clean overview of Uber's global operations. Recently, female user was raped in India when she used the company's services in India. Uber has since been banned from operating in the second most populous nation in the world. Such events have opened inquires on the potential risks of hiring the services of unlicensed and unregulated taxi operators. Labor unions are another burgeoning hurdle to overcome. Such unions are especially strong in Europe where Germany, France, and Spain (also increasingly in the UK) have imposed restrictions

Exactly on the 1st of January 2015, Beijing's Traffic Enforcement Unit banned the operation of "illegal" taxi services in the capital after receiving complaints from passengers. In its eyes, unlicensed taxis, which includes Uber vehicles, are "taxi clones" and affirms that private cars operating through taxi applications is considered an act of illegal operation. The Ministry's stated reason for the ban was to protect the "hired car" market from unfair competition. This is the standing opposition of antagonists be it in Beijing, or in New York.

 Uber's disruptive services are a major threat to taxi drivers in New York, considering  Yellow Cab drivers need to pay close to a million dollars for a license to operate in New York

Uber's disruptive services are a major threat to taxi drivers in New York, considering Yellow Cab drivers need to pay close to a million dollars for a license to operate in New York

$840,000. The price of a New York taxi medallion in November 2014
— New York Times

It isn't just Uber that is reeling from the crackdown on unlicensed for-profit drivers. China's market of private taxis remains dominated by domestic ride-haling technology firms which collectively compete with traditional licensed taxi operators which do business under licenses granted by the Government. These licenses don't come cheap.

Like almost everything "innovative" in the Mainland, Uber's operating model has been imitated by a host of local companies seeking market in a growing pie which leverages on the increasing connecvitiy of consumers through higher penetration of mobile technology.

This marks the first time that Beijing has classified such unlicensed operations of taxis to be illegal. Like in most cities it still operates in, Uber offers its premium Uber Black, and normal Uber X (known in China as "Peoples' Uber" in Beijing. Although Uber has yet to provide a public statement, it has mentioned that it will do so in due time.

The Guardian has more:

China has banned drivers of private cars from offering services through ride-hailing apps, throwing up a new hurdle to Uber’s global expansion.

Only licensed taxis may use ride-hailing apps, the ministry of transport announced on Friday. Such apps are hugely popular in China, and the ministry said it needed to protect users.

The ruling could be a setback for Uber, which faces legal challenges in South Korea, India, Europe, California and other markets for using drivers who lack taxi licenses.

“While we encourage innovation, we prohibit private cars from using platforms to participate in the ’hired car’ business,” said a ministry announcement. It said companies that operate ride-hailing apps will be required to make sure no unlicensed drivers use them.

China’s ride-hailing market is dominated by domestic competitors Didi Dache, backed by internet giant Tencent, and Kuaidi Dache, backed by rival Alibaba Group. Those services are used mostly by taxi companies.

A third Chinese internet giant, search engine operator Baidu, jumped into the market in December by investing in Uber.

Taxi companies in the US, Europe and other countries have complained that Uber and similar ride-hailing services have an unfair advantage because they are not covered by regulations that affect the established industry.

In December, the Shanghai city government detained and fined 12 unlicensed drivers who received business through the Didi Dache app.

In South Korea, the chief executive of Uber’s local subsidiary was charged in December with operating an unlicensed transport company.

Police in New Delhi say they are considering similar charges. A French court has ordered Uber to remove from its app any language suggesting it was legal for its drivers to act like taxis.
— The Guardian

A Tale Of Two Cities, But Back To America

No, this isn't from a Charles Dickens novel. This is real life. While China has been involved in tit-for-tat, beggar thy neighbor behavior for eons now, the message to Uber seems to be "go back to your own country". Harsh as it may sound, readers would quickly realize just by looking at the Bloomberg graphic above, it is a tale of two cities for the this taxi company - having been completely banned from China, there isn't a route in sight to circumvent this roadblock. The way we see it, Uber is being pushed back towards its most profitable market - America.

We’re so confident in the earnings gains drivers will see that we’re making earnings guarantees in every city where we’re cutting prices.” Uber said in a recent blog post. “We feel that it is important for drivers to have this kind of certainty and comfort going into a price cut.
— Uber

Sure enough, Uber announced this past Friday that it was reducing fares across 48 cities in America. It has also gone out on a limb by assuring its drivers that despite the lower rates that riders pay, Uber drivers would see improvements in their earnings. This statement of confidence illustrates the firm's believe that it will retain support in its homeland.

Although the company has not yet released detailed figures, it doesn't take much to come to the conclusion that Uber's largest and most profitable market remains to be America. The land that it was raised and bred in will probably be the lynchpin that keeps it afloat in the interim while it tries to find footing in the slippery business of penetrating what has traditionally been a regulated and hence restricted market of taxiing.

So for now, it is one market - which turns out to be the world's most populous nation - down; the $41.2bn price tag remains, no discount as of now. We patiently wait for positive positive (hopefully) developments, and most importantly, strategies to side step its mounting hurdles; because absent which severely limits the company's potential.