The Failure of Uber in the Republic of Korea: Effects of Culture and Foreign Direct Investment on the Taxicab Industry in Seoul

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13th Global Conference on Business & Economics
ISBN : 9780974211428
The Failure of Uber in the Republic of Korea:
Effects of Culture and Foreign Direct Investment on
the Taxicab Industry in Seoul
Michael Collin Zreet
The University of Texas at Dallas
mcz130030@utdallas.edu
Keywords:
Foreign Direct Investment
Joint Venture
Public Administration
Transportation
Geert Hofstede
Cultural Dimensions
Uber Technologies Inc.
Republic of Korea
Seoul Metropolitan Government
November 22-23, 2015
Oxford, UK
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AUTHOR
Michael ‘Collin’ Zreet is currently a part time student at The University of Texas at Dallas where
he is completing his MBA and a Masters in Innovation & Entrepreneurship. He currently works
at Bell Helicopter as a Reliability Engineer and Cost Analyst on the commercial 525 Relentless
program, and has previous experience on the H-1 Huey and V-22 Osprey military programs. He
received his undergraduate degree in Aerospace Engineering from The University of Texas at
Austin in 2009 and currently resides in Dallas, Texas.
November 22-23, 2015
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ABSTRACT
INTRODUCTION: The American ride-share company, Uber Technologies, has
enjoyed successes and failures across the globe. Recently, Uber had been legally
forced out of the South Korea by the local government. Uber has had success in
other international cities, but why did it not find success in Seoul?
OBJECTIVE: The primary objective of this paper is to explore why and how
Uber was unable to maintain business operations in Seoul and not become the
success it has been in many other American and International cities.
APPROACH: I had recently studied public administration policy in the Case
Study Program in conjunction with the University of Seoul and the Seoul
Metropolitan Government. This knowledge coupled with research into Uber’s
history and business plan are the foundation of this paper.
FINDINGS: Research showed that Uber was favorable (95% approval rating)
among passengers, while the local taxicabs only were not as favored (56%
approval rating). Using the Geert Hofstede cultural comparison tool, it seems that
the problem may be deeply embedded in the Korean culture, including many sub
contexts like Individualism and Long Term Orientation.
IMPLICATIONS: As markets are opening up in East Asia (specifically South
Korea), American companies need to be more aware of cultural norms in these
countries, possibly creating joint ventures or international branches to
accommodate these differences.
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1.0 INTRODUCTION
After attending the 17th annual Case Study Program in a partnership with the University
of Seoul and Seoul Metropolitan Government in May of 2015, a question had been running
through my mind about a phenomenon seen back in the United States. The transportation
company, Uber, had wide success throughout many large cities throughout the United State,
but I had not witnessed any evidence of it in Seoul. During a lecture from Dr. Joonho Ko, a
research fellow at The Seoul Institute covering Seoul’s Public Transportation System, I asked
him if the Seoul Metropolitan Government had ever considered a rideshare service like Uber
or their competitor, Lyft, and if it would be ever profitable in the area.
To my own
ignorance, I quickly learned that Uber had been forced out of Seoul and would be have been
heavily fined if they ever returned to Seoul. This piqued my interest and furthered my
research into the topic. This paper will look into the history of Uber as a company, an
overview of Uber’s general business plan, general policies of the taxi system in Seoul, and
the history and disputes of Uber in Seoul.
2.0 HISTORY OF UBER IN THE UNITED STATES
Uber was started by Travis Kalanick (founder of the Peer-to-Peer file sharing company,
Red Swoosh) and Garrett Camp (co-founder of the web discovery platform, StumbleUpon) in
March of 2009. Trying to come with a solution to San Francisco’s taxi problem, they came
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up with UberCab, which originally was supposed to be a luxury car timeshare company that
was based upon an iPhone application (Arrington 2010).
Kalanick and Camp were able to recognize the need for fast and reliable transportation
service in densely populated areas. In their hometown of San Francisco, the dense city, steep
hills, and many local attractions made it very difficult to park a personal vehicle, making
taxis a very efficient alternative to owning a car. As of the 2010 census, the population
density of San Francisco is 17,246 people per square mile, becoming the 20th densest city in
the United States (U.S. Census Bureau 2010). Because of this density, it made it very
difficult to find and hail a taxi in a timely manner, averaging out to about 30 minutes per
instance (Chokkattu & Crook 2014). The overlying idea behind Uber was to employ nonprofessional drivers to use their personal vehicles to ferry around customers by the use of an
iPhone application that facilitates communication between the two parties involved.
After a few key hires, developing the software, and test run in New York City with three
cars and a cell phone, UberCab (as it was originally known) was launched in San Francisco
on July 5th, 2010 (Chokkattu & Crook 2014). Shortly after, in October of 2010, UberCab
received its first (of many more to come) roadblocks, as the San Francisco Metro Transit
Authority sent them a Cease & Desist Order for operating like a taxi company without the
required licensing (Chokkattu & Crook 2014). After a name change, to just “Uber,” the
company was able to get around the regulation because unlike a taxi company, Uber prearranged customer pickups and does not acquire customers curbside, more like a limousine
service. By late 2011, Uber had raised $49.5 million dollars through angel investments from
large entities across the country including Goldman Sachs, Bezos Expeditions (Jeff Bezos,
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founder of Amazon), and Benchmark Capital and was valued at $330 million (Myers 2015).
As of May 2015, Uber had been valued as a $50 billion company (Myers 2015).
As Uber had problems in its hometown of San Francisco, Uber also came up against
similar issues in other U.S. cities with taxi unions and municipal governments. The state of
Nevada has some of the strictest taxi and limousine regulations in the country, which is why
Uber is absent in Las Vegas, as the third largest metropolitan area in the country (Shine
2014). To be able to operate in Nevada, they would have to apply for a taxi medallion and
operate under the same rules and regulations as taxis (Shine 2014). Uber is also not allowed
to operate in Portland, Oregon due to city ordinances (Kulikowski 2014).
Uber expanded internationally into Paris, France in December of 2011 (Tsotsis 2011),
Vancouver, Canada in March 2012 (Sawers 2012), and London, United Kingdom in July of
2012 (Apps Rush 2015). As in the United States, there was also some push back from taxi
union groups, including a violent riot in the streets of Paris in June of 2015 (Smith-Spark
2015). Uber has also been banned in other international cities, like Brussels, Belgium and
Berlin, Germany (Kwaak 2014).
3.0 BUSINESS MODEL OF UBER
Uber’s business model is fairly simple. They employ non-professional drivers to drive
their own personal vehicles around, picking up pre-scheduled customers through an easy-touse smart phone application. The customers having already pre-loaded their credit card
information through the smart phone application, digitally pay their fare once the ride is over.
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The fare is calculated by combining a base fare (B) plus a rate cost (ct and cd) for both time
(t) and distance (d) traveled, displayed as:
This method of charging customers allows Uber and its drivers to make money both
when time is short but distance may be longer (low t; low traffic scenarios), when distance is
short but time takes longer (low d; high traffic scenarios), or when both are short (low t; low
d; B fare is constant) since the base fare (B) is always a constant amount. All of these
variables are different between the regions they operate in. This is very similar to how
taxicab companies operate today across the world.
Uber also provides varying levels of vehicles to be picked up in, increasing in luxury,
size, and cost (Uber 2015):
UberX: UberX is the lowest cost option for everyday use, which requires the drivers to
provide a car model year 2000 or newer and be able to seat four passengers
UberXL: The UberXL is slightly larger version the UberX carrying six passengers and
requires a higher fare than UberX.
UberPlus/UberSelect: The UberPlus/Uberselect is a luxury sedan with leather interiors
that is typically a higher end car model, like an Audi or BMW, that seats four passengers.
UberBlack: UberBlack provides passengers with high-end executive sedan vehicles and
requires the highest of all the Uber vehicles.
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To combat high demand scenarios (during work rush hour or other high density events),
Uber also applies an overall multiplier that increases the overall fare, in which they call
“Surge Pricing.” In these high demand “Surge” instances, the Uber pricing model behaves
exactly in a typical Supply-Demand curve scenario. When demand (D; passengers) is greater
than supply (S; available drivers), an increase in price is motivation for the demand to return
back to equilibrium. This also encourages more drivers to be available during peak hours
due to the lure of making more money at these times. Allowing the prices to change, allows
for Uber to set prices that will be most beneficial to the current traffic situation.
As far as paying their employees, the drivers actually keep a majority of the fares. Uber
only keeps 20% of the fare for administration services, allowing the drivers to keep the
remaining 80% (Uber 2015). On average, Uber drivers make $19.04 per hour (Driver Jobs
2015).
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Figure 1.0 Average Wages of Various Driver Jobs (Driver Jobs 2015)
Uber requires their drivers to be at least 21 years of age, drive a car manufactured in the
year 2000 or later, and pass a background check (Driver Jobs 2015). The drivers then receive
a unique smartphone application that allows them to collect fares, receive payment, and
provide directions for transporting their passengers. Uber has recently extended automobile
insurance to drivers while they are working, with increased coverage while they have a
customer (Driver Jobs 2015).
4.0 TRANSPORTATION POLICY OF SEOUL
There are over 72,181 taxis in Seoul, with about 7% of the population using taxis for
transportation between 2002 and 2010, as seen in Figure 4.0 and Figure 5.0 (Ko 2015).
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Looking at the trend from 1970 onward, taxis have become less and less poplar, declining
from a height of 19.0% of all transportation in 1980 to 6.2% in 2010 (Ko 2015).
Mode Share Trend
40%
Percentage Used
35%
30%
25%
Subway
20%
Bus
15%
Passenger Car
10%
Taxi
5%
0%
2000
Etc.
2002
2004
2006
Year
2008
2010
2012
Figure 2.0 Percentages of Transportation Modes in Seoul from 2002 to 2010 (Ko 2015)
1960
1970
1980
1990
2000
2010
2,445,402 5,433,198 8,364,379 10,612,577 10,373,234 10,575,447
9,113
8,863
13,774
17,352
17,132
17,473
6,610
7,734
7,889
8,142
15.15%
18.32%
21.01%
22.02%
7,818
60,442 206,778 1,193,633 2,440,992 2,981,400
7,238
8,781
8,483
7,548
395
450
395
368
Bus
72.8%
65.9%
43.3%
28.3%
27.8%
Subway
6.2%
6.8%
18.3%
35.3%
35.2%
Modal Share (%)
Taxi
15.5%
19.0%
12.8%
8.8%
6.2%
Auto
14.0%
19.1%
25.9%
5.5%
8.3%
Etc.
11.1%
8.5%
4.9%
Metro/Subway Length (km)
10
106
139
290
315
1,388
Subway Ridership (million people)
1,889
1,769
(in 1993)
Population (person)
Population Density (person/km 2)
Road Length (km)
Share of Road (%)
Vehicle Popuation (vehicle)
Buses (vehicle)
Bus Routes
Figure 3.0 Select Transportation of Seoul from 1970 to 2010 (Ko 2015)
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Much of this can be attributed to the rise of the personal affordable automobile from the
1990s forward, made by local manufacturers: KIA, Hyundai, and others. In 2009 alone,
South Korean automobile manufacturers’ annual output was 3.2 million passenger vehicles,
with 2 million of those exported to U.S. and European markets, with a steady growth toward
Chinese and Indian markets (Ritter 2010).
Figure 4.0 Increasing Automotive Production in Select Asian Countries (Kidambu 2013)
In South Korea there are a few different varieties of taxi (Jang):
Regular Taxi: These taxicabs are owned by the drivers themselves and are required to
have five years of accident-free experience. Since they are self owned, the drivers keep
all of their fares.
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Brand Taxi: These taxicabs are owned by a company that pays the drivers a commission
from their fares. They are relatively the same fares as the Regular Taxis.
Deluxe Taxi: These taxicab drivers must have ten years of accident-free experience and
must also receive Deluxe Taxi Certification. Fares for the Deluxe Taxi are higher than
Regular Taxis because of their safer record and certification.
Jumbo Taxi: Similar to the Deluxe Taxi but can carry up to eight or nine passengers.
International Taxi: A variety of Regular, Deluxe, or Jumbo Taxi but with drivers fluent
in either English or Japanese.
5.0 HISTORY OF UBER IN KOREA
Uber expanded to Seoul in December 2014, after providing three months of free services
to test the market (Ritter 2010).
But even before Uber could have started, the Seoul
Metropolitan Government had already been arresting Uber drivers, deeming the ridesharing
service illegal (Hwang 2014). Punishment could be up to two years of imprisonment or a
fine of 20,000,000 won ($20,000 U.S.) (Hwang 2014). This hard stance on Uber came as a
directive from South Korea’s Ministry of Land, Infrastructure, and Transport (MLIT), saying
that anyone operating as a transportation service need proper licensing and certification
(Hwang 2014). A large problem with this is that the licenses cost 1,000,000 won ($77,000
U.S.) and are bought and sold under the table (Taxi License Value 2014). In April of 2014,
the Seoul Metropolitan Government issued a fine of 1 million won (approximately $974
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U.S.) to anyone trying to pick up fares through the Uber application (Kwaak 2014). The
local government also launched an investigation against Uber but was unsuccessful due to
lack of evidence (Kwaak 2014).
There are two types of taxi licenses in South Korea. All drivers start off as employees of
corporate taxi companies. After years of experience, the drivers are then allowed to obtain a
separate license where they can buy their own car and work as an independent driver.
Despite the local and national governments’ hard stance on Uber, the public seemed to
very much enjoy the services that Uber provided. According to a third party study, 90% of
the users in Seoul supported the service, and over 95% would recommend it to a friend
(Hwang 2014). Compared to the data shown in Figure 7.0 below, this is a stark difference to
the approximate 56% satisfaction rates of the taxis operating in Seoul, the lowest out of all
modes of transportation. All other modes of transportation are increasing in satisfaction,
where taxis is the only mode in decline (Ko 2015).
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Figure 5.0 Public Satisfaction with Seoul Public Transportation (Ko 2015)
On May 29th 2015, South Korean lawmakers passed a national bill banning any type of
transportation service provided by private drivers (Lee & Kim 2015). This ban is different
than previous legislation in that it covers all versions of private driving services, and does
more than just singling out Uber (Lee & Kim).
In reaction to Uber’s arrival in Seoul, taxi drivers were actually able to work with local
technology firms and create a smart phone application that performs similarly to Uber’s
(Kwaak 2015). Since South Korea is such a technologically driven country, this is a logical
step for them. One observation is why this has not happened in other large cities across the
United States and Europe, in response to Uber. A creation of this technology for already
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existing taxicab services would help the current taxicab drivers in competition with Uber, and
in the end benefiting customers on both sides.
6.0 FOREIGN DIRECT INVESTMENT IN KOREA
In the business world, the influx of money, capital, and commerce from an outside
country is called Foreign Direct Investment (FDI). FDI typically carries both pros and cons,
especially with larger influxes of capital, like with smaller oil-rich countries that receive lots
of investment from developed countries seeking some of the profits involved; or with laborrich countries, like China and India, where other countries can make textiles and other labor
intensive consumer products, for a lot cheaper abroad than at home. In the case Uber, there
is no fear of environmental or worker exploitation. If anything, Uber allows the their wouldbe employees in South Korea to have a side job to allow them to have more financial
freedom, though this could possibly come at the cost of some of the current taxi drivers.
Overall, the more open an economy is, the more economically beneficial it is for the
home economy and its citizens, as well as foreign competitors. When completing an analysis
on the introduction of foreign competition into a closed market, there is usually a large
growth in consumer surplus, even more so than what is lost in the producer surplus. Even
when a tariff is implemented, it can be set to where local producers still gain more of a
producer surplus, still with an overall gain in surplus compared to a closed market. The main
actions and response of the Seoul Metropolitan Government indicates that are afraid of losing
out on the producer surplus of their current local taxis, at the expense of growing of the
industry.
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In the case of Uber, FDI should not be considered an issue due to the fact that their
business model would not negatively affect the South Korean economy in the exploitation of
labor or material resources.
7.0 EFFECT OF KOREAN CULTURE ON FOREIGN BUSINESS
Figure 6.0 6-D Model of Culture for South Korea (Hofstede)
Another aspect to look at in this situation is from a cultural standpoint. Traditionally,
most Asian countries are very collectivistic and are very closed-off to outsiders.
Geerte
Hofstede’s Culture Comparison tool confirms this, as South Korea has a low ‘Individualism’
rating of 18 out of 100 points, highlighting their loyalty to their families and government, and
where employee relationships are perceived more in familial terms (Hofstede). This would lead
to skepticism from foreign companies, including Uber. This is very interesting because Uber
fared well with customers while running free trials early on in Seoul. South Korea also scores
the highest possible on ‘Long Term Orientation,’ indicating that they are always looking towards
the future, opting for long term growth strategies, instead of short term monetary advances
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(Hofstede). This also leads to high company loyalty, which would be another reason the Seoul
Metropolitan Government would be against a foreign company coming in and trying to take over
the market.
These cultural dimensions are very similar across many countries in Asia, which has been
a struggle for outside companies to create business opportunities in these countries. In light of
this, Uber should have recognized this cultural difference and suggested in partnering with a
local Korean in the creation of a Joint Venture with South Korean entrepreneurs. Though this
may have relinquished some of the control over the region to another business partner, it possibly
could have created possible expansion in the regional market for future projects in other
countries.
This issue is not unique to the transportation industry and these lessons learned should be
applied across the board in all industries. There are numerous examples of these joint ventures
occurring in other industries, including the aerospace industry where Bell Helicopter and Fuji
Heavy Industries (FHI) were selected in the construction of the UH-Z, a multipurpose multi-role
helicopter, for the Japanese ministry of defense. While Japan does not score as similar to South
Korea in Individualism according to Hofsede, they are very similar is Uncertainty Avoidance,
thus making Japan a difficult market to penetrate (Hofstede).
Assuming Uber could successfully create a joint venture with a South Korean business
partner, the opportunities are right in front of them. They can compete on the same scale since
the taxicabs are in similar segments that Uber already provides (e.g. UberX and Regular Taxis,
UberXL and Jumbo Taxis, UberPlus/UberSelect and Deluxe Taxis).
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8.0 CONCLUSION
Considering the facts presented, the demise of Uber was likely a combination of the taxis
drivers’ fear of losing customers to a cheaper competitor, and the central and local governments’
fear of losing out on the revenues provided by taxes and the selling of taxi licenses. Despite high
satisfaction with Uber and its services and considerably lower satisfaction with the current taxi
system, the Seoul Metropolitan Government decided to support the local taxi drivers. In this
kind of business environment, abroad and in the United States, the losers in this scenario are the
citizens. Without competition in any industry, innovation and creativity are stifled and it begins
to stagnate. While unlike their Western counterparts, South Korean taxi drivers are currently
planning and implementing a smart phone application to at least facilitate hailing a taxi.
This should be a lesson for U.S. and European cities with similar issues in dealing with Uber.
The taxis are already losing out to the rise of personal cars and the expansion of the subways in
Seoul in both ridership and public perception. In my opinion, Uber should have been embraced
in part by the Seoul Metropolitan Government in order to jumpstart a stifled industry. It is
understandable that the local government did not want to lose out the revenues generated by the
taxicab licenses and transportation taxes, but should have been flexible to the point where both
sides could have been profitable.
In my opinion, the largest factor at play here is the
collectivistic culture of the Seoul Metropolitan Government wanting to keep the local taxis
profitable and in control of the Seoul personal transportation market, even at the expense of
growing the industry. This should have been recognized by Uber, who could have used this
opportunity to create a joint venture, which could have ultimately created a penetration into a
traditionally closed region.
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APPENDIX A – References
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Chokkattu, Julian and Jordan Crook. “A Brief History of Uber.” Tech Crunch N.p., 14 August
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Jang, Min-young. “The Complete Guide to Seoul Taxis.” CNN N.p., 24 October 2011. Web.
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Kidambu, Ram et al. “The Contribution of the Automobile Industry to Technology and
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Value Creation.” AT Kearny N.p., September 2013. Web. 26 June 2015.
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Smith-Spark, Laura. “Courtney Love Rages at Violent Anti-Uber Protest by Paris Taxi
Drivers.” Cable News Network (CNN) N.p., 25 June 2015. Web. 25 June 2015.
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Uber Available from: <www.uber.com>. [25 June 2015]
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