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 1 13th Global Conference on Business & Economics ISBN : 9780974211428 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 Oxford, UK 2 13th Global Conference on Business & Economics ISBN : 9780974211428 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. November 22-23, 2015 Oxford, UK 3 13th Global Conference on Business & Economics ISBN : 9780974211428 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 November 22-23, 2015 Oxford, UK 4 13th Global Conference on Business & Economics ISBN : 9780974211428 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, November 22-23, 2015 Oxford, UK 5 13th Global Conference on Business & Economics ISBN : 9780974211428 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. November 22-23, 2015 Oxford, UK 6 13th Global Conference on Business & Economics ISBN : 9780974211428 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. November 22-23, 2015 Oxford, UK 7 13th Global Conference on Business & Economics ISBN : 9780974211428 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). November 22-23, 2015 Oxford, UK 8 13th Global Conference on Business & Economics ISBN : 9780974211428 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). November 22-23, 2015 Oxford, UK 9 13th Global Conference on Business & Economics ISBN : 9780974211428 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) November 22-23, 2015 Oxford, UK 10 13th Global Conference on Business & Economics ISBN : 9780974211428 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. November 22-23, 2015 Oxford, UK 11 13th Global Conference on Business & Economics ISBN : 9780974211428 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 November 22-23, 2015 Oxford, UK 12 13th Global Conference on Business & Economics ISBN : 9780974211428 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). November 22-23, 2015 Oxford, UK 13 13th Global Conference on Business & Economics ISBN : 9780974211428 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 November 22-23, 2015 Oxford, UK 14 13th Global Conference on Business & Economics ISBN : 9780974211428 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. November 22-23, 2015 Oxford, UK 15 13th Global Conference on Business & Economics ISBN : 9780974211428 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 November 22-23, 2015 Oxford, UK 16 13th Global Conference on Business & Economics ISBN : 9780974211428 (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). November 22-23, 2015 Oxford, UK 17 13th Global Conference on Business & Economics ISBN : 9780974211428 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. November 22-23, 2015 Oxford, UK 18 13th Global Conference on Business & Economics November 22-23, 2015 Oxford, UK ISBN : 9780974211428 19 13th Global Conference on Business & Economics ISBN : 9780974211428 APPENDIX A – References “Apps Rush: Uber, Google Analytics, Futures EP, AA Best Walks, Visible Body, UK Bus Checker and more.” The Guardian N.p., 2 July 2012. Web. 25 June 2015. Arrington, Michael. “Uber CEO Super Pumped About Being Replaced By Founder.” Tech Crunch N.p., 22 December 2010. Web. 25 June 2015. 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