It was a bright day during the winters of 2008. My co-passenger, a Kazakh boy of my age, and I connected over Bollywood¹ and Shahrukh Khan while traveling from Berlin to Munich in a shared car. Like me, he was also backpacking in Europe, and we both loved using the German ride-sharing website Mitfahrgelegenheit.de² – which translates to ‘drive-with-opportunity’. He also introduced me to the French version of it – BlaBlaCar. In between our Bollywood banter, I could also sense an entrepreneur in him. He liked the idea of ride-sharing so much that he wanted to start something similar in his home country. Whereas, I firmly believed that despite a rise in the number of vehicles on the Indian roads and several other issues paramounting with them, carpooling for one-off or long-distance journeys would not succeed in India, at least then. In my perception, there were two main reasons. First, India’s internet penetration (% of the population) was at a meagre 4.4% in 2008³. Second is the diverse socio-economic strata of the Indian population and the presence of multiple languages in India. Both of these challenges together could arise issues like reliability, safety, security and trust.

Few young entrepreneurs, who had different thoughts than mine, took some of these challenges head-ons and started companies like Ola Cabs & TaxiForSure in the metro cities. Ola started as Ola Trip – a tour & travel operator in 2010 and soon pivoted to a ride-hailing platform. TaxiForSure started operations as a taxi aggregator in 2011.

Ola acquired in TaxiForSure in 2015 and outside India now it operate in UK, Australia & New Zealand. Ola’s pre-Covid, valuation was $5.5 billion.

Uber’s Expansion in India

Miles away, known for the ruthless & aggressive strategies, Travis Kalanick, the then CEO of Uber, also had high ambitions for the Indian subcontinent and considered India a “super-important” market. In August 2013 Uber started rolling out ‘Secret Ubers’⁴ in Bengaluru to test out the service. Although, after 7 years Uber claims⁵ to command more than 50% of the ride-hailing market in India, the ride has not been less then bumpy for it in India. On top of the competition against a home grown, well-funded and aggressive rival Ola, Uber faced many challenges that it didn’t face elsewhere.

Heterogeneity

India is very heterogeneous in terms of fixed and mobile internet usage by socioeconomic groups, age, gender, race, and ethnicity. When Uber entered, internet penetration in India was around 15 % ⁶. India had about 524 million mobile phone users (mainly concentrated towards the urban), but the penetration of smartphones as a percentage of mobile users was pegged at just 10%. The average internet speed was ~ 1.5 Mbps, one of the slowest in Asia-pacific and 117 internationally⁷.

For a map-based app, technology was another bottleneck, not just because of the reliability of the internet, mainly because of the landscape of India. You cannot rely on GPS completely for ETAs and directions. The roads tend to be terrible; uneven, unlit, clogged with potholes, narrow, unscientific and unmarked speed-breakers, missing warning signs etc. For example, Bengaluru, one of the cities I have lived in for an extended period, is infamous for its one-ways and ever-shifting routes.

Another issue, which is more cultural – in India people were not used to maps. When giving directions, they do not follow formal stricture; instead of cardinal directions, they would prefer to use a series of routes and familiar landmarks. This becomes utterly ineffective for people who don’t share a language. Over time, it became a norm to expect a direct phone call from your Uber or Ola driver confirming your destination after accepting the ride in the app. And if for any reason, like the traffic condition on that route or mode of payment, they don’t prefer to accept the ride, they would rather cancel the ride or ask you to cancel the ride.

Similarly, when it comes to payments, Uber’s just-get-out-of-the-car, aka cashless model in the US, was surely not going to work. Within two years, it had to roll out the Uber CASH (not to be confused with Uber Cash – digital payment within Uber Apps). Until recently (post-demonetization & proliferation of digital payment apps), many people preferred cash over in-app transactions. In one incident, before travelling to Guwahati, the capital city of Assam, in 2019, I was reminded multiple times to carry cash for my Uber ride payment. I didn’t want to take a chance, and instead of topping up my Uber Wallet, I queued for 30 minutes at the ATM outside the Airport. After booking the ride, the driver called me to confirm my destination, mode of payment and then instead of coming to the designated pickup point, he gave me directions to his parking location. Strangely, I was feeling lucky, but the experience had left me very curious. It was a long ride, and so I tried to get my answers from the Uber driver. As per him, when a rider pays digitally for their ride on Ola App, the driver is paid the next day through bank transfer and in the case of Uber App, the driver is paid within a week through bank transfer. In both cases, the driver would need to visit a bank or ATM to withdraw cash which could take considerable time and might affect his weekly target of rides set by these companies. To avoid all this hassle, they prefer to take some money home daily. On the demand side, riders prefer cash to save the booking fee and additional charges levied by the bank.

Laws & Regulations

In addition to differences in culture, economy and demography, the expansion of digital platforms across geographies is affected by regulations. Governments across the border differ in how they regulate foreign investments, competition, data privacy, net neutrality, intellectual properties etc.

Transport regulations in India are notorious for being complicated, allowing companies to interpret in ways that suit one’s interests. Road transport in India is in the domain of State administration. The central law — The Motor Vehicles Act regulates road transport vehicles, requires specific permits for transport vehicles, and stipulates various conditions and requirements for holding such licenses. The Act also grants state authorities the power to issue rules regulating taxis. State governments have established radio taxi systems that control traditional radio taxis’ operations in exercising this power. State government and taxi driver unions also regulate taxi fares. And then, there is the Information Technology Act, which provides the legal framework for IT companies in India.

To sum it up, there were no central or state laws in 2013 to regulate digital aggregators. Uber used this for its benefit and ducked all the existing regulations. RBI ( India’s central bank and regulatory body) also found Uber in violation because of using ways to bypass Indian laws to conduct transactions overseas. Uber recruited drivers for its technology platform without any background checks and, in many cases, without permits to carry local fares. It soon faced its first legal ban in India in Delhi on December 8, 2014, after a woman accused an Uber driver of raping her. The investigative agencies took hours to locate Uber executives as apparently the company was operating from few hotel rooms. It took additional 5 hours to get the details of the accused driver as the servers were in the US.

Still recovering from the 2012 Nirbhaya case, these incidents proved to be a wake-up call for India. As a result, Delhi Government modified its existing radio Taxi licensing rules to allow app-based taxis aggregator to be eligible for a radio taxi license. It hence will have to abide by all the relevant statutes, including the central Motor Vehicles Act and Information Technology Act. The app-based taxis aggregator like Uber were now :

• Mandated to introduce safety measures including SOS, live vehicle tracking, dedicated control centre and call -centre for distress signals
• Responsible for the quality of drivers, police verifications, their conduct with passengers
• Required to have a registered office in Delhi with details submitted to the Transport Department.

Soon many other states followed Delhi, and presumably the reasons for the slow expansion of Uber. As of 2021, Uber operates in 89 cities in India, whereas Ola operates in more than 250 Cities. In 2020, Central Government issued new guidelines to the app-based ride-hailing companies setting the rules for commission & surge pricing.

Uber is not new to running into legal tangles due to its employees’, executives’ and drivers’ conduct and parallelly, it keeps getting into difficulties with the regulatory authorities. Besides the US & India, Uber has been contending regulatory battles in many countries — The Netherlands, France, Spain, Germany, UK, China, Thailand, Vietnam, South Korea, to name a few.

While this may not be entirely true that regulations imply a slower growth for foreign platforms, the differences by country threaten their success. In contrast, a local platform may benefit and prosper. To stay out of trouble and to continue to thrive, such platforms needs to adapt to local peculiarities.

Network Effects

For a 2-sided local marketplace, like Uber, co-location or geographical proximity of the supply side and the demand side is essential. Adding a supply unit (driver) makes the product more valuable to the demand side ( riders) within a small geographic radius and vice versa. It is of less or no value to the riders if the drivers are beyond this radius. Similarly, for the drivers, it is entirely immaterial if there are more riders in another city. A network effect, where the value of the network to its users increases with the number of users in proximity, is known as Local Network Effect.

In the case of Uber, local networks effects come into play. Therefore, whenever it expanded to other cities ( in the US or any other part of the world), it first had to attract a new fleet of drivers, and once a critical mass of drivers is on board, the second cycle starts to attract the riders. The acquisition of drivers & riders requires additional expenses and investments; the only advantage is that they didn’t have to make significant investments in certain reusable assets such as their IP, i.e. match-making algorithm. This expansion becomes a much more expensive affair if a local competitor has already established itself in that city, whether a taxis aggregator or a ride-hailing company. To attract & retain drivers, Uber incentivize them with monetary rewards in addition to per-ride compensation. To attract riders, Uber advertised heavily, threw discounts and subsidized the cost of a ride.

Unlike US, where Uber was primarily depended upon the untapped labor and capital to compete with private car ownership, in India it had to leapfrog of car ownerships and fulfill the supply by recruiting and training drivers. This also required to setup leasing deals with banks and car manufacturers to get special terms for the drivers in need of vehicles.

Uber has diversified into other adjacent markets by leveraging its network of drivers and logistic capabilities — Food & grocery delivery (Uber Eats), P2P delivery (Uber Connect, after shutting down Uber RUSH ), on-demand goods delivery (Uber Direct) , a completely new shipping platform that connects trucks drivers and shippers (Uber Freight) and a self-driving unit (Uber ATG, which was sold to Aurora in 2020). Some of these activities, like Uber Eats might define the future path of Uber but currently they are in a nascent stage and not profitable. Ride-sharing still remains the core of Uber and the struggle to keep the costs low continues. The main cost drivers for the core platform are constant expansion to other markets, high cost of customer & partner acquisition and high churn rate of drivers.

Worldwide, Uber might be a market leader in ride-hailing but it’s business model is a loss making one and that’s not a secret. Uber lost around $2 billion in 2015 on gross revenues of $ 1.3 billion, in 2016 the losses grew by 175%. Until 2017 it lost more than $11 billion cumulatively. 2018 was the only year where it was profitable on paper, probably due to the exits it made from Russia, China & South east Asia. The same year it also shut down Uber Rush. Uber went public in 2019, the reported losses that year were $8.5 billion. During the pandemic Despite the pandemic the YoY net losses reduced by 14%.

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1. Fun fact – Bollywood movies are so popular in Kazhakstan that they used to have a dedicated 24 hour channel for Indian movies. Bollywood Actor – Mithun’s dance on Jimmy Jimmy is more popular in Khzhakstan than in India’) ↩
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5. Uber’s Investor Presentation – Feb 2020 ↩
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