This post covers why I believe concerns about regulatory obstructionism as Uber expands into Greater China are justified but perhaps overblown. Disclaimer that I don’t talk about Uber until the fifth sub-header.

Objections Over China’s Regulatory Environment

The most common objection to my last post on Uber’s market potential across greater mainland China was not in the revenue model’s core assumptions.It was in the fact that, in a country famous for being suspicious of and hard on foreign companies, I ignored the possibility of regulatory obstruction inhibiting a company with a reputation for rubbing governments the wrong way.

Are Justified

These concerns are valid and come at an especially trying time, as the US and Chinese governments play tit-for-tat on cyber and industrial espionage accusations. Only a few months ago, Windows 8 was banned for use on Chinese government computers amid national security concerns, and now Microsoft has come under investigation for antitrust violations. We’re all familiar with Google, Facebook, and Twitter’s status in the country.

It’s not only tech companies, either. McDonalds recently took a blow from a meat scandal, despite sourcing from a domestic supplier, and British pharmaceutical giant GlaxoSmithKline’s former lead in China, Mark Reilly, is facing decades in prison on corruption charges for which many business executives could be indicted.

And Not Limited To Business

Life is already not easy for a foreign company in China. Making matters worse, particularly for a black car service, is the fact that China is currently going through arguably the largest anti-corruption campaign in modern Chinese history.

The movie-script story of Bo Xilai and decidely less sexy (but equally fascinating)downfall of Zhou Yongkang are two of the 61,703 people across 41,150 “anti-bureaucracy” cases that demonstrate the sternness with which the central government is tightening its grip over the national, provincial, and municipal apparats.

In the public sector, the nationwide crackdown is effectively causing the lower levels of government to strike. In the private sector, while there has been no reported dropoff in offical GDP numbers, the environment has certainly affected businesses that cater to Uber’s would-be customers: luxury goods sales sputtered to 2.5 percent in 2013, the slowest pace since 2000, according to Bain & Co.

So Uber China’s Operating Environment Looks Tough

This is the environment — suspicious of foreigners and imprisoning high-end businessmen and politicians daily — into which Uber is launching one of its most ambitious expansion plans to date. It seems kamikaze considering that Uber is a company that charges fares 1.5–2x normal taxi fares and that originally wanted its customers to enjoy the “I pushed a button and a car rolled up and now I’m a frickin’ pimp” experience.

An already difficult consumer culture to crack and a business poorly suited to an inconspicuous consumption regulatory environment, it looks hopeless.

After Launching in China, Uber Needed to Learn

When Uber first launched in Shanghai, it did what we all thought it would do in a market where taxis are insanely cheap and conspicuous consumption among the rich is entirely out of control: they ran a luxury black car service, and charged a ton of money for it. Rides from Shanghai PuDong Airport to downtown ran 600RMB one way, where taxis were only 150RMB.

While rich Chinese people do love other people watching them spend money and did so in a then-record-setting way following Uber Shanghai’s launch, this strategy was not optimal. In a market discovery move, the company lowered prices and expanded into Guangzhou and Shenzhen.

Before It Got It Right: 人民优步

One year after test launching in Shanghai, Uber China officially launched in Beijing, its fourth Chinese city, just last month.

Competition from local apps is fierce in the Chinese taxi and ride-sharing space and Uber is a foreign company in the capital of a proud, nationalistic nation in the throes of its most serious governmental reform movement in post-imperial history.

But by now, Uber has the ground game down pat. Travis Kalanick on launching new cities:

“We have launchers that going into a city and turn nothing into something. I like to say that they drop in with parachutes and machetes and get highly involved with the…people who own cars and run car services, and really just make sure that we can launch a service that is high-quality from the start. Being local and speaking with local voice is important when you’re doing transportation and means you know what’s going on for the city.”

人民优步: People’s Uber

Listening to Beijingers talk about traffic and transportation, and recognizing their pain points and desired experiences, earlier this month, Uber did something no one expected: they launched People’s Uber (人民优步), a non-profit version of UberPool specific to Beijing, the cultural epicenter of Chinese society.

There are multple strategic layers in this single move. One layer is the language. 人民 (rénmín) translates to “people” and is used to mean all common people, the proletariat. In China, the word is widespread across a variety of contexts, almost all of them positive. It’s proud yet humble and very Chinese: in the same way we called the United States of America the US, China (中国) is officially The People’s Republic of China (中国人民共和国).

Another layer is the non-profit business model. This is not UberPool. Riders pay drivers and that’s it. Nothing is free in China, and even the Red Cross is rife with corruption. This is one area where being a foreign company will engender trust. More importantly, Uber’s move to take a famously competitive for-profit industry and blow it up with a platform enabling private transactions among the people is refreshingly humanizing.

Finally, Beijing is the capital. What happens here is discussed and analyzed the country over. Currently, the corruption trials dominate the news. People who have flaunted and abused their power to amass incredible wealth for nearly thirty years in the midst of the single greatest economic development story in the history of the world are being cleansed from civil society. And then there’s Uber, helping regular people do regular things. There’s a bottom-up feel to Chinese politics right now, and Uber’s capitalizing on it.

The list goes on. Other strategic moves by Uber Beijing around People’s Uber include:

• Partnering with the Green Commuting Fund to research and promote efficient transportation models in the world’s most famously polluted city.
• Publishing Driver Stories to capture the motivations, personalities, and values of early drivers in a deeply distrustful society.
• Giving free rides up to 60RMB (for a limited time) where taxi rides usually cost 15–20RMB.

All of these marketing decisions sum up to a brand message that is very different than its competitors: in China, Uber is not just your private driver. It’s your friend.

But Let’s Revisit Regulation

Of course, none of this really matters if the government decides it wants to protect domestic business. The good news here is that China in practice is not what it’s portrayed as in Western media.

Occasionally the government will make examples of major foreign businesses in order to send a clear message to the market, as happened with GlaxoSmithKline. “There’s a Chinese saying that paraphrased is ‘You kill the chicken to scare the monkeys,’” Jeremy Gordon, consultant and author of China: Risky Business, explains in a Forbes article on how international business is affected by the crackdown. Foreign firms are the chickens. That makes sense.

But what are the odds of the government coming after Uber? Americans (and people who don’t or haven’t lived in China) often cite restrictions on Google, Facebook, Twitter and now Microsoft as examples of heavy handed regulation on foreign tech firms. But these are all businesses where the exchange of information (some of it potentially dangerous to the Communist Party’s image and credibility) is the core product. Uber has a wealth of information, but its product is providing car rides to people. Asian business consultant David Clive Price claims that China is changing, particularly in larger cities. Intellectual property theft is down, goverment obstruction is less common. “Overall stronger corporate governance based on EU and US models is emerging,” Price says. “China is really getting with the game, although there is still some work to be done.” The question is: if Uber is not threatening the credibility of the Communist Party, will the government care that it helps people get around China’s traffic-clogged cities?

And Now I’ll Take A Guess At The Future

I will probably be wrong, but what the heck — no harm in a bit of amateur fortune telling.

Without a doubt, regulatory obstruction by the Chinese government is concerning, and is something that Uber should be keenly aware of as it begins to expand into Greater China. Compared to other foreign companies operating in China, Uber has two key advantages that will help it avoid conflict with the government.

First is that Uber is well aware of the cultural, social, and political environment in China and is actively crafting a message specific to the Chinese marketplace around these considerations. It’s not a black car service. It’s a tool that empowers people to help each other.

The second advantage is that as long as Uber remains popular and continues to see high adoption and retention rates beyond its initial, free expansion of People’s Uber, it will be difficult — though certainly not impossible — for the Chinese government to trump up the sort of charges that could seriously harm the company. It’s not like any foreign tech company that’s come before it: it acts Chinese, it’s not (yet) openly combative with the Chinese government, and it doesn’t provide the sort of peer-to-peer communication that could be used to organize a destabilizing protest or flash mob. At least for the moment, it’s just an app for getting a ride that has a lot of promise, and that should get it pretty far with the Chinese government.

So here’s my prediction: Six months to a year from now, Uber will have succeeded and the question will have become which companies have followed or will follow its model in managing the complexities of the Chinese marketplace. I’d bet a couple beers that one of them just bought a $19 billion messaging service not too long ago.

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