The Sleeping Giant: Uber’s Expansion into Greater China

Since its last round of financing on June 3rd, Uber has rolled into 48 new cities. Of the combined 72 million people that these cities represent, 90.8% live abroad:

In my last post, I wrote about Uber’s upcoming expansion into Asia Pacific. From the chart above, it’s easy to see why it’s happening so quickly — 9 cities with operations and engagement teams that can reach more customers than all of the other 39 combined.

Let’s unpack the expansion:

Surprisingly, Uber recently launched only one Chinese city — Hong Kong — in all of Asia Pacific. Adding HK to Shanghai, Beijing, Shenzhen, and Guangzhou, Uber currently provides service in five Chinese cities.APAC Expansion Redux

Recall that APAC has both the most people and the most money of any region in the world. Three of the world’s ten largest economies are there as well as 60% of the people. Uber is gearing up for a major run on APAC.

As the single largest APAC country, China alone accounts for 12.3% of global GDP and 19% of its people. With Uber already established in the standard, Westernized Chinese megalopolises, it’s not surprising that an expansion into greater mainland China will be the centrepiece of the upcoming APAC growth campaign.@Uber_Mainland

Reading the hiring tea leaves, Uber China is set to expand into 10 new cities across the mainland, adding to its five “old guard” markets.

At face value, 10 new cities over a few months is nothing impressive for a company with such a parabolic track record. But this is China, a country where fresh air is sold in cans and frogs and turtles are sold at Walmart. You can’t expect the norm here and the market potential is gigantic.

To see how much mainland China could move the needle, let’s do a rough sketch of what Uber’s revenues might look like in the country.Building a Revenue Model

Here’s a table of the 10 mainland Chinese cities that Uber will soon launch in, including their population and the base fare for a local taxi:

A napkin and some spilt ink show us that just more than 82 million people call these cities home.

Assuming that taxi riders are the closest estimation of an Uber rider in mainland China, with population and base taxi rates, we’re close to being able to project revenue. The pieces we’re missing are the projected number of users, the frequency of their usage, the average distance traveled, and Uber’s projected market share and cut of total ride revenue.Number of Riders

This is where it gets tricky. Data on Chinese taxis is very hard to come by on a budget so let’s start with one foundational assumption: the entire taxi-riding population in urban China is 20–64.

People aged 20–64 comprise 69.8% of the total population in urban China. Assuming that all taxis are taken by people within this age range, we can approximate the taxi riding population for a Chinese city:

Taxi Riding Population = [city_pop] x (.698) (age adj)

Uber doesn’t compete for the the entire taxi customer base, though. Sam Gellman, Uber’s head of Asia expansion, equates an Uber customer to one who can afford a latte at Starbucks. This means middle, upper-middle, and upper class riders. According to McKinsey, that’s approximately 71% of households in urban China:

Factoring this into our Uber population number:

Local Uber Population = Taxi Riding Pop x Wealth Adjustment = [city_pop] x (.698) (age adj) x .71 (wealth adj)

Importantly, we don’t want to double-count when it comes to wealth and smartphone ownership. KPMG found that 78% of urban Chinese own smartphones. This number is greater than the 71% who can afford an Uber, and without better data, we assume these two fully overlap (i.e. all wealthy people own smartphones) and don’t adjust our population size based on smartphone ownership.Frequency

Second, we need to find the rate at which urban Chinese take taxis.

New Yorkers take 175 million taxi trips a year for a population of 5.187 million people between ages 20 & 64, which comes out to about 33.74 trips per person per year, or about one trip a person every 11 days.

As seen above, New York City and urban China are fairly similar demographically, with 20–64 year olds accounting for 6.8% more of the population in urban China than in New York. Assuming similar demographics will yield similar behavior, and adding the fact that Chinese taxis are not nearly as expensive as American taxis even when adjusted for standard of living, we can feel comfortable predicting that urban Chinese will take taxis about as often as New Yorkers. While a bit lower than some Chinese’s personal estimates, this number is probably within reason.Average Distance

Those of you reading closely probably noticed that I skimmed over a key detail: base fares.

This revenue model currently assumes that every Uber ride is 3 kilometers or less, which is the standard base fare distance for a taxi in most Chinese cities. For rides farther than 3km, the fare generally increases by about 25% of the base fare per additonal kilometer.

To more accurately forecast revenue, we will assume that the average Uber trip is 5 kilometers, which results in a calculation that likely underestimates revenue were all other assumptions to hold true, but is far more realistic than the base fare assumption.Uber-Specific Assumptions

Finally, let’s take Travis Kalanick’s word that Uber gets about 20% of every ride’s total fare and let’s also assume that an Uber is between 1.5 to 2 times the price of a taxi, like it is in Shanghai. Last, we’ll assume that Uber gets 15% of the local taxi market.Final Equation

With all of this baked in, the final equation is:

Uber Annual Revenue Per City = [city_population] x (.698) (age adjustment) x .71 (wealth adjustment) x ([base_fare]+[base_fare/2]) (distance_adjustment) x 33.74 (rides/year) x 1.75 (uber price adjustment) x .15 (market share)
= Gross Annual Revenue (RMB) x (1USD/6.15RMB) (currency exchange) = Gross Annual Revenue (USD) x .20 (Uber’s cut)

Sum the revenue from each city to arrive at a final projection for the Greater China expansion.Greater China Revenue Projection

Let’s run the numbers:Numbers in Context

So what does all this mean?

To put these numbers in context, Valleywag’s leak of Uber’s internal global revenue numbers from December 2013 estimated that Uber was generating an average of $20.5 million per week serving 60 cities.

Today, Uber rolls in 171 cities worldwide. Since many of Uber’s domestic launches have been in smaller markets, it wouldn’t be accurate to assume that Uber’s weekly revenue has tripled just because there are three times as many cities. But let’s say it nearly doubled and is making about $40 million per week, or about $234,000 per week per city.

According to this revenue model, each additional mainland Chinese city would add an average of $247,700 per week, summing to about $128.8 million over the course of a year for all 10 expansions.Country Context

In themselves, these slightly above-average numbers may not be the sort of mind-blowing projection that many (including myself, prior to writing this) would expect to come out of China. But when you consider that China has over 160 cities with > 1 million people and that Uber will only be in 8% of them after this intitial expansion, the opportunity becomes more clear.Sleeping Giant

“China is a sleeping giant. Let her sleep, for when she wakes she will shake the world.”

The past thirty years have seen Napoleon’s famous premonition come true. The question now in the technology world is whether Uber is the next sleeping giant.

Time will tell, but with already considerable projected revenues in the country and over 145 cities with 1 million-plus people to expand into, a well-executed initial launch into greater mainland China will certainly be an important part of how Uber’s broader story plays out.

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