A lot has been written on Uber’s disastrous failure in Japan. Most authors point to the fact that taxies in Japan are abundant, clean, safe and affordable. While that’s all true, it misses a more important truth.
The success of any market entry depends only partially on things like product-market-fit, sufficient capitalization and local competition. Sometimes the secret to success lies simply in not doing what Uber did
You see, Uber represents a new kind of startup. The very thing that makes them so successful in America dooms them to failure in Japan, and watching how this has played out illustrates an important difference in how disruption takes place in America and in Japan.
Breaking Down The Business
For any of this to make sense, we will need to put aside the feel-good fluff of the absurdly named “sharing economy” and understand that Uber’s business model, and Airbnb’s as well, revolves around a kind of legal arbitrage. Their significant price advantage comes from the fact that they choose to ignore a great many laws and regulations that their competition must follow.
Airbnb hosts routinely ignore zoning laws, hotel taxes, safety regulations and insurance requirements. Most Uber drivers do not have taxi or chauffeur licenses, obtain commercial insurance, pass safely inspections or comply with ADA regulations.
The exceptionally clever part of the model is that the bulk of the rule breaking is not done by the companies, but by the drivers and the hosts. These people are not employees, so Uber and Airbnb can’t be held responsible for their actions. Legally speaking, Uber and Airbnb are just platforms, and the hosts and drivers are operating independently and of their own volition.
Obviously, that’s nonsense, but this legal fiction provides both businesses with a powerful legal shield.
Authorities were initially reluctant to aggressively target the companies because they were not actually breaking the law, and targeting individual drivers is politically difficult. Back in 2012, officials in Washington D.C.arrested an Uber driver, and the Uber-sponsored backlash was swift and punitive. Uber was seen as an innovator being held back by anti-progress bureaucrats picking on hard-working Americans just trying to make ends meet.
And here, the model becomes very American.
The Scorched Earth
Uber now employs hundreds of lobbyists and spends tens of millions of dollars recruiting friendly legislators to rewrite these laws. They simultaneously run aggressive publicity campaigns painting non-cooperative legislators as corrupt and in collusion with the taxi and hotel industries.
They have managed to woo legislators to their side, but they are simultaneously fighting a scorched-earth campaign against the regulators in courtrooms across America. Those bureaucrats may be slow, but they get to you eventually.
The regulators want to see our accident statistics? Sue us! You win in court? We appeal. You win on appeal? We’ll send a partial list. You can’t prove it’s a partial list, so sue us again!
Uber has lost a few local battles that have either increased their costs or caused them to temporarily pull out of a market, but they are wining the war. They are now widely used and an accepted as part of the economy. No local government is going to shut them down.
Before we go on, I want to make it clear that I am not making value judgments here. There are plenty of people on both sides arguing whether this kind of strategy benefits society in the long run.
My point is that if we want to learn from Uber’s mistakes in Japan, we need to put aside the babble of visionary founders chasing their passions and take a dispassionate look at what the business model and the go-to-market playbook actually involve.
This strategy has been phenomenally successful in America, but has failed miserably in Japan for three key reasons.
#1 People Trust Government More than Industry
My libertarian friends in San Francisco find this baffling. They often dismiss it as brainwashing or propaganda when I explain it, but it’s not. The United States is unique in the free world for our visceral disgust for and distrust of our own government.
It’s not that people is Asia consider government motivations to be pure. Over beers Japanese, Taiwanese, Indians and even Singaporeans gripe about how politicians are crooked and enriching themselves at the expense of the public.
Mistrust of government is pretty much universal, and that’s a good thing. Outside of the United States, however, people trust corporations even less.
Americans seem uniquely credulous of corporate claims of being the true champions of the consumer and of regulations existing primarily to benefit politicians and their cronies.
In the rest of the world, however, when Uber drives into town claiming to be a white knight who will fight the government regulators in order to provide good jobs and affordable services, people simply don’t believe them. Nor should they. It’s a laughable claim.
The U.S. playbook assumes that consumers will come down on the side of the disruptor, but that doesn’t automatically happen in Japan.
In most of the world, when a company claims that labor protections, environmental laws, tax laws, insurance regulations, and licensing requirements all need to be changed so that they can do business, that company is viewed with extreme suspicion.
Uber grossly over-estimated the amount of grass roots support they would receive when they entered the Japanese market. They’ve since regrouped and are now taking a more patient and conciliatory approach to winning over Japan’s consumers.
However, it’s too late because …
#2 It’s Not OK to Break the Law in Japan
More accurately stated, it’s not OK to break the law by yourself in Japan. If you’ve attended a crowded movie in Japan or seen baked sweet-potato vendors driving around Tokyo with a exposed fires in the back of their trucks, you understand that many laws can be broken as long as everyone breaks them together.
America jails or fines individuals who break the law, but corporate non-compliance is different. In fact, there is a school of thought in the West that says when the fines are cheaper than the cost of compliance, it is not only OK to break that law, but that the CEO has a fiduciary duty to break the law.
Fines are simply a cost of doing business. No executive is going to be fired over a few thousand dollars in fines caused by an action that saved the company millions.
Things don’t work that way in Japan. People don’t make a strong distinction between the actions you take as a CEO and the actions you take as an individual. You are either an honest, trustworthy person or you are not.
In fact, the corporate law-breakers we see in Japan seem to have almost been given permission to break the law. There are steady streams of bribery, kick-back and collusion scandals. Well-connected companies get special treatment, and powerful local businesses sometimes violate regulations for generations.
The reason these CEOs are able to maintain face is that both the Japanese law itself and the standards by which it is enforced are so maddeningly vague that it’s probably impossible to operate a business without being in violation of something.
The way the game is usually played is to work things out with the regulators before you begin operation, and the regulators can be surprisingly flexible in helping you craft a plan that complies with how they interpret the law.
If things go wrong, and the authorities show up informing you that you are in violation, your only real option is to apologize and then change your behavior. At this point, the vagueness of the law gives you cover and the ability to reasonably declare that you were doing everything possible to comply.
By stopping immediately, the regulators save face, you can claim you never intended any wrongdoing, and much will be forgiven. This pattern seems to hold true even with egregious violations. In many ways, you get one free pass in Japan.
Trying to use the U.S. playbook backfires horribly. Taking on the regulators, filing a lawsuit to get an injunction against them, refusing to turn over information, and launching a publicity campaign to convince the public that the laws are outdated not only won’t work. It will end the career of any CEO who tries it.
There is genuine shame and stigma attached to knowingly and publicly violating the law or to having your operations suspended. These CEOs are viewed as untrustworthy and suffer a genuine loss of social standing and prestige. The fact that they were making money for their company doesn’t really matter.
The Japanese consider regulators to be annoying, but not an enemy. Loudly declaring your intention to defy them earns you nothing but contempt from the Japanese public.
Uber ran a variation of the strategy that worked so well in America and has been shut down several times as a result. However, even if they somehow managed to win over the Japanese consumer at this point it would not help them because ….
#3 Uber’s Playbook Is No Longer Secret
Uber got to scale in the US because they flew under the radar. By the time local regulators understood just how disruptive it would be — in both the best and worst sense of the word — the regulators were no longer up against a small, scrappy startup, but a popular and massively-funded lobbying machine.
Japanese lawmakers, and those elsewhere in the world, now know how this plays out, and they are acting quickly. Actually, I think this window has closed in the United States as well.
For example, In 2014 a San Francisco company called MonkeyParking launched an app that allowed drivers to auction off the parking spot they were occupying to other drivers. If you don’t see why this is a horrifically bad idea, you’ve probably never had to park in San Francisco. If you have and still think it’s a good idea, then we can debate it in the comments section.
Within weeks of MonkeyParking’s release, city officials sent them a cease and desist order that threatened fines of $2,500 per transaction, petitioned Apple to pull the app from the App Store, and introduced legislation specifically outlawing the business model.
Even American regulators have their guard up at this point.
Ironically, Japan is now starting to change. It’s taken a few years, but room-sharing and ride-sharing are increasingly seen as not only legitimate, but beneficial. National and local governments are drafting new laws and are changing regulations to accommodate these businesses.
This being Japan, many aspects of the new regulations are unclear. We are entering a phase where companies need to work with the regulators to create a reasonable framework. Unlike in the United States, however, this does not mean lobbying lawmakers and fighting court battles. It means literally working with the regulators to help them sort it all out. There are surprisingly few lawyers involved in the process.
Naturally, established firms have an advantage here, and that does slow the pace of change, but recently regulators are becoming more willing to work with startups, or at least groups of startups. However, regulators remain very reluctant to work with companies with a consistent history of lawbreaking, and Japanese consumers have the same reluctance.
Knowingly violating the law severely damages your brand in Japan.
I’m not trying to argue that one system is better than the other. The point is that entry into a market like Japan requires that you reconsider even go-to-market strategies that were extremely effective in your home market.
Japan is no longer a closed maker. Western companies can and do disrupt the status quo. Microsoft, Salesforce, Facebook, AWS, and many other firms completely transformed their industries here.
But all of them were smart enough to leave the U.S. playbook at home.
We Americans love rule-breakers. It’s so ingrained in our culture we’ve managed to convince ourselves that progress is impossible without rule-breaking. When progress is made without breaking the rules, we’ll retroactively redefine some convention or common practice as a rule, and then credit our visionary entrepreneur with bravely breaking it.
Japan has a much clearer understanding of what a rule is. Defying convention is viewed as risky, sometimes selfish, but (and this gives me hope for Japan) it is increasingly admired. Defying convention to pursue a dream is slowly becoming a positive thing, and innovative startups who defy convention are welcomed.
Breaking a law, however, is very different. It’s not admired, even when the law is stupid and antiquated. Companies who openly break the law are not viewed as engines of innovation or the champions of the middle-class, but as selfish entities run by people who obviously can’t be trusted.
If you want to disrupt Japan, your success with depend only partially on your product, local competition and the resources you deploy. Once you have all of that working in your favor, you will only prosper by crafting a strategy that focuses on pushing the competition out of the market, not on trying to play citizens and government against each other.
This article was based on a special episode of Disrupting Japan, my podcast that covers Japanese startups and innovation.
Thanks to David Corbin who helped with early drafts of this article.
Interesting article. I like it.
The point about MonkeyParking reminds me of our vast hypocrisy in the U.S. MonkeyParking is unacceptable. And yet we allow valet companies to profit from taxpayer-owned streets and deprive citizens of spaces they OWN. And then, in many cases, they park the cars on those same streets. Pathetic.
Thanks for listening.
You make an interesting point about valet companies. I did not know they used street parking and had assumed they used parking garages. If they are using street parking, then I agree they are profiting from collectively owned resources. It would be harder to crack down on them since they are not selling that resource directly, but effectively paying someone else to stand in line for them.
> “If you’ve attended a movie in Japan… you understand that many laws can be broken as long as everyone breaks them together.”
What does this refer to?
Many movie theaters are not very large, and between the showings people entering and exiting are jammed into the same hallway. A fire would be devastating.
The problem with US companies is that they are not open for discussion until they got fined or their product or service gets suspended. Examples would be Google evading taxes in EU and Whatsapp getting blocked in Brazil. Once you draw their attention they bring up their “policy”, vision/mission”, their “TOS” etc. But neither company’s policy, vision/mission or TOS is above the law and common practice in the country they operate.
Thanks for listening. That is an unfortunate aspect of US business culture that almost all interaction with regulating bodies, or government in general, is assumed to be adversarial. The TOS and EULA these companies use have been under increasing legal scrutienty as to what extent it constitutes a valid contract. The concept has outgrown it’s usefulness.
Thanks so much for the ‘legal arbitrage’ narrative. I’ve always thought that part was under reported.
I think one thing which might be noted is that these regulations in the US really do have a sordid history. For example, the NYC medallion system was adopted at the onset of the great depression. Suddenly, anyone with a car was a cabbie, and the real taxi drivers formed a coalition to block them out. Today, the population of New York has multiplied more than 10 times, but the number of medallions is unchanged. It is therefor impossible to get a cab outside of Manhattan, where 85% of NYC’s population is (you have to call ahead to livery services). This is largely due to a powerful lobby of Billionaire taxi medallion kingpins (really).
In many cities it is far worse; in Las Vegas, for example, it is widely known that the taxi industry has a prominent mob presence, one of their last strongholds, which is not uncommon in many medium sized cities.
So at least thats why I personally am not scandalized by Uber’s scorched earth approach. I just wish they would use that narrative; the medallion system is really oppressive. It takes money out of the pockets of the poor (often immigrants) to the benefit of sleazy medallion owners… etc, etc. Instead they often just demonize legislators and I think one day they’ll get what they’ve got coming.
So in a country without that narrative (or where that type of regulation was common outside of the taxi industry) I can imagine why that wouldn’t work.
(AirBNB is another story)
Thanks for listening. I think one of the reasons that Uber has seen such success in the US is that the taxi industry is so corrupt. I’ve talked to a lot of Uber drivers who are/were also cab hacks and their attitude seems to be mostly “Sure Uber treats us like crap, but the taxi companies treat us worse.”
In some cities limiting the number of cabs makes sense. In NYC, for example, more cabs on the roads can actually increase the average time it takes to hail a cab and reach your destination, although it reduces the amount of time required to hail a cab. When I started looking into it, it turned out the issue was much more complex than I thought.
I do think the legal arbitrage play is bad for the US in general, but it’s not restricted to Uber. I think the idea that companies with enough money can break the law until the can lobby to get those laws changed, actually slows down innovation and hurts startups. Uber is an outlier. But that’s a whole different discussion.
Hope to hear more of your thoughts in the future.
I read the article and found it very interesting. However, I’d like to add one element to the discussion as a reason for Uber/Airbnb’s struggles. I believe that it also has to do with social differences, and in this case the vision the Japanese have regarding private spaces. Forgive the generalization, but the Japanese overall are not comfortable, or, let’s say, they’re not used to share “social space” with people they don’t know. What I mean is that sharing time in a car or at someone’s apartment is not like sharing a train ride or an elevator. You are, to a certain extent, expected to engage in a human relationship (=chat with the driver, ask question to the landlord/lady…), and most Japanese are simply not willing to do that. So, it is the business model itself that in my opinion does not fit yet Japanese society, thou it will hopefully change and it works great for foreigners traveling in Japan.
Thanks for reading. What you say is true. There is a different sense of private and public space and inside/outside groups in Japan. I think that does lead to a slower uptake of sharing-economy services, but it’s not a deal killer. People change their behaviors when there is a good reason to do so. There are a number of room-sharing and tool-sharing and similar startups in Japan that have done reasonably well.
Anyone coming into the market needs to plan for these kinds of attitudes, but its not a reason to give up. Back in the late 90s all of the experts were explaining that Japanese consumers would never buy goods online, and always had a list of completely true reasons that consumers might hesitate.
One more thing, if I may. Again I generalize and I talk about a “traditional” Japan that we all hope is on its way to change, but I believe the Japanese (anachronistically) draw a THICK line between “professionals” and “amateurs”. Workers are expected to be trained, licensed, verified… Uber and AirBnB, as much as new trends such as blogs and YouTube are to them in an often uncomfortable grey area, where the people involved might or might not be up to standard. Of course they are rated, but not by “the Authority”. In other words, we are talking about enterprises that by definition destroy the confucian verticality which is at the core of Japanese society, something that many might doubt here.
I agree with you Tim, it doesn’t mean that it will not work, but on top of adjustment on legalities, I believe it needs some flexibility when it comes to cultural sensitivity. As every long-term resident here knows, in many cases you can’t simply juxtapose something that works in the US or in Europe, and expect that it will fit perfectly in Japan.
You make a very good point, and one I had not fully considered. I do think the strong differentiation between pros and amateurs in Japan, as well as the very high expectations for customer service in general, makes things more challenging for these kinds of services in Japan.
But I think the situation is temporary. I think there will eventually be a general understanding that these people are not pros and maybe Japanese companies will adopt a more friendly and personal positioning to make it clear that they are not pros, Not sure, but I think things will develop differently here. They usually fo.