Uber and, to a lesser extent, Airbnb are failing horribly in Japan. There have been quite a few articles that have tried to explain what this is, and most of those articles have focused on why the market conditions in Japan make it hard for those companies.

There is certainly some truth to those articles, but they miss a larger and much more important factor about why these companies are struggling in Japan and in Asia in general.

You see, Uber and Airbnb represent a new very kind of startup, one that could not have existed twenty years ago, and the reason has nothing to do with smartphones or cloud computing or anything related to technology at all.

In fact, the very thing that makes these companies powerful and transformative in the United States is what ensures they will never really succeed in Japan.

You may not agree with everything I have to say, but I think you’ll enjoy it.

If you don’t feel like listening to or reading the transcript, I’ve written an article based on this episode. It’s shorter and easier to read than the transcript.

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I first released this episode about Uber’s failed Japan market entry strategy over two years ago, but it remains one of Disrupting Japan’s most downloaded episodes. In fact, a number of people have told me that it’s the best advice they’ve ever heard about doing business in Japan.

I appreciate the praise, and this seems like a topic worth revisiting.

Over the past few years things have played out largely as predicted for Uber and Airbnb, but there have been a few interesting twists, particularly on the Airbnb side, so I’ll give you an update after the show.

Please enjoy.

Welcome to Disrupting Japan. Straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero and thanks for listening.

Once again, I’ve got a special show for you today. There will be no guests, no wine, no playful banter with someone speaking English as a second language. Today it’s just you and me. For the next 20 minutes, I’ll be whispering in your ear about something I consider very important, but that not enough people are talking about.

You know, a lot has been written about why Uber is failing so disastrously in Asia in general and Japan in particular. Most authors cite the very different state of the taxi industry here, and there is certainly some truth to that. Taxis in Japan are clean, safe, affordable and easy to hail.

But that analysis misses a larger and more important truth. You see Uber, and AirBnb as well, represent a very new kind of startup. One whose defining characteristic – the very thing that makes them what they are – has little to do with technology and ensures that they will always struggle in Asia.

Don’t get me wrong, Japan and greater-Asia market entry is challenging for even the best companies. I’ve been involved with a number of market entries, and the process is sometimes very much like the chaos and uncertainly of running a startup.

You see, if you are ready to expand overseas, you have clearly nailed the product-market fit and figured out how to scale you sales process. However, until you start selling in a new market, you are never really sure what positioning will resonate or which strategies will be effective.

You might be up against entrenched competitors, you might lack the word-of-mouth reputation or partnership ecosystem that was critical to your success at home. The overwhelming pain you are solving for your existing clients might not even be viewed as a big deal in Japan, and on the other hand a minor feature barely mentioned in your marketing collateral might be seen as a game-changer.

For example, I ran the market entry for a San Francisco company that built its reputation and market on helping developers deploy their product quickly and innovate more rapidly. And we had the hard data to back up those claims, but the Japanese prospects were not particularly impressed. However, when we started focusing on how the product also decreased downtime and greatly improved how reliable their software was perceived by their users, and we began to sell like crazy.

These challenges are common to all companies, not just startups. But Uber and Airbnb are different. They are special. Examining why they are struggling in Japan illustrates a very important difference about how disrupting takes place in America and in Japan.

OK, other than insane valuations and phenomenal growth, what’s so special about Uber and Airbnb? Quite a lot really, but today I want to focus on a specific aspect of their business model.

Putting aside all the feel-good fluff of the absurdly named “sharing economy”. Both Uber and Airbnb’s business models revolve around a kind of legal arbitrage.

Don’t get me wrong, I think both Uber and Airbnb are great services and I’ve used both of them. However, the only reason they can offer their services at the prices they do. They only reason they have such a powerful price advantage at all is because they choose to ignore a great many laws and regulations.

Airbnb hosts routinely ignore zoning laws, hotel taxes, safety regulations and insurance requirements. Uber does not require its drivers to have taxi or chauffeur licenses, obtain commercial insurance, pass commercial safely inspections or abide by dozens of other laws and regulations.

Now, many of these laws and regulations might be outdated and unnecessary, or even harmful, to the economy as a whole. That’s not what I’m here to talk about today.

No, they key point is understanding (without any kind of moral judgment) that the bulk of their competitive advantage comes from the fact that their competition must spend a great deal of money to obey laws and regulations that Uber and Airbnb ignore. In fact, when you sign up for Uber and click on their EULA, you explicitly agree and accept that Uber drivers may not be in full compliance with local laws and regulations.

And this brings us to another, exceptionally clever, part of their model. The bulk of the rule breaking is not actually done by the companies themselves, but by the Uber drivers and the Airbnb hosts. These people are not employees, so Uber and Airbnb are not legally responsible for their actions. Legally speaking, Uber and Airbnb are just platforms and hosts and drivers are operating independently and on their own volition.

From a common sense point of view, that’s obviously nonsense, but this legal fiction provides both business models with an effective legal shield. The authorities can’t easily come after the companies because they are not directly in violation of the law, and targeting individual drivers or hosts for enforcement is disastrous politically. Early on, several cities did make a few high-profile arrests of Uber drivers, and the backlash was swift and severe. Uber was seen as an innovator and the government was seen as both anti-progress and anti-citizen by arresting regular middle-class citizens just trying to make ends meet.

“That’s great!” I hear our American listeners cheering “Not playing by the rules is the heart of disruption!” Maybe so, but I’m going to ask you to put that opinion aside for a moment. And to suspend that belief for a little while. Because the unwillingness to question that belief is what is killing Uber in Japan.

Now, our non-American listeners will doubtless assume that a new company whose business requires breaking the law will either be shut down quickly or will have to operate out of the mainstream. But here is where this business model becomes very American. And this is the part that requires far more capital than building and marketing a technology platform.

Both Uber and Airbnb spend a lot of money working to get the laws changed and legitimize their business. And don’t get me wrong, that’s is perfectly normal corporate behavior. Even for new companies. Tesla is now in a multi-state fight trying to overturn laws that require it sell through local dealers and Amazon fought tooth and nail the prevent sales taxes from being collected on out-of-state purchases. Companies around the world lobby to get unfavorable laws changed, the difference here, however, is that the laws in question are those that determine the legality of Uber and Airbnb’s very business model.

Grace Hopper once said, “It is easier to ask forgiveness than to get permission.” Words that any founder should live by and have been at the heart of Uber & Airbnb’s expansion plans.

Early on, the city and local governments that regulate the taxi and hotel industries may not have been happy with what these companies were doing, but it wasn’t a problem many people were demanding be addressed and besides, bureaucracy moves slowly. While the legislators and regulators were trying to schedule their next meetings, Uber and Airbnb raced ahead.

Today these companies have hired hundreds of lobbyists and have spent tens of millions of dollars pressure legislators into changing the laws, and they’ve also launched massive and effective publicity campaigns. Legislators that opposed Uber were portrayed as corrupt an in collusion with taxi companies or wanting to protect their donations from special interests in order to take money out of the pockets of hard-working home-owners who were just trying to make ends meet.

Airbnb, in particular, has been very effective at mobilizing and coordinating its hosts to put pressure on regulators. They make sure that hundreds of people showed up for hearings about the relevant laws.

The PR strategy has been effective in the US. The media largely framed this as a battle between innovative and visionary companies who want to create jobs vs backward or corrupt politicians who want to enrich their cronies by protecting the status quo. Hell, the widespread adoption of the term ”sharing economy” to describe these companies shows how incredibly effective these efforts have been.

Make no mistake, however, this is a battle. Both Uber and Airbnb are fighting dozens of court cases. Those regulators and bureaucrats may be slow, but they do get to you eventually. At this point, however, the companies have seized the moral high ground and are fighting tenaciously for every inch of it. Regulators want to see host addresses? Sue us. Win in court? We’ll appeal. Win on appeal? We’ll send a partial list. You can’t prove it’s a partial list, so sue us again!

The US is certainly not unique in its separation of those charged with making the laws and those charged with enforcing them. However, the separation is extreme in America where it is perfectly normal to engage in a scored-earth campaign against those who enforce the law while simultaneously running a charm offensive to woo those who make the law.

And it’s undeniably working. Oh, there have been a few setbacks. Both Uber and Airbnb have lost a few battles with local regulators that have either increased their costs or caused them to temporarily pull out of a few markets. But they are making steady progress and it’s almost inevitable now that they will manage to exempt themselves from the relevant regulations and permanently legitimize their business. More important, both Uber and Airbnb are now both widely used and seen as an accepted part of the economy by most Americans. No local government is going to be able to shut them down.

And I doubt they are too worried about their minor setbacks because they have an ace up their sleeve in America. You see the regulations they want changed are almost all local and city regulations. Local politicians are the ones with the ties to the taxi industries and benefit from hotel taxes. As Uber and Airbnb’s coffers and power grows they will increasingly be able to target national politicians.

Local regulators in the US never knew what hit them.

I want to state again that I’m not making any value judgments here. There are plenty of people on both sides arguing whether this kind of strategy benefits for society in the long run. That question does not interest me today.

My point is that if you want to understand why Uber and Airbnb are failing in Japan you need to put aside the hype of visionary founders chasing their passion and look at what their business model and their go-to-market playbook actually involve.

It’s been phenomenally successful in the US, but it has failed miserably in Japan and most of Asia for three key reasons.

Number one. Most of the world trusts government more than they trust private industry.

My libertarian friends in San Francisco find this baffling. In fact, many have called it brainwashing or propaganda when I explained it to them. But it’s not. In fact, America’s is unique in the developed for their visceral disgust for and distrust of government. In fact, it’s relatively recent in America, going back only a few decades.

Don’t get me wrong. It’s not that people in Asia actually trust the government. Over a beer or two Japanese, Taiwanese, Indians and even Singaporeans will tell you how politicians are crooked and enriching themselves at the expense of the citizens.

Mistrust of the government is pretty much universal, and that’s a good thing. Everyone complains that companies with ties to politicians are unfairly awarded contracts. Almost everyone agrees, in the abstract, that regulations are too complex and that taxes are too high. No one really trusts their government. Outside of the US, however, people trust private industry even less.

Americans seem uniquely credulous when companies claim that they are the real champions of the consumer and that regulations exist primarily to benefit politicians and their cronies. Many take Uber’s and Airbnb’s claims of standing up to stifling government regulations at face value. In the rest of the world, however, when Uber drives into town claiming to be the white night that will fight the government regulators in order to provide more jobs and lower cost services. People simply don’t believe them.

Nor should they. It’s a laughable position to take.

The US playbook assumes that consumers will come down on the side of the disruptor, but that doesn’t automatically happen in Japan.

When companies claim that labor protections, environmental laws, tax laws, insurance regulations, and licensing requirements all need to be changed in order for them to do business, those companies are viewed with extreme suspicion – particularly foreign companies. Such claims are not met with cheers, but with they question “What makes you such a special snowflake?” Just declaring that regulations are bad for innovation in general or your business, in particular, is not enough.

It seems that both Uber and Airbnb both grossly over-estimated the amount of grass roots support and goodwill they would receive when they entered the Japanese market. Since that time, both have regrouped and are taking a more patient and conciliatory approach to winning the hearts and minds of Japan’s consumers.

They are both taking the time to educate consumers and regulators about which regulations should be changed and how such changes would benefit society as a whole. And both companies have even done what would be unthinkable in the US. They have signaled their willingness to change their very business model as needed to conform to the respective laws and regulations.

However, it might already be too late for them because of:

Number two. It’s not OK to break the law in Japan. — or in most of Asia for that matter.

Alright, more accurately stated, I should say it’s not OK to break the law by yourself in Japan. Anyone who has been to a Japanese movie theater or has seen a baked sweet-potato vendor driving around Tokyo with an open fire in the back of a pickup truck understands that a lot of fire regulations are, shall we say, optional. It’s breaking the law by yourself that’s the problem.

But I hear you say “What are you talking about Tim? It’s not OK to break the law in the America” Except, it really is. Sure America will fine or jail individuals who break the law, but corporate non-compliance is different. In fact, there is a common school of thought in the West that if it is cheaper to violate a regulation than it is to obey it, it is not only OK to break that law, but that the CEO has an actual obligation to his shareholders to break that law. Fines are simply a cost of doing business. No corporate exec is going to get fired for saving his company millions of dollars and paying a few thousand in fines.

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 your not.

This is not to say that all actors are squeakily clean in Japan. Far from it, there is no shortage of bribery, kick-back and collusion scandals, well-connected companies get away with all kinds of things, and powerful local businesses will sometimes violate regulations for generations. In fact regulations in Japan are so numerous and so unclear, it’s probably impossible to operate a business here without being in violation of something.

You see, Japanese regulations, both laws themselves and the standards by which they are enforced, are maddeningly vague. The way the game is usually played in Japan is to work things out with the relevant regulators before you begin operations, and the regulators can be surprisingly flexible in helping you craft a plan that will comply with how they interpret the law.

Sometimes you are not even aware you are even in violation of the law until the authorities show up to either discuss it with you (in which case there is still hope) or to simply tell you to stop.

Now, once they tell you to stop, however, your only real option is to apologize for causing the inconvenience and then change your behavior. The vagueness of the law gives everyone involved a certain amount of plausible deniability, and the ability to reasonably declare that they are doing everything possible to comply with the law.

If you stop right away, the regulators save face, you can claim that you never intended to do anything wrong, and a lot will be forgiven. Amazingly this seems to work even with egregious violations. In many ways, you get one free pass in Japan.

Using the US playbook here backfires horribly. Taking on the regulators, filing a lawsuit to get an injunction against their ruling, refusing to turn over documents, gearing up a PR campaign to convince the public that the laws are bad and should not be enforced, not only won’t work but will most likely end the career of any CEO that tried it.

There is a genuine shame and stigma attached to knowingly and publicly violating the law or in having your operations suspended. CEOs in charge of such operations are viewed as untrustworthy and there is a genuine loss of social standing and prestige. The fact that he was making money for his company doesn’t really matter.

The Japanese may view the regulators as annoying, but they are not considered the enemy. Loudly declaring your intention to defy them earns you nothing but contempt in Japan. To be fair, Airbnb has tried much more lightly here, and have been trying to build a working relationship with the government authorities, but Uber has tried a toned-down version of the American playbook and has been shut down several times.

Even though both Airbnb and Uber are starting to play the game the right way here. It’s probably too late because ….

Reason Number Three: The playbook is no longer secret.

Uber and AirBnb got to scale in the US because they flew under the radar. By the time local regulators understood just how disruptive these companies would be (in both the best and worst sense of the word) … well they had become too big for them to easily regulate. Local regulators were not fighting a small, scrappy startup, but a widely popular and massively-funded lobbying machine. And the local governments are losing.

Japanese lawmakers, and those elsewhere in the world, now know how this plays out and they are acting more quickly. Actually, I think that window has closed in the US 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 currently occupying to drivers looking for parking. 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 you still think it’s a good idea,,,, well, talk to me in the comments section and we can debate it there.

In any event, within a few weeks of MonkeyParking’s release, the city of San Francisco had sent them a cease and desist letter threatening to fine than $2,500 per transaction, petitioned Apple to remove the app from the app store, and introduced legislation specifically banning that business model. Less than a month later, the company was forced out of San Francisco, and several other cities preemptively passed legislation banning their operation.

Even US regulators have their guard up at this point.

Actually, the lobbying has started to have an effect in Japan. 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 in Japan and thought Asia are drafting new laws and changing regulations to accommodate them.

Unfortunately, it’s too late for Uber, Asian companies are going to dominate the ride-sharing market here, but Airbnb still has a solid chance.

This being Japan, many aspects of these new regulations are not very clear, and we are entering a phase where companies need to work with the regulators to make it all work. Unlike the US, this does not mean lobbying lawmakers and fighting the actual regulators in court. It means, well actually working with the regulators and helping them sort all this out.

Large established companies naturally have an advantage here, and that does slow the pace of change, but recently regulators have been more and more willing to work with startups or groups of startups. However, they are very reluctant to work with companies who are proven they are willing to break the law, and most other companies and consumers will have the same reluctance.

Knowingly violating the law severely damages your brand in Japan.

Wrap up

To wrap up, I’m not arguing about which system is better. I’m not saying that America should be more like Japan or that Japan should be more like America. The point is that companies coming into Japan — particularly a company planning on Disrupting Japan need to understand these differences and come up with a different strategy for the Japanese market.

And make no mistake. Japan is not a closed market. Western companies can come in and utterly disrupt the way things work. Microsoft, Salesforce, Facebook, AWS, and many other firms came in and transformed their markets.

But all of them were smart enough to leave the US playbook at home. We Americans love the rule-breakers. It’s so ingrained in our culture that most Americans will tell you with a straight face that no progress is possible at all without breaking the rules. 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, however, 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 the future of Japan — it is increasingly admired. More and more, defying convention to pursue one’s dreams is seen as a positive thing. Startups who defy convention to introduce new ways of doing things are welcomed.

Breaking a law, however, is something very different. It’s not admired, even when the law is a stupid and antiquated one. Companies who break the law or openly violate regulations are not viewed as engines of innovation or the champions of the middle-class workers, but rather as selfish entities run by people who clearly can’t be trusted.

A lot of Japanese regulation is maddeningly vague, and the Japanese bureaucracy has far too much influence both over how the law is written and how it is interpreted. There is no doubt that this leads to a lot of corrupt deals that cost the taxpayers billions of dollars a year and also significantly slows down the pace of innovation here.

But … that’s not your fight. Nor is it mine.

If you really want to disrupt Japan, your success will depend only partially on your product, the local competition and the economics of the market as a whole. Once you have all of that working in your favor, your success will depend you crafting a strategy that focuses on pushing your competition out of the market, not on trying to play citizens and the governments against each other.


So what’s new in Japan with America’s sharing economy darlings?

In a way, so much has changed that I should probably do a whole show on the current state of the sharing economy in Japan. And If you want to hear that, let me know. If there is enough interest, I’ll put it together.

Uber, has been pretty much crushed in Japan.  I think the new CEO has done a very impressive job in trying to rehabilitate the company, and Uber Eats is fairly successful here. It’s one of the top food delivery services. But their main business has never taken off. They were operating a free service in one rural community, have started selling software to other taxi companies, and have very limited Uber-black coverage, but the ride-sharing business never really recovered from the initial scorched Earth market entry campaign.

In fact, I think one of the reasons that ride-sharing still has not taken hold in Japan, despite Softbank’s massive investments and heavy lobbying is because of how badly Uber poisoned that well during their market entry. Non-Uber ride-sharing companies have been successful in many areas in Asia, but not Japan. The whole industry has a bad image, and I don’t think that’s likely to change soon.

Airbnb played the game better. They weren’t combative, they worked with the regulators, but things did not work out as they hoped. When the new minpaku law was enacted last year, it placed some very limiting restrictions on what rooms can be listed. How much of this was a result of hotel industry lobbying and how much due to genuine concerns of people living near Airbnb rentals …  well, that’s a topic for another day.

In any event, Airbnb complied with the law and removed about 80% of their listings and actually started enforcing the new requirements rather than just pushing the legal responsibly onto their hosts. In doing so, they’ve maintained a reasonably good image here in Japan.

So Airbnb lost round one, but if they are playing the long game, and they seem to be, they just might get another bite at that apple. With so many things about the Japanese travel industry being disrupted, they might pull it off in the end, and I hope they do.

But most of all, thanks for listening, and thank you for letting people interested in Japanese startups know about the show.

I’m Tim Romero and thanks for listing to Disrupting Japan.