Uber in Germany

Introduction

The world of business has completely changed in the past few decades due to the rise of globalization. Consequently, businesses are no longer confined to the local economy as companies can move their operations across the border. Removal of barriers to trade, including tariffs opened up many economies to international trade and investment. International trade and investment patterns have continued to transform the way multinationals and international businesses operate outside their local markets. Understanding the transformative process is critical to comprehend the way businesses operate today because of the benefits accrued in the global market and economy (Leamer & Stern, 2017). The media is awash with current events in the international business, such as companies that have explored new markets, in the developing and developed economies, including the analysis of the potential affordances and hindrances to their operations and profitability in the global marketplace. One recent case study is the reported decision by Uber Freight to launch its services in Germany.

Regardless of the benefits of operations in the international market, companies have to contend with highly regulated business environments from the local governments and trading blocs that hinder activities in the target market. Many companies are venturing into markets that have restrictive laws and regulations, which affect their operations and success potential. Their success depends on whether their business model can survive the opposition. It is imperative to explore the decision of Uber Freight to launch its operations in Germany, using the international economic theories/models, amid major regulations and court decisions that hinder its effectiveness. Although Uber is working in some cities in the country, the high level of legislative and regulatory guidelines hinders its success regardless of the technological advantage.

Uber’s Services in Germany

The event described includes the launch of Uber’s services in Germany. The local and international media have reported the major decision in international trade. According to a report by Reuters, Uber launched its services in the second city of Germany, Hamburg. The company’s decision was driven by the need to begin strategic operations in a country where it has faced a lot of resistance from the government and the court. The locals and the government in Germany have resisted the entry of international firms, such as Uber, which uses an aggressive business model to launch its technology-based transport model (Kelly, 2019). However, the multinational company that uses effective strategic planning can still venture and succeed in the market. Uber strives to achieve economies of scale by investing in the developed market. However, regardless of its technological advantage, the company might be unable to overcome the restrictions in the county to be productive. It might not counter the resistance irrespective of the openness of the market and minimal competition.

Uber is one of the leading taxi companies in the international market. The US-based technological taxi firm seeks to connect additional cities in the European market by launching in Hamburg. The $75 billion-platform was to be launched through its low-cost business model, UberX. (Gesley, 2016). The decision is strategic as the company’s management tests the performance in the highly resisted market. Besides, the company will also operate in the new market through its traditional taxi service, Uber Taxi, and the use of electric cars through Uber Green (Kelly, 2019). The company is already operating in the region, with Hamburg being its sixth German city. The executives realized the potential in the market because of the impressive economic potential in the area, which is one of the European’s economic giants. Therefore, if Uber succeeds in the country, it will have considerable financial performance and productivity.

Uber is based on a model that seeks to contribute to the economic growth and development of its host countries. The transportation sector is the backbone of economies globally. Significant developments have been witnessed in the industry, including the use of technology. Technological platforms have changed the way people move around, including the model of ride-sharing across Europe. Uber is taking advantage of the changes to integrate major technical operations in the sector (Gesley, 2016). The management has aired the decision for the company to partner with cities throughout Germany in addressing and meeting their needs for reliable transportation and influence the future of urban mobility. The company will join other similar platforms that are easing movements across the country and internationally.

The challenge for Uber in the new market is the high level of regulation and recent court decisions that hinder its operations. The company faces minimal competition from FREE NOW, which is a taxi application supported by Daimler and BMW (Gesley, 2016). There is a recently rebranded model of FREE NOW, which is an aspect of the shared venture that Daimler and BMW plan to invest $1.12 billion. Regardless of the minimal competition, the company faces huge opposition that might affect its operations in the city and the country in general. Besides the business rivals, Uber has faced resistance from the government and courts in Germany. For example, the court has in the past ruled that an outdated limousine service that Uber provided was illegal. However, following the interventional business rules and agreements, Germany is a free market in which international businesses can venture (Kelly, 2019). Therefore, international economic models can be used to analyze the viability of Uber’s decision to operate in Germany.

Relevant Economic Models

International economics theory plays a vital role in explaining the working of a global economic system. A theory is used to predict and explain events in the international market and the relationship between economies in the globalized world. Generally, an economic model abstracts from the information surrounding the economic event and isolate a few concepts that can define and explain the incident. The model leaves out a few variables and associations that are considered critical to predict and explain the event.  From this perspective, international economic models assume the two-nations, two-factor, and two-commodity world (Leamer & Stern, 2017). It shows the way countries of businesses interact and relate in the marketplace in the exchange of goods and services in a way that benefits the trading partners. Generally, for business to occur, trading partners must agree on the terms of trade and one the means of exchanging their commodities or services. Therefore, economic models are essential from this point of view.

The international economic model explains the way the global market operates. The theory assumes a business environment without any trade restrictions. It is a setting that enables the ideal mobility of goods and factors of production within and outside a country. A perfect market also assumes ideal competition in all commodities as well as factor markets to allow businesses to compete with others. Besides, the models reveal restrictive factors that constrain international investors intending to operate in foreign markets (Leamer & Stern, 2017). Therefore, the conclusions of the model hold even in the most restrictive settings where commodities and services are not easily sold in the global market due to regulatory and legislative measures. The theory explains the global mobility of factors, unfair competition, as well as trade restrictions. The factors affect the success of a global investor such as Uber. Various theories can be useful in analyzing the case of Uber as an increasing return to scale technology that seeks to monopolize the European market, such as in Germany. The applicable theories in the case study include absolute advantage and comparative advantage models. The following section consists of an analysis of the two competing international economics model to establish the most applicable to the Uber case study.

Absolute Advantage

Absolute advantage applies to countries that can produce a good or service with greater efficiency than others. The theory was proposed by Adam Smith, who established the foundation for international trade. It offers the basis for business interactions between countries from the perspective of specialization and division of labor. The model suggests that some countries can produce goods or services at a cheaper cost or lower marginal compared with others because of both labor and production costs. In turn, a country that can produce a good at a lower cost is capable of selling the product at a lower price compared to others that lack similar advantage (Seretis & Tsaliki, 2016). Generally, countries differ in their advantage over others, creating the need to specialize in the source of the advantage.

From the perspective of the absolute advantage, if a country is capable of producing some goods at a lower cost compared to another, and if the second country can produce a different kind of product, then each of the two should focus on whichever product they can produce cheaply. Besides, each of the two should trade in the product and purchase the second commodity from the other country. The principle of “absolute advantage” counters the original mercantilist notion that international business is a zero-sum game. The theory has the primary implication that countries will produce and export products that they can cheaply produce and import those which they are unable to produce cost-effectively (Seretis & Tsaliki, 2016). The theory applies to companies in countries that engage in international trade. However, the model has a drawback if one country is capable of producing the two products at a low marginal cost.

The following is an analysis of absolute advantage works in practice. For example, Economy A produces five gadgets per hour with three employees. Economy B produces ten devices per hour with three employees. Employees in the two economies are paying the same amount of wages for their work. However, the second economy has an absolute advantage over the first economy in the production of gadgets per hour. The absolute advantage emanates from the fact that the second economy can generate twice as many gadgets as the first economy using the same amount of labor.

Notably, if there is no business, each of the countries can consume its products. According to Adam Smith, countries should focus on the products that they can manufacture at a lower cost because they can go beyond their production capacity for their own and others’ benefits. They can produce and consume more goods.

Comparative Advantage

Comparative advantage is also an advantage of an economy over another. However, the two models of international economies differ. Countries with comparative advantages over others are capable of producing goods or services at a lower opportunity cost compared with their trading partners. Opportunity cost is the foregone opportunity and the lost benefit that could have been generated from the opportunity (Hanson, Lind, & Muendler, 2015). The idea behind the model is that even countries with an absolute advantage in producing all products, they still can profit from trading with other economies. For example, a country can still import products if they have a higher cost of producing them locally. They will spend fewer resources when importing goods than they could by producing them. In the comparative advantage model, sexualization leads to an efficient allocation of global resources. The trading economies have a more significant amount of outputs. Business between economies is still viable regardless of the differences in the opportunity cost.

Following is an example of how comparative advantage works in practice. For instance, two economies that produce CD players and computer motherboards can be considered. The first economy spends less time to manufacture the two products compared with the second economy. The first country enjoys an absolute advantage in producing such gadgets because it can manufacture them using fewer resources. Nonetheless, the following table affirms that the first country has a comparative advantage in the production of a computer motherboard, while the second country has an advantage in CD players’ production.  The two economies can benefit from specialization and conducting business, which would lead to better resource allocation across the two nations.

Production Without Trade

Opportunity Cost of Production

Production with Trade

From the tables, Economy A has a comparative advantage in the production of a computer motherboard, while Economy B has a comparative advantage in the production of CD players. Therefore, the two countries have the opportunity to benefit from being trading partners.

It is critical to differentiate between the concepts of competitive advantage and comparative advantage. Although the two models sound the same, they differ in their meaning and use in the international economics perspective. Competitive advantage is the attribute of a product or country that differentiates it from rivals. The differentiating attributes might or might not be related to efficiency or opportunity cost. For instance, a company with positive brand recognition or relationship with suppliers has a competitive advantage over those firms that lack the attribute (Hanson, Lind, & Muendler, 2015). However, the company might lack comparative advantage. While the concept of competitive advantage is relevant, it is not commonly used in international trade. Comparative advantage is used to determine the advantage of some economies over others. The theories of absolute and comparative advantage are useful in analyzing the case study of Uber and its investment decision in Germany.

Theoretical analysis of Uber in Germany

Uber’s decision can be analyzed from the two theoretical perspectives to establish the potential of its international investment in Germany. Hence, to be successful in the foreign market, the company should have the considerable advantage that buyers in the new market are most likely to be attracted to. However, since the initial days of Uber presence in Germany, it faced considerable challenges. Similar issues were experienced in the rest of Europe. For example, the company has experienced a ban in various European nations, but it has managed to venture in Germany. However, it operates in only four cities in the country, Düsseldorf, Frankfurt, Berlin, and Munich. Nevertheless, the model of its operation in the region is different from what it uses in the United States (Geradin, 2015). The common UberPop ride-app service, which is used in America, is evidently missing in Germany. The company implemented its inexpensive business models, Only UberX, and UberTaxi, in the foreign market. In Munich, it has launched UberVan and UberGreen (electric-powered vehicles). The different business model was in response to the roadblocks experienced in the region.

Right from the beginning of its operations in Germany around 2014, the company experienced significant drawbacks. However, the problem might have the approach that Uber used to launch its services in the new market. The technology-based company sought to monoline the IRS technologies market in the region but using the American approach (Geradin, 2015). The ridesharing pioneer moved into the new market using a model that appeared to be unwelcome in Germany. The company tried hard to make its way through the country’s regulations, laws, culture, and traditions. The Uber management believed that the company would succeed and monopolize the Germany market if they used the same gonzo strategy that they used back in the United States and expand its investment and operations beyond the local market. By 2014, the company operated in more than 600 cities in the world (Thelen, 2018).  As a result, its executives believed that it would have its way in Europe. However, the model has proven ineffective for the region because of the considerable resistance of the company’s services.

Around 2014, the company used an aggressive approach to invest in the international market. It used a method known as “principled confrontation.” Under the approach, the company would begin operating in a region without establishing the legality of its services. It would operate successfully until the management was informed that the firm lacked the legal mandate to do so. To counter the setback, the company would use lobbyists and political campaigns to receive public support for its operations (Thelen, 2018). The campaigns would be geared towards making the local government to amend their regulations and facilitate its continued services. Although the method worked in some regions, it failed considerably in others, including the United States and Canada. The company faced considerable resistance in many cities and countries because of the aggressive business model. Some even went to court to reinforce the ban for Uber to operate in the regions.

Uber’s Advantage in Germany

Uber maintains an advantage over competitors in terms of the use of technology in the transportation industry. The company is a pioneer in this area. Therefore, many countries would benefit from a decision by Uber to invest in their markets because of the cost-effective technology-based business model. Uber generates its comparative and absolute advantages from its extensive use of technology. Notably, this is an advantage because it is based on innovation and creativity. Besides, the company has an increasing return to scale (IRS) because of the use of technology to reach a vast market and connect cities across the country. However, the impact of the technology and the ability to tap into the income in the foreign market largely depends on the regulatory environment within the target market (Thelen, 2018). The local government and regulators can control the advantage such that it fails to provide the firm the expected returns on a scale. Such is the case of Uber in most European countries, including Germany.

The Imminent Failure of Uber in Germany

Regardless of Uber’s advantage drawn from its technology, its success in Germany remains controversial. Therefore, even though Uber faces low competition in the country, it might still fail to succeed in the market because of the legal and regulatory restriction facing it in the international market. The absolute and comparative advantages might not give the company the benefit it requires in investing in a highly restrictive market. The government regulations for Uber services in Germany and the rest of Europe creates a major threat for the technology-based company. For example, Uber drivers in Germany are required to have a professional chauffeur’s license. The license differs from the usual German driving license used by other drivers. Furthermore, most regions in the country have discouraged Uber investment through legal and legislative measures that dissuade the success of the company (Thelen, 2018). The firm’s management might continue trying to invest in the international market, but the expected progress is highly unlikely.

Uber will not successfully invest and operate in German, like in other European regions. The market is not welcoming of the confrontational leadership style and aggressive approach that Uber management uses to invest in foreign markets. Therefore, even without competition, the company will be the leading cause of its failure because of its market approach. The approach has already resulted in anti-Uber sentiments such as “Everybody Hates Uber: Regulations, Outraged Taxi Drivers, and In-house Scandals That Ruin Their Business” and the hashtag “#deleteUber” (Everybody Hates Uber, 2018). Its expansion abroad continues to be affected by such resistant that has prevented the technological advantage to gain a positive milestone in the foreign markets. Although Uber promised convenience in transportation, especially in transporting people within and across cities, the idea remains highly unwelcome in many countries, including Europe. Therefore, its success remains debatable because of anti-Uber sentiments.

While technology is a source of advantage for Uber against the conventional taxi models that remain in use in many parts of the world, it is not necessarily a source of benefit for Uber because of the growing resistance. Since its initial investment days outside the United States, the company has been resisted, especially in freewheeling capitalism as well as in regions where “disruptive technology” is not necessarily considered a source of absolute or comparative advantage for international investors (Defossez, 2017). The European Union has led the string opposition of Uber, especially its app-based ridesharing business approach. The region has not been welcoming of the approach in which any person with a driving license and a vehicle could take people from one place to another and earn money in the process (DeMasi, 2016). The region lacks any legal provision for freelance driving using private cars, or even for “transportation network companies” (TNC). Therefore, the countries within the trading bloc have no room for the technological-based model initiated by Uber. Hence, the success of Uber in the market might be unlikely in the long run.

European countries have launched successful legal battles against Uber. The company defended its business model against attacks by claiming that it is an information service provider and not a transport company. The company could draw its competitive and economic advantage from assuming the information technology model because its users take advantage of technology to facilitate their travels (Thelen, 2018). However, the court in Europe has a counter view of the company. Recently, in 2017, a ruling was made by the European Court of Justice that declared it a transport company. From the perspective of the ruling, Uber would be subject to the local transport regulations in the EU member countries, including Germany (Defossez, 2017). The ruling increased the disapproval of Uber’s uber-male corporate culture. Such claims have made it hard for the company to venture into other big markets such as London and China. Clearly, the Uber business model is its undoing in terms of its attempts to break through leading markets internationally.

Another drawback in Uber’s effort to achieve actual benefits through international investment is its information-based model. In international investment, although technology can provide an advantage for companies, it can also be a misdoing, depending on the ability to protect the platform. Uber has faced serious criticisms relating to its information security. The 2016 major data breach is one of the issues that affected the company in recent years. In fact, the breach and the European Union intransigence instigated the stepping down of the then CEO, Kalanick at the beginning of 2018. Dara Khosrowshahi took his place and made one critical decision to apologize for the company’s previous confrontational strategy when venturing into the international markets. Although his lenient approach has enabled the company to progress in the global market, it does not guarantee success in operating in European countries such as Germany. The company remains strained when making its investment decisions.

Although Uber can still operate in some European countries such as Germany, the regulatory limitations might not allow the company to take advantage of its technological advantage. The European Union court decision did not completely bar countries like Germany from welcoming international investment by Uber. However, the country’s local regulations are still not friendly to Uber. In the EU, and specifically in Germany, Uber can still operate. However, they have restricted the business models, which the company can operate in the local market. The company can only use certified taxi drivers and vehicles to operate Uber platforms. The decision explains the use of low-cost models such as the UberX/UberTaxi taxi service. The company has had to agree with the restrictions to avoid losing its license completely (Thelen, 2018). The limitation affects the advantage of Uber over other taxi operators in the international market. Besides, the firm is not able to gain the expected scales in revenue because of the restricted operations. For example, the company cannot operate the US-style UberPop freelance ride service in the European Union.

Legal Hurdles and Regulatory Roadblocks in Germany

The section provides evidence for the argument that the anti-Uber ideals in Germany will continue to create a hostile operating environment regardless of the technological advantage of the company. As it enters the market, the company encounters a huge array of regulations and laws that are absent in other regions, such as in the United States. The laws are so restrictive that the firm might not make the level of income that will allow it to survive in the foreign market. The regulations and licensing requirements are most likely to hinder the smooth operation of the taxi company despite an impressive technological model that could provide an advantage in a business environment devoid of such restrictions (Defossez, 2017). The PBefG (for Personenbeforderungsgesetz) is an example of the challenge that the company has faced in Germany that has affected its operations. The laws that regulate the commercial transport of passengers have altered the model of business that enables even owners of private cars to operate.

Besides the many legal battles and court rulings, Uber faces many other challenges that might affect its potential in Germany. The firm has to operate in a very hostile environment because of culture and government that restricts the investment. Although the company could benefit from the convenience of the technology supported transport network, it appears unprepared to welcome the business. Within and outside the legal arena, politically and culturally, the country appears to be unprepared for the Uber investment model. Without changes in the statutory provisions and the attitude of the people towards the Uber model, the company may not operate profitably in German regardless of the ease with which it could begin its operations as a technology-based firm. Uber’s basic ridesharing concept that matches travelers with private and uncertified drivers has not been approved in the German market. The government has completely resisted any idea of revising the law, locally, nationally or European Union-wide to accommodate the Uber business model.

Conclusion

Uber’s decision to launch its operations in Germany is an international investment strategy. The company is based in the United States but has operations in more than 600 cities across the world. Its decision to operate in various markets has faced major opposition, primarily because of the aggressive, confrontational model. Although the model worked in some regions, it has failed to be effective in Europe, including in countries such as Germany. The model has failed in the region regardless of the technological advantage that the company enjoys. If all factors were constant, including lack of competition, the company would successfully operate in the international market because of the IT platform. However, its business has proven difficult in Germany because of legal and regulatory restrictions. The firm has confirmed the fact that absolute and comparative advantages are not the only means necessary for multinationals to operate successfully in foreign companies. The operating environment should be welcoming and conducive for the investor to operate in the market effectively. Therefore, the anti-Uber sentiments in Germany will affect its success negatively regardless of the technological advantage.

References

Defossez, D. A. L. (2017). The regulation of a project of the deregulation: UBER in Brazil and the European Union. Journal of Law and Regulation, 3(1), 1-28.

DeMasi, A. A. (2016). Uber: Europe’s backseat driver for the sharing economy. Creighton Int’l & Comp. LJ, 7, 73.

Everybody Hates Uber: Regulations, outraged taxi drivers, and in-house scandals that ruin their business (2018). Lawless.tech. Retrieved from https://lawless.tech/everybody-hates-uber-regulations-outraged-taxi-drivers-and-in-house-scandals-that-ruin-their-business/

Geradin, D. (2015). Uber and the rule of law: Should spontaneous liberalization be applauded or criticized?. Competition Policy International (2015), 15-53.

Gesley, J. (2016). Legal challenges for Uber in the European Union and in Germany. Retrieved from https://blogs.loc.gov/law/2016/03/legal-challenges-for-uber-in-the-european-union-and-in-germany/

Hanson, G. H., Lind, N., & Muendler, M. A. (2015). The dynamics of comparative advantage (No. w21753). National bureau of economic research.

Kelly, A. (2019). Uber launches in Hamburg, now live in six German cities, Routers.

Leamer, E. E., & Stern, R. M. (2017). Quantitative international economics. New York: Routledge.

Seretis, S. A., & Tsaliki, P. V. (2016). Absolute advantage and international trade: Evidence from four Euro-zone economies. Review of Radical Political Economics, 48(3), 438-451.

Stadtmann, G., Barainsky, L., Gumberidze, E., & Nurul, A. M. Uber and Taxi Regulations: are Member States preserving a legal monopoly to the detriment of consumers? Retrieved from https://www.researchgate.net/profile/Mohammad_Nurul_Amin/publication/309679194_Case_Study_Uber-_Solution_European_Competition_Law/links/581ce5d208aeccc08aeca320.pdf

Thelen, K. (2018). Regulating Uber: The politics of the platform economy in Europe and the United States. Perspectives on Politics, 16(4), 938-953.

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