How Uber's Failure in Japan Can Help Startups Everywhere

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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.



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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 both 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 spend 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 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 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 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 movie in Japan or seen baked sweet-potato vendors driving around Tokyo with an exposed fire 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 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 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 MonkeyParkinglaunched 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.
Lessons Learned
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.