What challenges might face Uber in the Dominican Republic?
Entering to a new international market has always been challenging for many companies, especially in developing countries where things can be time-consuming. Culturally, administratively, legally and politically. We must take into account the legislation, the political environment, the levels of corruption that might affect our investment, the business culture, consumer behavior, education levels that might interfere with operational efficiency, the lack of accountability from providers and their breach of contract, the weak government institutions and judiciary system, among many others. Even though the Dominican Republic is one of the countries with the largest foreign direct investment in the Caribbean and Central America it is a country with numerous obstacles and for a company like Uber some might slow down their operations.
Uber has become one of the most controversial companies in the world. Two European Uber executives are now facing the possibility of prison in France on charges including “deceptive commercial practices” and “complicity in illegal activities.” In many countries, including Brazil, Canada, China, Germany, India, Japan, Korea and Spain, among others, the taxi industry and government officials have joined forces to stop Uber and are working for its prohibition. The taxi industry worldwide is definitively not prepared to accept a company like Uber. This big company is not only disrupting the market, but it is also confronting local interests, including unions, political protectionists, nationalists, legally registered taxi companies and taxi drivers who are paying their taxes and licences in order to have the right to operate.
The Dominican Republic is among the main recipients of Foreign Direct Investment in the Caribbean and Central America. About 50% of the country’s current deficit is covered by FDI. Many foreign companies are investing in different industries despite the challenges foreign investors have to face in the Dominican Republic. Although the taxi industry is not regulated in the Dominican Republic and opens a breach where wrong business practices are ignored it does not mean that a foreign company has the right to violate the legislation and promote the wrongdoing.
Overview of the Dominican market — The opportunity
On the island that “has it all,” Uber has recently launched UberX. This is Uber’s budget option. The car must be 2006 or newer and it must have 4 doors, air conditioning, etc. Any driver who has a particular car and who is interested in using his/her vehicle to transport other people and make money can be a Uber’s driver. Certainly, there are “regulations” requiring taxi drivers to have a licence but only 15% of all taxi drivers are legally registered. The industry is not well regulated, but that doesn’t mean that Uber has the right to break the law. Especially, if you are valued at US$ 5oB and you recently raised US$ 1B. There is the possibility that some parties might be interested in grabbing some of that juicy budget.
For Dominican users, as with many users in the world, Uber represents a great revolution. Dominicans are used to call traditional taxi companies such as Apolo Taxi, Tecni Taxi, Zona Taxi, TuvSud, Taxi Anacaona, to name a few. From my experience, it can take a long time to get a taxi after spending more than 10 minutes calling. Taxi companies always tell you that your driver will be with you “in 3 minutes,” but sometimes, taxis can take up to 20 minutes to arrive, or you may need to call again. The service is not always great. A mobile app like Uber would solve this problem, especially when the app starts getting traction. A company like Apolo taxi has over 8,000 drivers and still does not manage to get taxis on time. What would be the magic number of drivers that Uber would need to provide a quick and reliable service?
Most taxis are in really bad conditions. You might end up with a 1986 Toyota Corolla with no air conditioning in a country where the heat can reach 30 degrees celsius. This is why users who call for a taxi need to ask for “un carro confortable con aire” (a comfortable car with air conditioning).
Stil, taxi companies and taxi drivers are increasingly aware of their client’s demands and have been investing in upgrading their cars in recent years. Hyundai Sonata, Brilliance (a Chinese car) and Toyota Sienna station waggon are becoming the most popular vehicles among taxi drivers due to their appeal and low cost. Luxury taxi companies have emerged offering car service in Tahoe, Mercedes, Limousine and other luxury vehicles.
As a result, this could be the right moment for Uber to target the Dominican market as more reliable cars are available and more individuals are looking for alternatives to increase their monthly income. Still, there remain certain challenges that will need to be addressed first.
On the other hand, taxi drivers are tired of being ripped-off by colleagues who steal their rides or lie about how far they are from the client, thus creating poor service. According to some taxi drivers who were interviewed, there is also a standard corrupt system where a driver bribes an operator in order to have clients. Radio service is completely obsolete when compared to an app with GPS and an automatic dispatch system that can effectively solve these issues. Both clients and taxi drivers would be much happier with a mobile app easy to use. The lack of initiative towards innovation has turned taxi companies into poor competitors against companies like Uber. This is where competition is actually healthy for the industry. Taxi companies will have to seriously consider to innovate and change the way they have been doing business so far.
There are more than 160 taxi companies and only 140 are registered in the Dominican Republic accordingly to the Administrative Taxi Council & Regulation Agency (CART). There are over 25,000 taxi drivers, but only 11,000 are legally registered and the majority are concentrated in Santo Domingo. This is due to either unemployment of taxi drivers or the low salaries they receive, which are below the cost of living. There is a 15% of the unemployment rate, the minimum wage in the Dominican Republic is approximately US$ 175/month, which is a poverty level income. The high migratory flows from rural regions into urban centers have also impacted the transportation industry. 70 % of the Dominican population is concentrated in urban areas. Many end up working as informal drivers earning an average of US$1,000/month. They are also protected by unions that provide social security and other services through their membership. Drivers are also potential voters in political campaigns.
1. The main Uber’s challenge: Apolo Taxi & transportation unions leaders
Apolo Taxi has more than thirty years in the industry and over 50% of the market share. Other large taxi companies are owned by powerful, well-organized transportation unions with strong political leverage. These two players will not give away their market so easily. They will fight back and will use all their resources, even violence if necessary as they have proven in the past every time there is a protest against governmental policies. The President of the National Transportation Council has already warned that it will stop any driver serving Uber. Drivers with the courage to drive in their territory will put their life at risk when protesters guided by their unions destroy their cars with baseball bats and rocks or maybe worse. According to a survey of over 200 taxi drivers that I had to prepare for a client interested in developing a taxi app, taxi companies are penalising drivers who use taxi apps. Consequently, drivers are unwilling to risk their jobs over an unknown app that doesn’t guarantee them a minimum income of US$ 1,000/month.
If Uber wants to avoid tragic events, its representatives need to negotiate with key industry players and local authorities. They need to either integrate themselves to the local community or partner to a powerful local family with strong political influence before considering recruiting taxi drivers.
2. Business Ethics, Politics, Regulations & Corruption
The Dominican Republic is among the most corrupt countries in the world according to the Corruption Perceptions Index from Transparency.org, the global coalition against corruption. Corruption is a primary barrier to economic and social development. Corruption usually ends up feeding organized crime and eventually affects the society in which the business operates. Bribery might be tempting in developing countries but even if you have the power to do it you should refrain from engaging in it because it can destroy everything you have worked so hard to achieve. Is it possible for Uber to not fall into deceptive commercial practices and become complicit in illegal activities in the Dominican Republic as it has in other countries around the world? Will the United States let an American company fall into the wrongdoing? Brewster, the US ambassador, has actively pointed that the Dominican Republic corruption demands answers and solutions. Will the Dominican government regulate the taxi industry, or will it ignore it?
How to maintain business ethics in a corrupt environment is quite a tricky question. Uber drivers will generate an income that will need to be reported to the Internal Tax General Department (DGII). Taxi drivers and Uber will need to pay 18% ITBIS (VAT) + 25% Income Tax (if the monthly income is superior to USD1,700). And they will also have to pay an annual licence fee according to the law 76–00. If the industry is regulated this will affect the market conditions and will increase the price of rides.
“An average ride could cost around US$ 6.25 instead of US$4.40 on a regularized market. “
Accordingly to the UberX business model in other countries, Uber takes 20% of the revenue generated by the taxi driver through the app. A taxi driver currently pays from USD13 to USD31 a weekly radio rent. This means that if taxi driver makes an average of USD1,000/month, he will have to pay US$200 to Uber. That’s almost twice what they currently pay to taxi companies. What would be the impact to the market if Uber operates accordingly to Dominican law 76–00? If drivers have to pay for ITBIS and ISR it means that they will have to give away 18% from their US$ 800 and 25% if their income is superior to USD1,700(approx.). The average taxi driver will earn around US$646 net. In order to compensate drivers will have to increase their rate about 38% more. A radical change that the Dominican Republic is not yet prepared to embrace. Obviously they will not be the only ones in reporting their taxes. That would not be fair. Traditional taxi companies will have to start regulating their operations as well and their drivers will also have to pay taxes. This will increase rates and affect the industry in the Dominican Republic. It would be great for the government to receive a new source of income by seriously regulating an industry, but Dominicans will reject this change since it would seriously affect their savings and certainly not help taxi companies and transportation unions.
Unions leaders have only one ambition: political leverage. For this, they will seek any opportunity to have more participation in the government, either in Congress or within governmental departments. Alternatively, they can also seek major government contracts.
In May 2016, Dominicans will vote in an election that will include presidential candidates as well as senators, congressmen, mayors, and local representatives. A lot is happening right now at the political level, many negotiations and strategic alliances are taking place among parties and the private sector.
Many politicians are also actively fundraising to finance their campaigns. 2016 might not be the year for market regulations but may be a time for negotiations for later years.
On the other hand, the present government cannot afford to give more power to unions but it might be willing to consider negotiating with them if this means gaining more votes. It certainly does not want to make more enemies, especially not with the unions. What would be the terms and conditions of a possible negotiation between unions, taxi companies, the government and Uber? In the Dominican political arena, anything is possible a strong political assessment is necessary. The US Embassy might have already provided a full brief to Uber. Fortunately for Uber, the US has a strong influence in Dominican national politics and among important powerful families.
3. User Behavior & Business Culture
The informal market represents more than 30% of total GDP and the government is actively regulating in order to collect taxes. About 60 % of jobs are informal and around 13,000 taxi drivers are not regulated. What would be the mechanism for Uber check that all drivers pay their taxes? As taxi drivers are not part of Uber’s hired staff, Uber cannot withhold taxes. Therefore, drivers are fully responsible for reporting their taxes to the Internal Tax Revenue Department. Would Uber promote the informal market by ignoring driver regulated status?
Most of the population use a prepaid data service. Taxi drivers will have to constantly top-up their data service in order to access to the Uber app or to be listed as available when users are looking for a taxi. Uber might need to evaluate the possibility of partnering with Telcos in order to keep the app and GPS always ON even when users have consumed their entire data package.
Some taxi drivers only have the basic car insurance policy “seguro de ley” that do not cover much. In case of any car accident, the insurance will not cover any damages against users. What would happen if any rape incident occurs on a Uber car? Would the victim be protected by any insurance company, “proconsumidor”, the agency that protects user’s rights or “la “procuraduria general”, the equivalent to the justice department in the US? Who would be responsible? How would Uber filter and avoid any convicted felon to become a Uber driver? How would Uber guarantee safety to its passengers?
Many taxi drivers do not respect traffic laws. They even have a nickname, “los dueños de la calle” (“the street lords”). They do not respect red lights and even drive in the wrong way becoming really reckless drivers. When sitting in the back seat of the car you might feel to be on a rollercoaster at a terrifying amusement park where a tragedy might happen at any moment. How would Uber control this situation? Would it provide a training program including driving ethics? How will it monitor reckless driving?
Many hard working and honest taxi drivers put themselves at risk every day. What would happen if a Uber passenger attacks, rob the driver or destroy his vehicle? Can Uber guarantee those driver’s safety? What would happen if unions start attacking Uber drivers? We might think that the arrival of Uber in the Dominican Republic is a great revolution, but it will certainly not bring peace unless that a proper procedure and negotiations with different parties are in place. Definitively not by imposing a foreign way of doing things.
Considering the close political elections and the transportation unions political strength, the lack of government regulations within the industry, and the inevitable corruption environment, the reckless driving culture and high criminality levels, the informal market and a population with low access to banking services and credit cards, Uber’s arrival to the Dominican Republic might be one the best thing that can ever happen to the taxi industry if and only if Uber acts accordingly to its regulations and joins forces with local industry players. Negotiations might not be so evident, but they are necessary for the health of the industry.