uber-trouble on the horizon for ride-sharing apps

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76 | GlobeAsia November 2015

Many have hailed the Uber ride-sharing app as a revolution in transport. The so called “gig-economy” has taken off

in a big way and so far poster child Uber has been growing at a staggering rate. Today, Uber’s valuation in the high-tech world is comparable only to Facebook and the company shows no signs of slowing down.

How has Uber achieved such rapid growth? Can a company grow to Uber’s size this rapidly without cutting a few corners? It’s an open secret at this point that these companies are one-part

technology, one-part labor law workaround. It isn’t some accident of chance that companies

like Uber often fall foul of local laws. In many cases, their very business model often depends on their “independent contractors” not being subject to the same sorts of regulations as professionals. One wonders whether Uber will remain as profitable once the cracks in the labor laws are filled.

Once Uber is forced to play by the rules, it may become apparent that it’s explosive growth was not the result of some super-secret special sauce but a function of how effective the company

Uber-trouble on the horizon for ride-sharing apps

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drivers would indeed be considered employees.

Many feel this could be a deathblow to Uber. Fortune recently crunched the numbers for the start-up and declared that company costs would go up by over $4 billion a year should they be forced to pay their drivers as employees. While any normal company could not easily sustain that sort of hit, lack of positive cash flow has never been a huge hindrance to a tech company. Uber in particular can lose that amount every year for a full decade and still have $10 billion to spare.

Can Uber change?Some analysts have suggested that with minor tweaks this could have minimal effect on Uber in the long term. Indeed, while granting class-action status to California drivers suing Uber, US District Judge Edwin Chen took pains to point out in her opinion that should Uber lose the case “...it will be free to restructure its relationship with its drivers in such a way that the drivers would actually be bona fide independent contractors...”

A recent article in the San Francisco Chronicle also argued that Uber would be fine either way. It quoted Jeff Tennery, CEO and co-founder of hiring platform Moonlighting, explaining that it was simply the “curated model” approach that some of these companies take that runs afoul of regulations.

The assumption is that all Uber would have to do was loosen controls they have over their drivers to the extent needed by the law and their drivers would then be considered independent contractors. In this scenario, presto change-o, everybody goes home happy, right? Maybe not. It is an unfortunate reality for the company that its “curated experience” is just exactly what makes it so successful. In many countries it is the Uber brand and the perception at least that there is some kind of screening for

Jason FernandesTech commentator and the founder of SmartKlock.

compensate for the high barrier to entry in the taxi industry. Uber drivers get to provide almost the same services but their prices need not factor in all these costs. In essence, regulations have the effect of ensuring not a level playing field but a situation where the taxi industry is actually at an unfair disadvantage.

One can certainly argue that Uber’s destruction of the New York City medallion system is just the free market making needed adjustments, but what of the training that these drivers receive? Is it right to put these professionals on the same level as regular citizens who picked up Uber in their spare time?

The greatest threat: Drivers are employeesPerhaps Uber’s greatest advantage over its competition is that because it considers its drivers to be independent contractors and not employees, it is not required to extend benefits like healthcare or unemployment. Unfortunately for Uber, that could change soon.

A recent advisory opinion from the Oregon Bureau of Labor and Industries (BOLI) in the US when applied to Uber indicates that because of the high degree of control Uber exerts on its drivers, those drivers are, from a legal perspective, employees. Oregon’s decision was not the first of its kind: BOLI’s conclusions mirrored those reached by some California courts previously and Oregon’s specifically based its closely on guidelines set forth by the Administrator of the US Department of Labor.

In the past, Uber drivers held the unenviable position of being ineligible for benefits while still not quite having the freedom an independent employee would expect. The government’s new guidelines and their six-factor test when applied to Uber leaves no question that the vast majority of Uber

Uber can lose $4 billion every year for a full decade and still have $10 billion to spare.

has been at avoidance of workplace regulation.

Regulation and the taxi industryUber faces relentless pushback from the taxi industry in almost every city it enters. In New York City, for example, taxi drivers that may have spent up to $1.3 million for the medallion that permits them to ply their trade are thoroughly disgusted by how easy it is in comparison for a layperson to get started with Uber.

It would certainly be tempting for

us to chalk this up to the old guard desperately clinging on to the last vestiges of its control while technology attempts to revolutionize an industry, but the truth is far murkier.

A recent article in The Guardian detailed the UK black cab driver’s frustration with Uber. While they have to license and insure their taxis, and pass a series of tests before they can get on the road, Uber drivers are subject to no such requirements.

The procedures that black cabs have to go through can take up to three years but the assumption of course is that this helps ensure passenger safety. These cabs are justifiably upset that Uber drivers unfairly get to skip the entire process and jump to the front of the line while providing almost exactly the same services.

If taxi fares in the UK are high, it’s because they’re intended to

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at least a portion of the benefits normally due to employees.

Now would also be a good time for governments to re-examine labor regulations as they apply to contingent workers. It is likely time to draw up a whole new set of rules for the gig economy, one that takes into consideration both the needs of the workers and their employers while still ensuring a free market for open competition.

Can Uber survive going legit? Plenty of companies are struggling with this exact same question. Companies like Handy, TaskRabbit and Zirtual all either have or are currently dealing with similar situations. Uber is in a difficult place right now but if they tough it out regulation could turn more favorable for them in the future.

Few may be aware that the case that opened the floodgates for contractors who thought they were really employees involved - of all places - a strip club! Dancers at the infamous Mitchell Brothers O’Farrell Theatre were granted employment status in 1998 on much the same grounds as Uber drivers recently in California. When asked about the future of the O’Farrell Theatre at the time, their attorney said, “We’re keeping the doors open, and the show will go on.” Legendary American author Hunter S Thompson (who also coincidentally happened to be the former night manager at the aforementioned gentlemen’s club) was fond of saying “Buy the ticket, take the ride.” For now, as government and industry adjust to a new reality, Uber is wise to sit back and see where this ride leads.

its drivers that makes Uber popular. The service would likely be a lot less compelling (or safe) if complete strangers were dispatched at odd hours of the night to pick you up from the airport.

In essence therefore, to survive the company would really have to change its entire business plan, focusing instead on merely connecting random people with cars to other random people who need rides. The company would then also presumably lose control of pricing power because part of the cornerstone of the independent contractor relationship is the ability for these contractors to set their own prices.

Uber’s problems go beyond whether or not their contractors are employees. Some countries like Brazil are skeptical that Uber has any positive benefit at all. Brazilian President Dilma Roussef has publicly called for increased regulation even as Rio de Janeiro has made moves towards banning the service. Following violent protests by French cabbies in Paris, French President Francoise Hollande seconded Roussef’s comments, saying services like low-cost Uberpop should be illegal.

On the other handA vast amount of the population is unemployed or underemployed and Uber allows them to work on their own schedule. Unemployment has been growing at a brisk pace in many countries and according to partial US statistics available, “contingent workers” (made up of freelance, part time and temporary workers) make up a good 30% of the labor force there. In fact, analysts predict that at least half of the jobs added post-recession would be for contingent workers.

In Australia, the Sydney Morning Herald published an article this February titled “Uber drawing drivers from the ranks of unemployed in Sydney” wherein it detailed how the majority of UberX drivers there come from areas of high unemployment.

In an environment like this, it seems more than a little ridiculous to throw away a perfectly decent shot at gainful employment for thousands.

It would also behoove local governments to try and figure out how much more passengers are willing to pay for the peace of mind of riding with a licensed city-based taxi. If it turns out passengers really don’t care one way or the other, one option is to let the free market take over completely, swallow up the cab industry and leave passenger safety solely up to the driver. Another would be putting in place commonsense regulations that aren’t too hard to adhere to and afford drivers

Uber is in a difficult place right now but if they tough it out regulation could turn more favorable for them in the future.

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interview96 The world is just shades of gray: Jeffrey ImmeltGeneral Electric’s chairman and CEO Jeffrey Immelt sees the future in the industrial Internet.

98 Toward 200 hotelsWorld-wide hotel operator Accor Hotel continues to expand in Indonesia despite the economic slowdown.

living the goodlife112 Artistic hospitalityRaffles Jakarta invites its guests to celebrate artistry and experience the legendary Butler Raffles service.

Back Page116 Forestry Planology building circa 1912

Columnists16 Paulius KuncinasBanks in the Philippines prepared to meet Basel III standards

20 Steve Hanke Pictures for the pope and progressives

54 Michael Gryseels and Sumit PopliIndonesian companies have head start in digital economy, but need to accelerate

72 Jamil Maidan FloresMission to Manila: Indo-Phil economic relations at the grassroots

76 Jason Fernandes Uber-trouble on the horizon for ride-sharing apps

94 Arvi Rahadian Augmenting Jakarta using electric bus

100 Scott YoungerThe Great Garuda: To be or not to be

102 Keith Loveard Time to get serious

contentsVOLUME 9 NUMBER 11 / NOVEMBER 2015

technology58 Technology that touches the heartIdeas flowed, advice was given freely and excitement was in the air at the third IDByte conference held recently. 62 Celebrities onlineIndonesian celebrities don’t want to miss the opportunity to do business online. They are aware that they can’t be celebrities forever so they have to be creative in facing the future.

companies66 Blessing in disguiseBeing an orphan operator of the CDMA cellular phone service saw telecommunications operator Smartfren booted off one frequency and on to another. But now it is reaping the rewards.

special reports80 The future is nowThe government’s recent policies aimed at reforming the bureaucracy and cutting energy subsidies will help to propel it to become the world’s seventh largest economy by 2030.

84 Quick wins see quick action After years of waiting for infrastructure work to start and little or nothing happening, radical action in the form of revisions to regulations is expected to finally allow development to get moving.

88 China woos Indonesia with massive loans

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Nadiem Makarim is the poster boy of Indonesia’s digital

revolution. The founder of Go-Jek, the motorcycle taxi company that is transforming into a logistics company, is much in demand as a speaker at major business conferences.

At the recent Indosat IDBytes 2015, Nadiem shared the same stage with Google and Disney along with other upcoming digital entrepreneurs. He may be the leader of the band but Nadiem is definitely not alone.

“We are starting a social revolution. You can make money by leveraging on your skill,” he told the audience. “This little app will liberate you from the middlemen.”

Disruptors liberate individuals and alter the business landscape. They rely on technology and the internet to create new solutions to the challenges facing mankind.

However, the digital revolution has been largely led by newcomers to the game. Their companies have focused on the consumer and services sector and have reaped the rewards.

But large, established industrial companies can also be disruptors. GE, founded more than 100 years ago and with $145 billion in sales, also sees itself as a disruptor by focusing on the industrial internet. The company’s chairman and chief executive officer, Jeffrey Immelt, who was in Jakarta recently, noted that the merger of the industrial world with the digital world will lead to the next revolution.

“We at GE call ourselves a digital industrial company. Yes we produce locomotives and jet engines but we use advanced analytics and physics to improve our productivity and raise our efficiency,” Immelt said.

Disruption is now taking place at unprecedented speed. Companies, countries

Editor’s NoteEditorialEditor in ChiefShoeb Kagda

Managing Editor Yanto Soegiarto

Deputy Editors Muhamad Al Azhari

Editor at LargeJohn Riady

Senior EditorAlbert W. Nonto

Contributing EditorsFarid HariantoSteve HankeScott Younger

ContributorsSuryo Bambang SulistoWijayanto SamirinFrans WinartaJason FernandesJohn Denton

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The Disruptors

and individuals who do not get on the train are going to be left behind. Indonesia cannot afford not to be on this train. But to get on it, the country and the government must change and adapt to the new digital world. It cannot continue to do things the old way.

The private sector has already felt the winds of change and companies are adapting. They are using digital technologies to find solutions and create new services. The government, however, is playing catch up and must pick up its pace.

The digital revolution will divide the world into two halves: the connected community and the disconnected. Currently only 3.5 billion people in the world have access to the internet. In Indonesia, more than 100 million people live without connection to data and information.

The Indonesia Economic Forum 2015 will raise these issues and hopefully find solutions to these challenges. With the theme “The Future Economy, Fostering Indonesia’s Economic and Social Growth,” the one-day conference will bring together business leaders, thinkers, digital entrepreneurs and top government ministers. When people with the same purpose gather in the same room, new ideas emerge.

Shoeb KagdaEditor in Chief

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