Getting your business model right or wrong: the Chinatown buses
People waiting to board a Chinatown bus in the Lower East Side of Manhattan, NYC. Image from The Lo-Down blog.
Last week, the Federal Motor Carrier Safety Administration (a unit of the US Department of Transportation) "busted" the so-called Chinatown bus "system," shutting down the three main companies that were operating 26 different subsidiaries, because of persistent safety and operating violations. See "U.S. cracks down on Chinatown bus operations; Philly firm targeted" from the Philadelphia Inquirer.
The publisher of Next American City had a post at GGW ("Deregulate our streets!") about how the crackdown was regulatory over-reach, that innovation needs to be supported. Fast Company has a piece, "Business Lessons from Chinatown Buses," focused on failures in the business model. Both articles miss key points, although the GGW piece is probably worse.
From the Fast Company piece:
In the end, Chinatown buses were victims of an inability to adapt to a shifting business environment. Although several lines--most notably the NYC-BOS carrier Fung Wah still appear to be running, most carriers were knocked out by the mass raid. Perpetual price-cutting, an unwillingness to submit to expensive (and necessary) inspection and safety standards, and unfamiliarity with American lobbying did them in.
The article states that the "bus lobby" persistently lobbied the regulator to act against the Chinatown buses, and how the Chinatown companies weren't members of the trade association, so they were caught flatfooted and unable to compete.
I don't agree. The biggest issue was the companies unwillingness to follow the safety and operating rules, providing the primary reason to and necessity of the regulatory authorities to act.
There are many types of ethnic businesses that start up focused on serving their compatriots, and then jump into and cross over to the mainstream. But to serve those markets, the companies have to adapt, to be able to respond to and serve the new segments. As the FC article points out, for the most part the Chinatown buses never did make those adaptations.
Once people had other options (Bolt Bus, Megabus), the "chaos" of the Chinatown buses, seemingly justified because of the low price, was no longer a selling point, i.e., difficulty of communicating with the ticket sellers and bus drivers, the scrum at boarding and not knowing if you would actually be able to ride--a real problem in cities like Philadelphia which by comparison to DC or NYC had more limited service, etc. In short, people were willing to pay more money to Bolt Bus, Megabus, and other independent carriers (e.g., DC2NY)--it only cost a little more--for more predictability and better service.
Obviously, the safety issue was paramount. If the Chinatown bus companies had followed the rules and provided safe operations, all the lobbying in the world wouldn't have impacted them (probably). Instead, they continued to flout the rules not just in terms of safety but in how they operated their companies (form and substance issues).
Many people use the line "it's better to beg for forgiveness than ask for permission."
That's not how it works with transportation safety regulations (it is a problem in other fields, see oil drilling in the Gulf of Mexico and underground mining regulation in West Virginia as counter examples) and government contracting generally. You follow the rules. If you act out of turn, you will always be subject to extra-normal treatment going forward, with the simplest provocation at the ready to shut you down.
Combine the chaos of the Chinatown bus operating model (hard to get tickets, no guarantees, difficulties at boarding, overbooking, uncleanliness of the buses, limited and often uncleanly waiting facilities) with the safety violations, and likely they were doomed. (Me, I Iiked that you could take a Chinatown bus from DC at 3:30am and get to NYC at the start of the day and have a full day there. Suzanne hates the chaos and refuses to ride them.)
Probably too there is a different lesson in the problem of "perpetual price cutting" than alluded to in the Fast Company story.
In my experience, lowest price often comes at the expense of being able to fund improvements in your business.
The owners thought price, specifically the lowest price, was the most important product differentiation they could offer. They didn't realize that while price is an issue, by comparison to train, plane, and higher priced bus services, they were cheap enough, and rock bottom pricing underfunded their ability to improve their operations and fund regulatory compliance.
Predictability and quality of the service, and from the standpoint of the business, the management of risk, were basic business requirements and far more important to their continued operation than offering the lowest price.
The bottom line is that by not following safety and operating rules the Chinatown bus companies irreparably damaged the ability of their businesses to be able to continue to operate in a regulatory environment.
Government contracting/government regulation
Some of you know that my business is focused on what I call "bicycle facilities systems integration" and that means competing for government contracts. It's hard. Especially going up against better funded competitors and companies that have been in operation longer.
While there are many problems with steering and other issues in the contracting process, at the end of the day, your ability to complete the application/proposal, format and print it, submit it on time, get insurance, get a performance bond, etc., indicates your capacity to fulfill the contract. When you can't it creates problems all around.
(Of course, the way contracting and procurement is set up usually posts significant barriers to entry when those requirements, along with license to operate in that particular venue, have to be met upon submitting the contract, rather than before signing the contract.)
While I think that most regulatory authorities are more focused on rules and compliance, and even licensing as a revenue generating function, the more forward-thinking organizations have a focus not so much on preventing a business from operating but towards getting them compliant--they will make recommendations on how to operate, suggest firms and consultants that can help them build capacity and technical competence, etc.
Presuming the Chinatown bus companies had insurance, I am surprised that the insurance companies they used didn't work with them to ensure compliance with safety and operating rules, because to operate counter to the rules and regulations increases risk of failure and claims. (Although if the companies aren't operating according to the rules and regulations, usually clauses in the contract give the insurance companies a reason to deny the claim.)
The US DOT/Federal Motor Carrier Safety Administration was forced to act because of persistent unwillingness to follow the rules. That's not about being against innovation--the idea of "Deregulat[ing] our streets" is terrifying when that means putting the public at extreme risk of accident and death.
At the end of the day, protecting the people who use the streets is more important than serving the companies that intend to profit from their use of streets.
I first recall a conversation about Chinatown buses in 2002, although I might have read about them earlier. So the companies had at least 10 years to get their acts together, after their services became known, used by the general public, and on the radar. That they didn't communicates a lot about their ability to conduct business properly.