Over the weekend, CNBC reported that Uber might be preparing to sell its Southeast Asia business to archrival Grab in exchange for a sizeable stake in the latter.
The truce would bring an end to a fierce and costly fight between the two firms, and cede the region’s ride-hailing market to one dominant player.
While the parties remain mum on the whole thing, some questions come to mind: Is Southeast Asia a losing battle for Uber? Does cutting a deal with Grab make sense? How does it affect consumers? What happens if no consolidation takes place?
Too early for Uber to quit
Uber famously quit China in 2016, after selling off to incumbent Didi Chuxing. Then in 2017, it exited Russia after an agreement with local ride-hailer Yandex. The transactions resolved the unhealthy price wars between them and left Uber with a foot in both markets through its stakes in the companies.
Uber had to bow out of the race because the local players had zoomed past it, and the gap was too difficult to close.
Logically, Uber might be better served if it makes the same move and hand over the keys to its nemesis in Southeast Asia, which is “over-capitalized” and isn’t “going to be profitable any time soon” as CEO Dara Khosrowshahi once said.
Uber can instead focus on its battles and regulatory roadblocks in the US – where it remains to be the dominant player – as well as Europe and everywhere else. For Grab, a deal gives it control of the market and eases the pressure on it to spend for subsidies.
However, Uber’s battle in Southeast Asia might not exactly be a losing one like in China and Russia. Uber might not be on top, but it doesn’t appear to be that far behind. And while Grab has diversified into other things like payments – a route Uber hasn’t taken, Uber has the firepower to continue marching on. It’s done just that by rolling out in Myanmar and Cambodia last year. Khosrowshahi had also dismissed the prospect of consolidation in Southeast Asia even if it’s going to be a long game.
What could prompt it to drop out of the race this early is its IPO ambitions. A highly unprofitable Uber makes investors nervous. That’s why some of its backers are reportedly making the case for Uber to get in bed with rivals in Southeast Asia as well as India. Khowsrowshahi has indicated to investors he wants to shore up the company’s finances ahead of the IPO, hence the China and Russia deals.
Talk about the possible merger with Grab has also intensified ever since SoftBank snapped up a stake in Uber. Observers say the move would play into SoftBank’s efforts to get control of the global ride-sharing market. SoftBank also owns shares in Grab, Didi, India’s Ola, and Brazil’s 99, and has publicly expressed interest in Lyft, Uber’s main competitor.
Monopoly may hurt consumers
Assuming the deal goes through, Grab will get a monopoly of the region, competing with only a couple of local players in each market. One possible huge contender remains to be Indonesia’s Go-Jek, which has divulged plans to expand overseas.
From a purely economic perspective, there’s a huge benefit to having a monopolist. “All incoming requests are channeled through that one operator who can match the demand with the supply, steering in a much more efficient way,” said Jochen Krauss, managing partner at consultancy Simon-Kucher & Partners.
Having said that, Krauss pointed out that there’s rightfully a lot of worry that the monopolist will take advantage of the situation and try to be as profitable as possible.
That means consumers and drivers alike could see subsidies, including fare discounts and income incentives, wind down.
What’s worse is that costs could be inscrutable because of the dynamic surge pricing system, Lawrence Cheok, senior research manager for IDC, previously told Tech in Asia. “Under a monopolistic market structure, there needs to be more transparency in how these changing prices are generated or calculated.”
“I’m pretty sure regulators will be looking into [the deal] because it provides such a huge market concentration,” added Krauss.
In Southeast Asia, specifically Singapore, private-car hires and taxi companies are regarded as an extension of the public transportation network. So it’s almost as if people have a natural right to a private-car hire, he pointed out. “If you look at other countries outside Asia, go to Europe, then the taxi is a rather costly alternative to public transportation or your own car.”
This bolsters his belief that regulators would probably “step in and regulate fares.”
Rising fares could force riders to look for cheap alternatives and serve as an entry point for others to set up their own ride-hailing companies.
This is reminiscent of what’s happened in China after the Uber-Didi deal.
“Following the Uber China buyout, Didi passengers have faced higher charges for trips after the company started raising prices and reducing cash subsidies for several services across the country, such as ride hailing and carpooling. As a result, in the four months since the merger, there’s been little growth in ridership figures,” the South China Morning Post reported in December 2016.
“Many drivers are weighing up whether to quit the industry, amid concerns about pay cuts,” the report added.
In Singapore, where Uber has a tie-up with top taxi operator ComfortDelGro, an Uber-Grab deal also raises concerns. If Grab merges with Uber, it could decide to work exclusively with ComfortDelGro because it’s more efficient. Smaller taxi operators may get squeezed out of the market.
“I foresee that if it’s approved, the market will have to be more tightly regulated,” said Singapore University of Social Sciences transport economist Walter Theseira in a report by The Straits Times.
How about a duopoly?
Both Grab and Uber declined to comment on the rumor. An Uber spokesman branded the news as “speculation.”
It’s uncertain whether any deal will take place, yet Theseira thinks it may be “inevitable.”
As he told The Straits Times, “it was clear that as long as both parties were splitting the market and fighting for market share with discounts, it would never be profitable.”
Obviously, it’s not a sustainable business model, and the companies are expected to continue bleeding if no consolidation happens.
But Krauss suggests that while ride-hailing is a network effects game, it doesn’t necessarily have to be winner-takes-all. There’s a “deserved” market share that Uber and Grab can have. In this scenario, the market is fully utilized and the players cannot grow their market shares any further.
“For argument’s sake, let’s say that the two reach a market share of 50 percent each. Somehow, we have a common understanding that this is the end of the game. What will happen next is that subsidies will decrease, and prices will also move up in parallel so no market deviation happens,” he explained.
That’s what you see in highly concentrated markets like the telco market. Typically, there are top two or three operators who have the same approach when it comes to pricing and promotions. They understand that they might be fighting for a few percentage points of market share but everything else has been divided.
It’s unclear when the ride-hailing market will reach saturation point. In the end, it still boils down to whether Grab and Uber investors would be willing to gas them up through that long journey.
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