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Uber’s sale of Southeast Asia operations to Grab leaves drivers, riders at a loss

Benjamin Cher & Trinity Chua
Benjamin Cher & Trinity Chua • 12 min read
Uber’s sale of Southeast Asia operations to Grab leaves drivers, riders at a loss
SINGAPORE (Apr 2): The 500 Uber employees who turned up for work at the company’s Singapore offices on March 26 received a rude shock: They had till 4pm to pack up and leave. The ride-hailing giant’s sale of its Southeast Asia operations to its rival
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SINGAPORE (Apr 2): The 500 Uber employees who turned up for work at the company’s Singapore offices on March 26 received a rude shock: They had till 4pm to pack up and leave. The ride-hailing giant’s sale of its Southeast Asia operations to its rival Grab was widely anticipated but has still managed to create a great deal of uncertainty. Drivers are worried about their livelihoods, employees are worried about their jobs, commuters are worried about prices, and investors are worried about the impact on ComfortDelGro Corp’s stock.

Update: Singapore watchdog says Uber-Grab deal may have infringed competition

These parties have valid reasons for concern. The Uber and Grab rivalry, fuelled not just by disruptive technology but also by very patient venture capital and private-equity money, had been a boon for many. To lure drivers from each other and existing taxi companies, Uber and Grab dangled attractive incentives in both cash and kind. Users benefited from discounts that sometimes made it cheaper to hire a car than to take the train. And anecdotal evidence suggests both companies were generous employers.

As the utilisation rate of its taxi fleet dwindled, ComfortDelGro struck a cooperation deal with Uber in December last year. The two companies launched a service allowing Comfort and CityCab drivers to offer fixed-rate fares to Uber users. ComfortDelGro also agreed to acquire 51% of Lion City Rentals (LCR), an Uber-owned car rental company. ComfortDelGro shareholders were hopeful that the transport company’s fortunes would turn.

Now, the Uber-Grab deal looks set to upend existing assumptions about the future of ride sharing and public transportation on the island. Will drivers and commuters abandon the ride sharing model once it is no longer supported by free-flowing funds? Is ComfortDelGro stuck with an overvalued asset? Should regulators step in?

Lack of clarity

Grab has agreed to acquire Uber’s operations in Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The acquisition includes food delivery service UberEats but excludes LCR. In exchange, Uber will take a 27.5% stake in Grab and Uber’s CEO Dara Khosrowshahi will join Grab’s board.

“Today’s acquisition marks the beginning of a new era. The combined business is the leader in platform and cost efficiency in the region,” Grab CEO Anthony Tan says in a statement. “Together with Uber, we are now in an even better position to fulfil our promise to out-serve our customers.”

In the chaotic hours after the deal was announced, however, it would have been difficult to find someone who agreed. ComfortDelGro told its 23,000 cabbies they could delete the Uber app from their phones, much to the chagrin of drivers who now fear potential income loss. Uber staff and drivers said they were not told about the deal prior to the announcement.

To its credit, Grab was quick to do damage control. Senior Grab executives took to social media and the press to inform Uber employees that they would be offered jobs. Grab even posted photos of rows of empty desks at their offices, to illustrate the space that is available for new staff. A town hall meeting was held March 27 across Grab offices. One attendee who declined to be named said the meeting was “factual” and “straightforward”, with officials talking about the potential of the enlarged company and taking questions.

One question stakeholders may be asking is whether the deal will face regulatory headwinds. The Competition Commission of Singapore reportedly did not receive formal notifications from both parties and will be writing to Uber and Grab for clarification. CCS says it will ask for the merger to be unwound or modified if it negatively impacts competition.

CCS is already evaluating a submission from ComfortDelGro to acquire 51% of LCR. Wun Rizwi, partner at RHTLaw Taylor Wessing, says the deal could complicate the Uber-Grab merger. “The relevant market for ComfortDelGro’s submission to the CCS concerned the car rental market. This current deal looks to be more relevant to the taxi or chauffeur industry,” he says. “If the relevant market is restricted to the ride sharing or taxi or chauffeur industry, then this deal might not be viewed favourably.” That is because those markets are already quite concentrated.

Most market watchers think the deal is likely to go through, though new regulations may be introduced to protect consumers and drivers.

“Commuters have already received emails from Grab and Uber informing them of the merger. The emails [did not] even have the term ‘subject to regulatory approval’. This shows how confident they are and speaks to, quite frankly, the weak track record of antitrust law enforcement here,” says Yang Nan, assistant professor at the National University of Singapore (NUS) Business School’s Department of Strategy and Policy. “Our antitrust statutes currently do not mandate a pre-merger approval from CCS.”

But Walter Theseira, senior lecturer and transport economist at the Singapore University of Social Sciences (SUSS), says there are many policy options for addressing market power. “Prohibiting mergers is only one such policy. Other options include regulating a dominant player in terms of prices or market conduct, for example,” he says, adding that the government has stated publicly that it does not want one single player to dominate the market for point-to-point transport.

Theseira says the government could choose to regulate the dynamic fare model so that it is more transparent. For instance, regulators may want to periodically inspect fares against underlying data to ensure compliance. “This would be similar to how taxi fares [were previously required to be] priced according to the meter,” he explains. “How quickly the meter runs up the fare is not the concern of the regulator, so long as it runs fairly and transparently.”

Howard Yu, professor of management and innovation at IMD Business School, believes CCS is unlikely to block the merger, as it is in the country’s interest to foster a local ride-hailing champion that can compete with regional players such as Indonesia’s Go-Jek. The latter is understood to be planning to expand to another country in Southeast Asia within a few weeks, with the Philippines mentioned as a possible country in interviews last year.

“For Grab to succeed outside of Singapore, it requires a critical mass of users at home. For Singapore, the country always wants a national champion. Viewed in this light, it would be surprising if the government were to stifle the emergence of a successful national champion and nip its market potential at a time when Grab is positioned to grow out from its domestic market,” says Yu.

ESSEC Business School professor Koh Ping-Sheng says the competition watchdog will have to weigh more than Grab’s ride-hailing monopoly; Grab has its fingers in payments, food delivery and micro-lending. “CCS will need to consider whether Grab’s expansion will allow it to reach such a dominant position that it discourages new entrants or innovation as Singapore develops its digital economy,” he says.

However, the impact of a monopoly in the digital economy space is unclear. “Digital transformation results in a convergence of industries and blurs the distinction between economies. It will be a difficult question for the CCS to determine at this stage the effect of the merger when no one really knows the true impact of digital transformation,” says Koh Chia Ling, director at law firm Osborne Clarke.

Changes in behaviour

Assuming the merger takes place, it seems likely that the discounts and subsidies that both riders and drivers have become accustomed to will diminish.

“The actual prices may not go up, but there may be fewer promo codes or commuters may find it harder to get the cheapest GrabCar when they need one. Some commuters may also switch back to public transport,” says Terence Fan, assistant professor of strategic management at Singapore Management University.

One commuter who declined to be named says he takes Uber or Grab two to three times a day. He has been riding the gravy train of discounts, even receiving an email of promo codes every Sunday night. “If [prices rise], then I think my commuting behaviour will adjust accordingly. But it is still dependent on the location, and coincides with factors such as my transport allowance,” he says. Another regular user says she will consider other transport options if her fare to work goes up to more than $6 a ride.

Uber drivers are not celebrating either. Fuad, who has been driving with Uber for a year, says: “I do expect temporary loss [of income as Uber goes offline]. The amount depends on when they are able to train the Uber drivers to get on board the [Grab system].” He is actively looking for another job. “Assuming a conservative figure of 5,000 Uber drivers who need to be formally trained to come aboard and get familiar with the system, [there are] effectively only 10 days to do that.” The Uber app in Southeast Asia goes offline on April 8.

“In the past, drivers were the scarce resource,” says SUSS’ Theseira. “A platform that couldn’t attract drivers couldn’t grow. This led to intense competition for drivers, with incentives and other deals. But now, with only one buyer for a driver’s services, I’d say that drivers have a lot less bargaining power. I would expect effective wages for drivers to fall, mostly through cutbacks in incentives and other offers targeted at drivers.

“Of course, drivers are still an important resource. But Grab no longer has to compete against Uber to secure drivers.”

The number of private-hire drivers is widely expected to fall. There were 22,440 taxis and 67,931 rented cars on the road as at end-February. At its peak, in 2014, the taxi fleet stood at 28,736.

But some taxi drivers are indifferent to the deal. Au, a ComfortDelGro driver of 10 years, says he only took Uber bookings because of the incentives he would get for clocking more than 100 rides a week. After hitting that number, he mainly took ComfortDelGro and GrabTaxi bookings. “More than half of my bookings come from ComfortDelGro, so Uber exiting the market does not matter much. I am considering using JustGrab when it is possible,” says the 57-year-old driver.

How drivers and commuters respond to the merger will show the true cost of reliability and efficiency in the private-transport-hire market. SUSS’ Theseira says, “The question is whether Grab can improve profitability solely through increasing efficiency by dominating the market or it discovers that the only way to become profitable is to charge higher prices and [pay] lower wages. I think it’s too early to tell, but signs in other markets are that profitability requires some rationalisation in prices.”

What’s next for ComfortDelGro?

Shares in ComfortDelGro gained nearly 3% on March 26, after the merger was announced, though they have since pared most of those gains. “The market is seeing it as positive for ComfortDelGro. While its taxi fleet size may not grow, the decline may be arrested,” says Shekhar Jaiswal, an analyst at RHB Research Institute Singapore. “Drivers who will get displaced from the Uber and Grab merger may consider joining ComfortDelGro now that the competitive intensity is expected to subside.” ComfortDelGro has a 5% idle rate, as thousands of cabbies switched over to Grab and Uber in the past year.

Eugene Chua, analyst at OCBC Investment Research, says Grab’s dominant position will allow it to control car rental rates and structure fares to improve profitability. This is likely to benefit ComfortDelGro. “We maintain our positive view on ComfortDelGro for now, with its more stabilised taxi business, coupled with limited downside, as we continue to expect earnings to bottom out in FY2018,” Chua says.

Other market watchers are more pessimistic. “In the short term, some Uber loyalists might be persuaded to switch to using taxis. However, it is not immediately obvious that taxi companies will reap positive benefits from this merger in the long run. Many taxi drivers are already using either the Grab or Uber app, or both. Uber’s withdrawal from the Singapore market may not necessarily translate into higher [bookings] for the taxi companies, given the popularity of the Grab app and the ease of switching from the Uber app to the Grab app,” says Osborne Clarke’s Koh.

Lee Der-Horng, transport researcher at NUS, thinks the fortunes of taxi operators will improve “only if there is stricter regulation imposed by the government to segregate the private-hire vehicle and taxi markets. Otherwise, it will be hard for taxi companies to gain back the lost share”, he says. Currently, he adds, taxi companies face more regulations than the likes of Grab, with more expensive cost structures.

Whatever the case, the likes of ComfortDelGro need to evolve if they are to stay in business. IMD’s Yu says the Grab-Uber merger represents a further evolution of the private transport system. “The most lasting contribution to the industry is the shift of consumer expectations and the realisation of a technology platform. Before Uber and Grab and Didi and Go-Jek, the taxi industry had been set in its own comfort zone, with no motivation to improve the customer experience. Only through hard times did the taxi industry around the world begin to embrace digital platforms of their own. In this regard, the future competition may be less about ride-sharing companies and more about freelance drivers facing off against professionals,” he says.

Ride-hailing apps have caused consumers to modify their behaviours in ways that do not benefit traditional taxi operators. Price hikes may cause some commuters to rethink the frequency with which they hail a private car, but other behaviours may not change as much. “I think the lasting consequence is that many commuters now think first of booking a ride using an app and not by going to a taxi stand or waiting by the roadside,” says SUSS’ Theseira. “The real question is how costly it is to operate the system, and whether the market can continue the way it has today — with widespread usage, owing to low prices and high wages for drivers. I think the market will continue, but prices must change to be sustainable.”

This article appears in Issue 824 (Apr 2) of The Edge Singapore which is on sale now

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