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Grab, GoJek, Didi and why it's hard to find winners in the few really successful EMs

Ben Paul
Ben Paul • 10 min read
Grab, GoJek, Didi and why it's hard to find winners in the few really successful EMs
SINGAPORE (Feb 18): They say there is no such thing as bad publicity. For GoJek, at least, the recent altercation between one of its drivers and a female passenger, who turned the phrase “Is it because I’m Chinese?” into a popular meme, has arguably
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SINGAPORE (Feb 18): They say there is no such thing as bad publicity. For GoJek, at least, the recent altercation between one of its drivers and a female passenger, who turned the phrase “Is it because I’m Chinese?” into a popular meme, has arguably done more to promote its brand than any carefully crafted marketing plan could have.

More than a fortnight after the whole incident, many people are still making jokes at the expense of the passenger, who accused her driver of being “out to cheat [her] money” by taking a route that included Electronic Road Pricing gantries, and kidnap her when he drove to a police station to resolve the dispute in a car with doors that lock automatically. On the other hand, the driver seemed to display remarkable grace under fire, though some question whether he should have shared his video recording of the whole argument online.

Whatever happens next, the incident has helped GoJek get a running start in building awareness of its presence in Singapore, a place where ride-hailing apps are no longer a novelty. Grab and Uber spent more than three years battling each other here, offering commuters as well as drivers all manner of incentives. In the process, they grew the market tremendously. There were reportedly twice as many private-hire cars than taxis on the road in Singapore last year.

Then, in March last year, Grab said it would acquire the Southeast Asian operations of Uber. On the face of it, the deal was an unlikely victory for Grab. Uber is a global player, and had raised funds on terms that valued the company at more than US$60 billion ($81 billion). On the other hand, Grab’s business is focused on Southeast Asia, and it is reportedly valued at only US$6 billion.

Yet, Uber has also beaten a retreat from other international markets in the face of tough competition from small but scrappy local players. In 2017, it merged its operations in Russia with Yandex.Taxi, a unit of the Russian search giant Yandex. More significantly, in 2016, Uber’s business in China was acquired by Didi Chuxing in a US$35 billion deal.

Didi Chuxing is now expanding beyond China’s vast market. Last year, it acquired 99, a ride-hailing player in Brazil, the largest economy in Latin America. It has also gained footholds in other key geographical markets around the world. It has invested in Lyft in the US, Ola in India, Careem in the Middle East, Taxify in Eastern Europe and Grab in Southeast Asia. In fact, Didi Chuxing was valued at some US$56 billion at a funding round last year, putting it almost on a par with Uber.

Still, it is not clear who will ultimately win this war; or, even if ride-hailing is actually the war that all these players are fighting. The ubiquity of mobile internet access as well as geolocation and payments technologies that make ride-hailing possible is finding many other useful applications, such as food delivery and electric vehicle sharing. Indeed, the major ride-hailing players have invested in exactly these alternative businesses, which could conceivably grow and morph into something just as exciting as their core businesses over time.

However, the players in these emerging fields are likely to have to fight off waves of competitors before they entrench any lasting leadership position. And, companies that appear to be leading today might not necessarily be in the same position tomorrow. GoJek’s launch of its ride-hailing service in Singapore last month, in the face of a dominant player like Grab, is a clear indication that the competitive spirit of the entrepreneurs and financiers behind these companies is alive and well.

Will emerging markets take off?

The issue of corporate and economic competitiveness came to mind over the last couple of weeks as I was thinking about investing in emerging markets. Even after a 7.9% bounce in the MSCI Emerging Markets Index since the beginning of 2019, this benchmark is still down more than 10.5% over the past 52 weeks. By comparison, the Standard & Poor’s 500 is up nearly 9.5% since the beginning of this year, and up more than 3% over the last 52 weeks. After that relative underperformance, there has been a chorus of positive commentaries and reports on EMs from analysts and the financial media, including this newspaper.

To be honest, I’m rather sceptical about the premise for the bullishness. In 2017, the market was abuzz with talk of “synchronised global growth”. At the time, and even well into 2018, EMs were touted as attractive value plays versus the red-hot US market. But the outlook for EMs soon soured. This was partly because of concerns of a trade war as the US and China imposed tariffs on goods they imported from each other. More importantly, it seemed at the time that strong growth and inflation would prompt much tighter US monetary policy, draining liquidity from riskier international markets.

The result was that EM countries — especially those with current account deficits — found themselves having to tighten their monetary and fiscal policies to keep their currencies stable as global liquidity receded. Even so, there were some nasty routs in the EM space. For instance, Turkey’s lira and Argentina’s peso suffered steep depreciations. Closer to home, there was also nervousness about Indonesia’s rupiah and India’s rupee.

Since September, however, things have changed dramatically. With US growth expected to slow, the US Federal Reserve has turned more dovish. Some market watchers are now expecting the Fed to hike rates only once or twice in 2019, instead of the three times that many were previously forecasting. The 10-year Treasury yield has fallen to less than 2.7% currently, from more than 3.2% in September. Meanwhile, there is growing optimism that the US-China trade war will not get any worse.

But can any rebound in the EM space last if US growth continues slowing? And, if US growth were to accelerate, wouldn’t further Fed tightening weigh on EM currencies and asset prices again? Is there a case for investing long term in EMs now?

Small group of outperformers

EMs are often said to be the growth engine of the world. Indeed, over the past 15 years, these economies — led by China and India — have accounted for almost two-thirds of the world’s GDP growth, and more than half of all new consumption. Yet, the performance of individual EM economies has varied widely, and only a handful of them are showing any real prospect of growing their per capita GDP fast enough to catch up with developed countries.

McKinsey Global Institute analysed the per capita GDP growth of 71 developing economies since 1965 in a report published in September last year. Of the 71 economies, only seven achieved real annual per capita GDP growth of 3.5% from 1965 to 2016. This threshold is the average growth rate required by developing economies to achieve upper middle-income status as defined by the World Bank within a 50-year period. The seven countries in this rarefied group are China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Thailand.

The report also identified another group of 11 “more recent, less heralded and more geographically diverse” outperformers that have achieved real annual per capita GDP growth of at least 5% from 1996 to 2016. This was 3.5 percentage points over the per capita GDP growth of the US, and sufficient to lift them by one income bracket as defined by the World Bank. The 11 countries are Azerbaijan, Belarus, Cambodia, Ethiopia, India, Kazakhstan, Laos, Myanmar, Turkmenistan, Uzbekistan and Vietnam.

The stories of all 18 of these outperformers are quite similar. Essentially, their growth was driven by increasing productivity, through the accumulation of capital and technology. The outperformers were able to tap relatively high levels of domestic savings to support this capital accumulation. They also pulled in 70% of the roughly US$900 billion in foreign investment that went to all EMs between 2000 and 2016.

In addition, the outperformers found global markets for their goods and services. Their share of global inflows and outflows across goods, services and finance grew from less than 7% in 1980 to more than 19% by 2016. And, as productivity growth took off, the gains were distributed through their economies in the form of more jobs and higher wages.

Challenge of identifying winners

The most interesting point made in the report related to the role played by the globally competitive, nimbly managed and highly productive companies in these developing economies. “In the 18 outperforming countries, we find that these firms, backed by macroeconomic and other enabling policies, not only helped boost GDP but also are catalysts for change at home,” the McKinsey report notes.

For instance, the top companies in EMs are big innovators, deriving 56% of their revenue from new products and services, eight percentage points more than their peers in advanced economies, according to the report. They also invest almost twice as much as comparable businesses in advanced economies, measured as a ratio of capital spending to depreciation.

The most successful companies in EM countries are also 27 percentage points more likely than their peers in developed countries to prioritise growth outside their home markets. As a result, some of them have become formidable global players. For instance, Thailand’s CP Group — which is involved in agribusiness, real estate, retailing and telecommunications — has been a big investor in China for decades, the report points out.

While the dynamism of the fastest-growing EM economies spells opportunity for investors, identifying the eventual winners is a big challenge. In the first place, there are lots of big companies (defined in the report as companies with annual revenue growth of at least US$500 million) vying for the spoils of growth in the 18 EM outperformers.

Specifically, there were 160 big firms per US$1 trillion of GDP in the 18 outperforming EMs in 2016. By comparison, there were only 80 big firms per US$1 trillion of GDP in non-outperforming EMs and 95 big firms per US$1 trillion of GDP in advanced economies. In the outperforming EMs, some 22% of firms account for 80% of all big-company revenue growth, versus only 8% in advanced economies.

Competition is also evidently brutal in the outperforming EMs. Only 45% of the big firms that reached the top quintile in terms of economic profit generation between 2001 and 2005 managed to maintain that position for a decade, according to McKinsey. In advanced economies, 62% managed to maintain their position during the same decade.

Another problem for ordinary investors, in my view, is that some of the most obviously productive companies that are proving to be potent catalysts for change are not listed. That includes the likes of Grab, GoJek and Didi Chuxing. By the time any of them go public, much of the value they are creating might have already been realised. In short, the intense competition and aggressive risk-taking that fuels the dynamism of the fastest-growing EMs in the world might not be the place for Buffett-esque investors who crave bargain stock prices as well as reliable corporate earnings.

This story appears in The Edge Singapore (Issue 869, week of Feb 18) which is on sale now. Subscribe here

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