Ride Hailing in Emerging Markets Is More Than Transport
When Apple introduced the iPhone in 2007, only the most prescient of market observers would have prophesied that the smartphone would lead to a coming upheaval of urban transport. Just over a decade later, ride-hailing platforms rank as the most significant of the many revolutions the smartphone has wrought. In 2017, some 16 billion rides were taken worldwide, a number set to rise to 24 billion in 2018.1

In this, the third in our series of blogs on China/Asia innovation, we delve into a burgeoning technology segment that is increasingly intriguing in its vast potential for ubiquity: ride hailing and its adjacencies. It is an exciting area in which we envision extraordinary companies will outperform thanks to real options arising from idiosyncratic context unique to their geographies, including inequality and superior driver economics in the emerging world.

Emerging Market Size and Opportunity Are Much Larger

Over the past 5 to 10 years, technology has had a significant effect on economies across the globe, but the size and speed of the impact on emerging economies has been the most profound. In the case of ride hailing, underdevelopment in the physical transportation world has allowed for a leapfrog effect to the virtual world in emerging markets (EM). Of the 16 billion rides taken in 2017 globally, two-thirds were handled by Uber, China’s Didi, and Southeast Asia’s Grab.2 Adding India’s Ola, Go-Jek in Southeast Asia, and Careem in the Middle East, Asia alone took 70% of all ride-hailing trips in 2017.3 While Uber boasts 3 million drivers on its platform globally, Didi has onboarded 21 million, of which 5 to 6 million are active each month.4

This rapid adoption is a result of unique characteristics shared by many emerging markets: vast populations, coupled with social inequality, that have created a foundation for abundant driver supply and sustainable driver economics.  These characteristics have enabled ride-hailing leaders to offer pioneering services.

A Blessing in Disguise: Inequality and Driver Economics

Ultimately, the long-term profitability of the ride-hailing ecosystem hinges on the sustainability of platform economics and distribution. Our way of looking at this sector does not differ from our analysis of systemic ecosystem profitability for marketplaces, which is largely about a balance between the gross merchandise value and merchant take rates. Similar to Alibaba’s consistent emphasis on merchant and brand empowerment through technology infrastructure support, ride-hailing businesses will only be sustainable on a large scale if platforms can ensure drivers that the economics will work for them.

One way platforms accomplish this is by aggregating expenses to reduce driver unit costs. With the capacity to collect and analyse meaningful data from other high-frequency use cases, ride-hailing platforms can add value by providing route optimisation and effective price segmentation through dynamic algorithms. The asset, in this case the vehicle, can operate during multiple shifts through creative methods such as co-ownership or financial firm ownership, which can reduce capital and operating unit costs.

As platforms experiment with ways to improve driver economics, be it through different tipping mechanisms, smarter customer segmentation, or dynamic routing and utilisation, they are all seeking a more mature operational mode that supports systemic ecosystem profitability. In essence, it is the pursuit of a sustainable balance between enabling adequate driver incomes and maintaining a profitable take rate.

Full-time drivers generally experience a greater than median level of income across Asia. Exhibit 1.  At about $10 per ride, Uber drivers make about 2.7 times as much as those driving for Didi or Grab.5  But the cost of their time is also higher. The minimum wage per hour in the United States, at $8, is about 3.5 times the rate in China or Southeast Asia.6 This means that a driver in Asia is more likely to cover the minimum wage, and potentially make multiples of it by devoting more hours to driving. For example, Didi drivers who work eight hours a day can make a net income of RMB14,000 a month,7 about four times the salary of the typical taxi driver in Beijing. In contrast, only the most hard-working Uber drivers, and only in select high-density cities such as New York or San Francisco, clock annual earnings of $70,000,8 which would still be just over 2.3 times the income of the typical U.S. taxi driver.9

Exhibit 1: Driver Economics Underpinned Success of Ride Hailing in Asia

Ride-hailing companies need to focus constantly on improving driver economics as their single most critical mission, in our view. Platforms could also empower drivers by facilitating aggregation of equipment purchases and negotiating discounts for fleet purchasing. This concept would also apply to insurance shopping, fuel purchases, development of third-party asset ownership/lease, etc.

Ride Hailing Fills Transport Gap Across Asia

On the demand side, low levels of passenger car ownership, coupled with the inadequacies of public transportation alternatives, have provided significant catalysts for the widespread adoption of ride-hailing and its derivatives. Further, asset utilisation levels for non-commercial automobiles are typically low. Developing countries, by definition, have low income levels, and thereby low discretionary capacity to own vehicles, which are, for most households, the single largest durable expenditure they are likely to make. Measured by National Gross Income per capita over average purchase price, new passenger cars are 50% less affordable in China versus the United States, and far less affordable in most developing economies in Southeast Asia and Latin America! Throw in fuel costs, maintenance, insurance, asset depreciation, and finance costs, and one can quickly see the lure of ride-hailing services among the poor. Moreover, in many large Asian metropolises, registration costs are high in an effort to curb congestion and pollution.

Despite significant infrastructure investment across Asia, investment in public transport has not kept pace with urbanization trends.  According to the United Nations, Asia is home to 54% of the world’s urban population. In China, 60% of the population lives in urban areas compared to just 26% in 1990.10 However, unlike developed Asian metropolises like Tokyo, Seoul, and Singapore, where 60% to 80% of inter-city mobility needs are fulfilled by a public transport system, urban cities in China have a public transport adoption rate of just 30% to 50%, thanks largely to less developed infrastructure.11  In Southeast Asia, the rate is below 30%.12

Ride-hailing platforms are filling these transport gaps. Platform companies are beginning to collaborate with public transport authorities to explore opportunities around carpooling and multi-mode transport.

Local Context Matters for Adjacent Businesses

Opportunities are emerging in many developing countries for ride-hailing platform monopolies beyond simply passenger transport. The greater relevance of ride-hailing to lower income countries, outlined above, is a function of historic context. Context also frames opportunities in adjacent businesses, which are relatively insignificant to Uber, its Western competitors, and even Didi in China. We see two big opportunities that the twin Southeast Asian giant platforms – Grab and Go-Jek – are tackling today. 

First, food delivery has the same inherent edge in the developing world as ride hailing (massive pools of low-cost labour) and is growing at rapid rates. In fact, food delivery literally rides on top of the inequality of ride hailing in every market, namely the large surplus of under-employed driver-entrepreneurs. In Jakarta, two-wheelers that can zip around town avoiding traffic (and quite often roads!) to complete trips dominate the ride-sharing segment. Drivers for Grab and Go-Jek minimise downtime by providing efficient food delivery services that operate using the same concept.

This opportunity is not as readily apparent in larger markets like China or the United States, where standalone companies already have achieved inherent natural advantages. For example, the aggressively competitive Chinese food delivery/local services market led by Meituan and Ele.me constrains Didi’s horizontal expansion; in the United States, Uber Eats has found it difficult to gain critical mass against the established Grubhub.

Second, digital payments are a natural extension of high-frequency use cases like food delivery and ride hailing, bringing meaningful upside as it leads to the development of full-fledged fintech platforms. This dynamic is illustrated by Alibaba and its online payment platform, Alipay, in the context of e-commerce. Similar to how Alibaba created Alipay to encourage buyers on its e-commerce marketplace to trust third-party sellers (by allowing Alipay to hold payment in escrow until the buyer is satisfied with the product), both ride hailing and food delivery services are the intuitive high-frequency use cases that draw consumers to deposit money into bank accounts and e-wallets. Payment infrastructure not only helps platform companies like Grab and Go-Jek in pricing and take-rate standardisation, but also ignites potential in areas such as credit intermediation, insurance, and wealth management. Exhibit 2. Southeast Asian markets are well positioned to leapfrog swiftly in this aspect, thanks to their historically underdeveloped offerings of payment options. With the exception of Malaysia and Singapore, most people in the region don’t own credit cards or even bank accounts.13

Exhibit 2: Opportunities Beyond Transport -- Interesting Optionality in SE Asia

Lumping together all of these unique, yet logical, scenarios beyond ride hailing, the industry leaders in geographies with underdeveloped technology infrastructure stand to gain the most. Ultimately, whoever owns the data reigns, as the more data a company aggregates through different service scenarios, the more it knows about individual users and the better it is able to cater to their needs. This data collection and analytics capability also feed back to the implementation of various efforts for driver economics improvement, such as customer segmentation and dynamic routing.

Consolidation Power Behind the Global Ride-Hailing Consortium

Didi, along with its investor SoftBank, has been ramping up global ride-hailing consolidation through investment. The Chinese ride-hailing giant has invested in Lyft, Uber, Grab, India’s Ola, and the Middle East’s Careem. Meanwhile, Softbank runs a $100 billion tech fund, which has enabled the investment powerhouse to bypass its peers, as well as Chinese and U.S. tech giants, to strike deals with startups under the overarching thesis of Artificial Intelligence. Having tightened its grip over the global ride-hailing sphere, with estimated stakes of 15% in Didi, 17% in Uber, 27% in Ola, and 20% in Grab, Softbank is poised to loom large over the global ride-hailing landscape. Its influence on these companies can be inferred by the recent Grab-Uber merger in Southeast Asia. Betting on the disruptive impact of autonomous vehicles (AV), Softbank has also been making a number of investments related to changes in mobility: NVIDIA, a key provider for companies looking to add automated driving; Arm, a key chip designer enabling AV; and GM Cruise, an autonomous driving operator, to name a few.

Significant Challenges Remain

It is important to realise that recent numbers across almost all regions are being adversely impacted by the embryonic stage of market development in the form of driver and consumer subsidies. In Asia, discounts to consumers remain high, at around 6% of gross revenue, whereas Uber has reduced these to under 2%.14 Aside from competition-induced market development, regulatory attention in China has ramped up after some unfortunate crimes involving Didi drivers. Growing new businesses in food delivery and fintech are likely to take a toll on Grab’s profitability, even as its ride-hailing business improves after the exit of Uber from the region. Even so, Grab enjoys a full suite of optionality that very few other platforms can access.

The story of ride hailing is indeed a global one. As consolidation continues to take place amid the evolving global competitive topography and technological advancement in areas like artificial intelligence and data analytics, we are confident about the multitude of real options lying ahead, and believe that truly audacious companies that are able to grasp these opportunities will be able to leapfrog global peers.

 
  1. ^Source: ABI Research, 9/4/18.
  2. ^Note: Uber, Didi and Grab are averaging 15 million, 25.5 million, and 5.3 million rides a day, respectively, as per company disclosures and media reports, as of 2018.
  3. ^Source: ABI Research, 9/4/18.
  4. ^Source: Company disclosures and media reports, as of 2018.
  5. ^Note: Based on disclosed financials for Uber, and industry discussions for Didi and Grab, mid-2018 data.
  6. ^Source: World Bank figures, 2017.
  7. ^Source: South China Morning Post, Didi Chuxing says it employs 3.9 million retired soldiers as drivers, easing China’s jobless veterans problem, 7/30/18.
  8. ^Source: RideGuru, https://ride.guru/content/resources/driver-payout-take-home#DIDI, accessed 11/18.
  9. ^Source: PayScale, https://www.payscale.com/research/US/Job=Taxi_Driver/Salary, accessed 11/18.
  10. ^Source:  United Nations, Department of Economic and Social Affairs, Population Division, 2018.  
  11. ^Source: World Economic Forum for Developed Asia Metropolises and Local Government Reports for China, 2018.
  12. ^Source: Boston Consulting Group, Unlocking Cities – The impact of ridesharing in Southeast Asia and beyond, 11/17.
  13. ^Source: KPMG research, 2016.
  14. ^Source: Uber disclosures and media reports.

Oppenheimer Developing Markets Fund Top 10 Stock Holdings by Issuer

Alibaba Group Holding Ltd.6.0%
Taiwan Semiconductor Manufacturing5.4
Novatek OAO4.5
Glencore Plc4.1
Tencent Holdings Ltd.4.1
Kering3.7
Housing Development Finance Corp.3.2
Kotak Mahindra Bank Ltd.2.8
AIA Group Ltd.2.7
LVMH Moet Hennessy Louis Vuitton2.4

All holdings are as of 10/31/18, subject to change.