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 that likely rose to 24 billion in 2018.1 In 2019, the growth of trips slowed in some markets, notably China and India, as platforms struggled with new regulations (in China) or attempts to cut losses (in India). But elsewhere, as in Southeast Asia, Russia and the US, trips have continued to grow, despite somewhat higher pricing from platforms.
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 have the
potential to outperform as a result of their having real options that arise from
idiosyncratic context unique to their geographies, including inequality and superior
driver economics in the emerging world.
size of the emerging markets and the opportunities there 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
In December 2018, Uber boasted 3.9 million drivers on its platform globally, but
Didi has onboarded 21 million drivers, of which about 4-5 million are active
Uber’s latest stats, for December 2018, show some 14 million
rides a day, globally. Despite a slow year, Didi in China was doing over twice
as many – 29 million rides a day – through 2019 and claiming a demand of 40
million rides per day that was not being fully met because of new regulations regarding
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.
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 analyze
meaningful data from other high-frequency use cases, ride-hailing platforms can
add value by providing route optimization 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 utilization, 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. Figure 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
14,000 renminbi a month,7 about four times the salary of the
typical taxi driver in Beijing. In contrast, only the most hard-working US 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 US taxi
Figure 1: Driver economics underpinned success of ride hailing in Asia
Driver take home income vs median disposable income, Beijing and NYC
In our view, ride-hailing companies need to focus constantly
on improving driver economics as their single most critical mission. 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
hailing fills transport gap across Asia
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. The
US has 875 registered vehicles per 1,000 people, while China is at only 164,
Indonesia at 40, and India trails at just 22.10
asset utilization 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 than they are in 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 as these cities try 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 now lives in
urban areas versus just 26% in 1990.11 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.12 In Southeast Asia, the rate is
Ride-hailing platforms are filling
these transport gaps. Platform companies are beginning to collaborate with
public transport authorities to explore opportunities around carpooling and
context matters for adjacent businesses
We believe 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 labor) 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 minimize
downtime by providing efficient food delivery services that operate using the
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
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
standardization, but also ignites potential in areas such as credit
intermediation, insurance, and wealth management. Figure 2. In our view, 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.14
Figure 2: Opportunities beyond transport — interesting optionality in SE Asia
Investments made by ride hailing services in adjacent businesses
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.
Indeed, as 2019 draws to a close, Southeast Asia’s Grab looks much different from early 2018, when all of its gross merchandise value (GMV) came from ride-hailing. Today, ride-hailing forms just about 45% of total GMV, with the rest coming from food delivery and fintech – services that were launched in early 2018 – or just six quarters back.
Significant challenges remain
It is important to realize 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 3-6% of gross revenue, whereas Uber has reduced these to under
2%.15 Driver subsidies remain high in some markets where competition
for market share is still fierce – as in Indonesia, where the battle between
Grab and Go-Jek has kept driver subsidies at or above 15%. In quieter markets,
such as Russia, these have already fallen below 5%.
Aside from competition-induced market development, regulatory attention in China has ramped
up after some unfortunate crimes involving Didi drivers. New rules around
driver registration significantly impacted driver availability for Didi all
through 2019, and may have reduced monthly active drivers from 5 million to 4
million, as per media reports and company statements. Growing new businesses in
food delivery and fintech are likely to take a toll on Grab’s profitability,
even as its ride-hailing business awaits a potential reduction of subsidies in
the Indonesian market. Even so, Grab enjoys a full suite of optionality that
very few other platforms can access.
Finally, we must recognize the role of easy money and
private equity fueled business grab in parts of global tech, from which
ride-hailing, food delivery and fintech, have not stayed immune. This also
implies that as subsidies are reduced or withdrawn, we must brace for slower
growth, potential loss of price elastic customers, and some consolidation that
will probably be just as well for the long-term health of these platforms
globally. With lower subsidies and a constructive relationship with regulators,
Yandex Taxi in Russia has achieved EBITDA (earnings before interest,
tax, depreciation and amortization) margins of nearly 20% by the second
quarter of 2019. Amid the challenges, therefore, there lurks hope that this
industry can reach a point of sustainable and steady profits.
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, most recent data
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, as of 11/18.
Source: PayScale, as of 11/18.
per Statista, stats for 2018
11. Source: United Nations, Department of Economic and
Social Affairs, Population Division, 2018.
12. Source: World Economic Forum for Developed Asia Metropolises
and Local Government Reports for China, 2018.
13. Source: Boston Consulting Group, Unlocking Cities
– The impact of ridesharing in Southeast Asia and beyond, 11/17.
Source: KPMG research, 2016.
Source: Uber disclosures and media reports.
Blog header image: d3sign / Getty
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