Ride hailing in emerging markets is more than transport

Geographic idiosyncrasies across Asia have fueled the ride-hailing industry and adjacent businesses.

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.

The 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 each month.4

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 driver registration.

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 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 driver.9

Figure 1: Driver economics underpinned success of ride hailing in Asia
Driver take home income vs median disposable income, Beijing and NYC

Source: Bjstats.gov.cn, 2019. Income shown in USD.

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 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. 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

Further, 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 below 30%.13

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

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 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 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

Source: Invesco, as of 11/18. Number of boxes corresponds to company’s relative investment in sector, compared with ride-hailing business, X signifies service not offered by company.

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.

Footnotes

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 available.

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, as of 11/18.

9. Source: PayScale, as of 11/18.

10. As 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.

14. Source: KPMG research, 2016.

15. Source: Uber disclosures and media reports.

Important Information

Blog header image: d3sign / Getty

An investment in emerging market countries carries greater risks compared to more developed economies.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The mention of specific companies, industries, sectors or countries does not constitute a recommendation on behalf of Invesco.

Justin Leverenz, Team Leader and Senior Portfolio Manager

Justin Leverenz is a Team Leader and Senior Portfolio Manager for the OFI Emerging Markets Equity team at Invesco.

Mr. Leverenz joined Invesco when the firm combined with OppenheimerFunds in 2019. He joined OppenheimerFunds in 2004 as a senior research analyst. Prior to joining OppenheimerFunds, Mr. Leverenz was the director of Pan-Asian technology research for Goldman Sachs in Asia, where he covered technology companies throughout the region. He also served as head of equity research in Taiwan for Barclays de Zoete Wedd (now Credit Suisse) and as a portfolio manager for Martin Currie Investment Managers in Scotland. He is fluent in Mandarin Chinese and worked for over 10 years in the greater China region.

Mr. Leverenz earned a BA degree in Chinese studies and political economy and an MA in international economics from the University of California. He is a Chartered Financial Analyst® (CFA) charterholder.

 

Bhavtosh Vajpayee is a Director of Equity Research for the OFI Emerging Markets Equity team at Invesco. In this role, he focuses on technology investments.

Mr. Vajpayee joined Invesco when the firm combined with OppenheimerFunds in 2019. Before joining OppenheimerFunds, he worked at Sanford C. Bernstein as an Asian internet analyst, at Barclays as head of equity research for Asia ex-Japan, and at CLSA as head of technology research, all based in Hong Kong. Mr. Vajpayee joined the financial services industry in 1999 and has researched various segments of the technology sector, based in Hong Kong, India, and New York.

Mr. Vajpayee earned an MBA from the Indian Institute of Management, Ahmedabad, India, and a B.Tech from the Indian Institute of Technology, Kanpur, India. He is a Chartered Financial Analyst® (CFA) charterholder.

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