Over the past few weeks, some media such as CNBC have reported that Uber’s online transport service may sell their business in Southeast Asia to its competitor, Grab. Instead, Uber will get a share of Grab’s shares.
This “peace” will stop the fierce competition going on between them, and make Grab the only online transportation service that dominates Southeast Asia. They only stay in competition with GO-JEK, which so far only operates in Indonesia.
The question is, is this Uber step a good thing for them? What does it affect consumers? And if this transaction does not happen, can both still be profitable?
Uber still wants to stay
In 2016, Uber finally decided to sell their operations in China to its competitors, Didi Chuxing. A year later, it was the turn of Uber’s operations in Russia that changed hands to a large online transport player there, Yandex. This step they take because of their position that has been far behind from the local players.
Based on these two incidents, it is no wonder that Uber will be doing similar things in Southeast Asia. The CEO of Dara Khosrowshahi himself stated that their business in the region “will not be profitable anytime soon.”
By selling their operations to Grab, Uber can focus more on their business in the United States, Europe, and in other countries where they are market leaders. They can still benefit from the market they leave behind, thanks to the ownership of some of the shares of the company that acquired them.
On the contrary, for Grab, this can reduce the pressure for them, so they do not need to give subsidies to users too much.
The possibility of unification of Uber and Grab in Southeast Asia is strengthened by Uber’s ambition to enter the stock market within the next few years. To do so, Uber must improve their current balance sheet, and show that they can make a profit. This is certainly difficult if they continue to maintain business in areas such as Southeast Asia which actually adds to the burden of spending.
Uber himself just got funding from SoftBank, who is also an investor of Grab. In order to maximize profits, it is not impossible if SoftBank will also encourage the merging of the strengths of the two services that have received investment from them.
Even so, CEO Uber Dara Khosrowshahi also had stated that Uber will not go from Southeast Asia in the near future. They have even just launched services in Myanmar and Cambodia in 2017.
Uber seems to intend to continue “fighting”, although it will take a long time and cost is not small.
If united, will Uber and Grab continue to subsidize?
If the unification of Grab and Uber in Southeast Asia is done, then Grab will monopolize the region. This is actually not entirely bad.
“All orders will be passed by one operator that can balance supply with demand. This makes the service more effective.”
Nevertheless, Krauss also highlighted the possibility that the market lords would take advantage of this, and take advantage as much as possible. That is, subsidies such as discounts for users and incentives for drivers, could be downgraded.
This can even be exacerbated by pricing mechanisms that can rise in the surge pricing. Communities can be required to pay very high fees, and they have no alternative.
The phenomenon has occurred in China, after Didi Chuxing acquired Uber’s operations there. The South China Morning Post reported in December 2016 that Didi’s passengers began to charge higher prices, and Didi Chuxing’s driver got less incentives.
On the other hand, this also becomes an opportunity that allows the growth of other startup, which can offer similar services at a more affordable price.
Can Uber and Grab make a profit if they continue to operate as usual?
Both Uber and Grab are equally refusing to comment on the news. A Uber spokesman called the news this speculation.
But according to transport economists from Singapore University of Social Sciences, Walter Theseira, the unification of the forces of both companies is inevitable, he said as quoted by The Straits Times.
If both companies continue to share the market and compete with discounts, they will not profit.
In contrast to Theseira, Krauss argues that the online transport business does not need to be controlled by a single company. Uber and Grab can share market share, and make a profit together.
“Let’s say the two companies each have a market share of fifty percent. And they both understand that this is the end of the competition. What will happen next is that both companies will reduce subsidies, and raise prices together, so their market share will not change too much, “Krauss explained.
He also exemplifies what is happening in the telecommunications business. Typically, there will be two or three major telecom operators, with promotions and service rates not too different. They can still compete for a few percent of market share, but generally they understand that every player has got their “share” of each.
Not yet certain when the online transportation business will arrive at the point of balance. Now it all depends on the investors and officials of Uber and Grab, whether they will continue to fight for long periods of time, or to unite forces to face big players like GO-JEK.