Uber, Ola enter new phase of competition, take a risky road to growth

With the Uber CEO affirming its commitment to India, the big two ride-hailing aggregators are entering a new phase of competition

It might be a difficult market to crack, especially when the average revenue per user (ARPU) is one tenth of the global average at $11. The combined revenues of ride-hailing companies in India do not make it to the top ten markets in the globe, with China grabbing half the global revenues $57,705 million.  India’s contribution to global revenues of the ride-hailing companies is expected to be a minuscule 0.65 per cent at $371 million this year, according to Statista, a global firm that tracks the sector.

So why is it still such an attractive market? That’s because 7 per cent (33 million users) are in India. And with 1.7 million rides a day, according to Bengaluru-based RedSeer Management Consulting, they have already grabbed over 11 per cent share of total rides across the globe.

India is also one of the fastest growing markets — according to RedSeer, the number of rides grew 30 per cent in 2017 over the previous year, while the gross booking value (GBV) of ride-hailing companies has hit $2.1 billion, a 40 per cent jump in the same period. For Uber, India accounts for as much as 10 percent of total rides globally.

It is this promise of a huge market that prompted Uber CEO Dara Khosrowshahi to deny in no uncertain terms the rumours that his company might pull out of India owing to mounting losses and competition. The concerns looked serious as Softbank, its new investor, nudged the company to look at the US, Europe and Latin American markets to drive profitability. But Khosrowshahi, who was on a two-day whistle stop visit to India last week, said: “India is a core market and we will continue to invest here. If we succeed in India with our product and quality, it will be the laboratory for the next six billion customers who will have access to our products.”

Khosrowshahi’s assurance means that Uber and competitor Ola, which jointly account for 95 per cent of the Indian market and, interestingly, share Softbank as a common investor, are headed for another head-to-head battle. Uber, say experts, has been losing market share to Ola in India and would like to wrest its number one position (neither companies share their numbers).

This time, the nature of the battle will be different. Both are focused on the overall transportation business, in which taxi services are only a part; the extended ambit includes autos, motorbikes, cycles, electric vehicles, water transport as well as food delivery services or anything that entails moving an individual or a product from one place to another.

The next battleground is the aggregation of over three million auto-rickshaws across the country. A few weeks ago, Uber decided to re- launch its auto-rickshaw service after closing it two years ago, starting with Bengaluru and Pune. Ola has a head start with over 200,000 partners.

So far, however, the cash-heavy business-building template is unchanged: offering drivers incentives they cannot refuse. Ola has announced Auto Unnati in south India, starting with Bengaluru, which guarantees income of  Rs 40,000 a month to auto drivers and tops it up with a Rs 500,000 insurance cover. Those in the know say that with an average income of  Rs 25,000 –Rs 30,000, the churn of drivers will be substantially reduced.

The focus on auto-rickshaws (India has more than three million of them) could substantially increase the number of active paying customers, who account for just 2.5 per cent of the total population, according to Statista. Also, it would bring in newer consumers who currently cannot afford cabs.

Can the taxi model work for auto-rickshaws? A senior executive of Bajaj Auto says the dynamics are different. “Autos, unlike cars (which also travel intercity) are easily available on the roads, so aggregation does not make sense. Also, drivers might not get enough additional business to justify paying commission to aggregators.”

He may have a point. Especially as attempts to aggregate other modes of transportation like bikes (offered by both Ola and Uber) and cycles have not really gained traction, though these are early days. Says Anil Kumar, CEO of RedSeer: “I think the auto-rickshaw business will grow but the others like mobikes have not really taken off.” His company estimates that for aggregators, autos already account for 4 per cent of their overall GBW.

The two are also waging another war — in the $3 billion-plus online food delivery business, which is set to grow at 17 per cent for the next few years. Uber has been ahead of the race in the food delivery business. Ola took everyone by surprise when it bought over FoodPanda.

The bread and butter cab aggregation business remains, but the money will go into the car-pooling or sharing business to attract more consumers with a view to upgrading them to premium taxi offerings later. It is a category that accounts for 11 per cent of GBV, but as Khosrowshahi acknowledged, “We are currently building this as a new category and it is globally loss making”. The fares are highly subsidised for consumers and since the driver partner gets the normal fare on the route irrespective of the number of customers, the difference has to be made good by the company.

It is, however, clear that shareholders want the companies to cut their losses. The first key step by both is to cut down incentives to its 12,00,000 driver partners. According to RedSeer, incentive offered by the industry has fallen 50 percentage points for drivers in 2017 over the previous year. The problem is that this withdrawal has taken its toll on the networks. “The ridership growth is not being matched with a commensurate increase in driver partners. As a result, the expected time-of-arrival of performance has been impacted adversely and that could discourage consumers. Also, many entrepreneurially-driven people who bought cars and started it as a business don’t find the remuneration so attractive now.”

Khosrowshahi, however, has decided not to expand its services beyond 29 cities at least for the next three years and instead focus on consolidating its presence in these markets. The strategy, experts say, makes sense even though Ola is in 110 cities, because around 85 per cent of the revenues of ride-hailing companies come from just eight to 10 cities.

With shareholders continuing to put in more cash (Chinese investor Tencent put in $1.1 billion in Ola recently and Softbank bought 15 per cent in Uber, investing another $1.2 billion), the challenge for both is to show profit at least in the next one to two years. Given the new business plans, investors perhaps should not hold their breath.