Podcast | Speculations around Ola-Uber merger heat up. Road ahead for Uber India

What are the ramifications of SoftBank having a stake in Ola as well as Uber?

Is Uber following the same path in India as it did in South East Asia and is SoftBank pressuring a merger of Uber with Ola?
The big question we are asking is just what is the future of Uber in India? That is what we are asking on our Deep Dive today. My name is Rakesh, and this is Moneycontrol.

THE LATEST FROM UBER
Before we answer all of these questions, let us try and find out just where Uber is right now. Uber once wanted to expand all over the world but last week, it added to its list of big strategic retreats in South East Asia with a little help from one of its biggest investors, SoftBank. In an email to the staff, Uber's CEO Dara Khosrowshahi said that the company would merge with its big South East Asian rival Grab. Uber would get 27.5 per cent stake in the combined firm, 500 staff members would shift to Grab and customers would be transitioned to the Grab apps.

And this is in the wake of similar such events in the past two years. Less than two years ago, Uber did a similar thing in China when it ceded control of the market to rival Didi Chuxing. It followed suit in Russia through a merger with Yandex Taxi.

In the beginning of this year, Japanese tech conglomerate SoftBank invested as much as 9.3 billion dollars in Uber and told the company to focus on core markets in the US, Europe, Latin America, and Australia. Missing from the list conspicuously are India and South East Asia. Meanwhile, Softbank and Didi are increasingly partnering up and last July the two companies invested as much as 2 billion dollars in Grab.

Uber has been on a handing over spree to Grab in countries like Vietnam, Cambodia, Malaysia, Thailand, Myanmar, Philippines, Indonesia and Singapore. It has finally come down to just which battles Uber can win and which ones it can gracefully bow out of.
In the letter to his staff, Khosrowshahi went on to say and we quote, "One of the potential dangers of our global strategy is that we take on too many battles across too many fronts and with too many competitors. This transaction now puts us in a position to compete with real focus and weight in the core markets where we operate, while giving us valuable and growing equity stakes in a number of big and important markets where we don’t." On being questioned if Uber was taking the merger route with Ola in India, Khosrowshahi said on his visit to India and we quote, "The great news about our Grab deal is that it allows us to double down to invest aggressively in our core markets - and we consider India very much as core to Uber's success. We will look at any deals that can add value to its partners and shareholders, but we believe in controlling our own destiny in India.”

OLA AND UBER IN INDIA 

Let’s quickly examine how Ola and Uber stack up against each other in India.

Uber operates in about 30 Indian cities and controls more than 35 per cent share of the taxi market. Ola operates in about 110 cities and controls more than 45 per cent of the share in India, according to Counterpoint Research. It also has a digital wallet called Ola Money and offers an in car entertainment platform like Prime Play during longer trips.

In India which marks more than 10% of its global rides, Uber has only one rival, Ola, but in South-East Asia and China, it has had to battle numerous local operators. Both companies claim leadership in India. In terms of market share, Ola has over 10 lakh registered driving partners across 110 cities while Uber has 4.5 lakh driving partners across 30 cities.

According to other independent analysts, Ola controls 70 per cent of the market while Uber commands 26 per cent. Uber has also been trying to match step by step Ola's tactics here including motorcycle hailing and autorickshaw hailing services. This has been the second time that the autorickshaw hailing service has been introduced after it was withdrawn in 2015. So, doing it right this time was also important for Uber.

UBER’S ATTEMPTS TO KEEP UP IN CORE AND NON-CORE MARKETS

Despite all these efforts, Uber seems to be losing ground to various local competitors across the world. Anyone who has taken a taxi in the crowded lanes of South-East Asia has always known that Uber was always an also ran in this region compared to Grab which was the dominant player. Uber in comparison had less cabs and few localised services. So when the news came out about Uber and Grab's merger, it was just a confirmation of what everyone knew already – that Uber was simply not keeping up.

Though, it should be noted, not for lack of trying.

Uber has raised more than 20 billion dollars in funding since its inception in an effort to bring its service to nearly every market on earth. But an inability to scale and localise quickly in certain markets has left more than enough room for local players to gain traction and fend off Uber's advances. Yandex Taxi in Russia, Didi Chuxing in China, Grab in South East Asia and Ola in India. It is not a pattern that is restricted to its non-core markets. There has been a slow change in what Uber sees as its core markets as well.

Take for example Latin America, which Uber considers part of its core markets.

SoftBank invested in Brazil-based ride-hailing app 99 last year before China's Didi (which also counts SoftBank as an investor), bought 99 outright. For context, Uber is the largest ride hailing app here. Rio de Janeiro and Sao Paulo are Uber's biggest cities globally when it comes down to the number of rides but here too SoftBank and Didi are making their presence felt.

In Mexico, one of Uber's most profitable markets and one where it enjoys a near monopoly, Didi is mixing things up by planning to launch its first international service. Didi – which we will remind you again counts SoftBank as one its investors – has raised nearly 4 billion dollars in December, just 8 months after having raised 5.5 billion dollars and merely a year after  having raised 7.3 billion dollars from backers that include big names like Apple. So it has raised nearly 20 billion dollars in funding which gives us an idea about how much clout it wields and how much expansion it is potentially capable of.

And even outside the emerging markets of South East Asia and Latin America, Uber is facing troubles. German automobile giant Daimler via its MyTaxi ride hailing offshoot has acquired Greece's Taxibeat to challenge Uber in Europe. Taxibeat also currently operates in Peru and Daimler's MyTaxi has said that it plans to invest in expanding operations across Latin America though it appears to be only limited to Chile right now. The point being that even in the markets of Latin America and South America, many competitors are propping up their technology-based urban mobility services to challenge Uber.  In related news, Daimler and BMW have announced a merger of their ride hailing units to challenge Uber and similar services.

Having surveyed many prominent markets, now let us turn to the Middle East and Africa.

Didi has already invested in Dubai-based Careem which operates in more than a dozen markets as part of a broader strategic partnership. It is however becoming clear that Latin America will be the next big battle ground for Uber. Uber has always had the first mover advantage but when it moved into all these territories, SoftBank and Didi's many billion dollars did not exist. Now, Uber can expect a tough time not only in expanding its service but also retaining its existing hold. Speaking about Uber's recent merger with Grab, Khosrowshahi  suggested that the company's future growth will be organic rather than through mergers and acquisitions. It is fair to ask if consolidation is now the strategy of the day given this is the third deal of its kind from China to Russia and now South-East Asia but the answer from him is, "No."

The bottomline is that Uber is facing a major battle in at least two of its core markets with a combined population of more than 300 million people. Didi is already reportedly poaching management staff from Uber in Mexico and Didi's money – 20 billion dollars to be exact – will go a long way in testing Uber's resolve to stay not just in Brazil but elsewhere. Here, we should also talk about Easy Taxi which is based in Sao Paulo and also operates in a number of Latin American markets like Argentina, Panama, Chile, Mexico, Bolivia, Peru, Brazil etc. Easy Taxi has not yet come to the attention of Didi, SoftBank or Uber but it has raised over 18 million dollars in funding.

As the battle heats up in Latin America, it remains to be seen what route Uber will take. Will it go the M&A route or will it continue to insist that its growth will be organic?

OLA & UBER: WHAT WOULD SOFTBANK DO?

Amidst all the market expansion and consolidation challenges comes the news that Uber is considering a public offering in 2019. With this, it will make sense for the company to pitch India's growth (the story we started out with) to investors. But it also needs to balance that by showing profitability. Here is where SoftBank comes in. SoftBank is like the pushy dance mom who has two daughters but knows that one of them is simply better than the other, and wants the daughter with the better performance to claim the spotlight. And that is precisely the story that is evolving in India. Uber is apparently in talks to merge its Indian operations with Ola because SoftBank which has a stake in both these companies is putting pressure supposedly on the US transport company to stem its losses in Asia and focus on its core Western markets. Of course, we have already spoken about the trouble in those markets as well, but it is not as bad as what the company is facing in Asia.

As reported by Financial Times, Uber and Ola have held a series of discussions in the recent months to explore all possible combinations. The talks are reportedly in an early stage but an agreement could be reached within the next few months. Apparently, SoftBank has been pushing for this deal ever since it became Uber's biggest investor in December although this piece of information, as per the FT report, was denied by someone close to SoftBank.

The question dominating this conversation is this – if the merger does happen, who will be in control? Sources close to Ola have gone on to say that any deal would be an acquisition by the company of Uber's operations and the terms would need to reflect Ola's larger market share. The numbers about market share have been wildly varied with different analysts citing different statistics but one thing is for sure – Ola is in more Indian cities than Uber is.

So let us take a look at what some of the reports about Ola are saying. Ola is supposedly looking to raise a new round of funding of at least a billion dollars from Singapore-based sovereign wealth fund Temasek to diversify its investor base. And why is diversifying its investor base important? To ensure that no single investor like SoftBank is able to dictate terms. Ola promoters Bhavish Aggarwal and Ankit Bhati have supposedly put a plan in place to deal with the eventuality of a merger or a buyout to ensure that they are in management control. According to a report on the Business Standard, the strategy to not let SoftBank dictate terms entirely was based on tense boardroom battles that were seen at e-marketplace Snapdeal when SoftBank put pressure that they sell the business to FlipKart, which they resisted. Post that episode, the Japanese investor wrote off its investment in Snapdeal which explains why Ola has gone beyond SoftBank for a fresh round of funding of a billion dollars from other sources such as Temasek. As it turns out, in October last year, it also raised another billion dollars led by SoftBank's rival from China, Tencent. Because of this, SoftBank's stake supposedly fell which it might want to make up for by buying from existing investors who may want a partial exit.

To quote a report from Business Standard, Ola has changed its articles of association. According to the report, any transfer of equity shares by Ola investors who have ten percent or more of the total equity, would need a clearance from the promoters. So, SoftBank cannot raise its stake without support from promoters Bhavish and Ankit. If SoftBank wants to raise its stake, it is beholden to the approval of the duo. But SoftBank can buy stakes to maintain its overall share holding which might have come down due to the expansion of the equity base. Sources say that the holding is at 22.5 to 25 percent while the promoters have about 12 per cent. So the corporate intrigue gets more interesting and we cannot wait to see what unfolds next.

WHAT ABOUT THE CUSTOMER AND THE DRIVERS?

The other most important question in all of this is – how are we affected if the merger does take place? Is this a good thing for the consumer? Based on precedent, the answer seems to be, 'No.'

Let us take South East Asia as an example case.

As we know Uber sold out its South East Asian business to its regional rival Grab. Services throughout Asia, as they have in India, have long relied on discounts and promotions for consumers and incentives for drivers, which made for tough competition and pushed down profit margins. We all remember the times we have taken those passes where a Rs 250 ride came down to about Rs 150 and we were all happy. As were our pockets. But now Grab has said that the Uber acquisition has accelerated its path to profitability in its core transport business as it will now become the most cost-efficient South East Asian platform. While drivers have been split on which of the two services offered better compensation, they generally expected for the fares to go up in the absence of competition. So the loser in the bargain is the customer.

If there was competition, the customer would have been offered competitive prices but when there is only one big entity, there is little or no possibility of discounts. And it is not just in South East Asia. A similar pattern was seen in China following the merger between Didi and Uber in 2016. Driver numbers dropped dramatically as subsidies lapsed and new regulations raised residency permit requirements for drivers. In the year following Didi's acquisition, driver response rates fell between 15 and 40 per cent in major Chinese cities, according to Didi Chuxing's data. So no competition and the absence of incentives is bad news not just for the customer but also the drivers who cannot pick and choose.

China's official news agency Xinhua has slammed car hailing service Didi for capricious and opaque price rise in the wake of this merger, suggesting that this acquisition has caused a monopoly. Another report in 2016 right after this merger had pointed out that fares in China soared after the Didi deal with the cost of the rides nearly doubling in Beijing which is a good indicator of what might happen if Uber and Ola came to a similar deal in India.

If a deal like this does go through and Softbank softarms Uber into making it, the losers will be the consumers and the drivers because the rates will for sure go through a change and not for the better. Even now the sporadic surge pricing is incomprehensible for most of us but in the absence of competition and in the presence of just one monolithic entity in the market, the surge in pricing will become even more opaque and unavoidable. The general customer would ideally want multiple players in the market to pick and choose from, but if you were to ask SoftBank which is pumping money in this operation, the answer would be clearly different.

The driver community meanwhile in India is not too happy about the developments between Uber and Ola. Drivers threatened to go on an indefinite strike from the midnight of the 18th of March and the strike was observed in  key cities like Mumbai, New Delhi, Bangalore, Hyderabad, Pune etc. Sanjay Naik of the Maharashtra Navnirman Vahatuk Sena said and we quote, "Ola and Uber had given big assurances to the drivers, but today they are unable to cover their costs. Drivers have invested Rs 5-7 lakh, and were expecting to make Rs 1.5 lakh a month but are unable to even make half of this, owing to mismanagement by these companies.” Naik went on to further allege that Ola and Uber give preference to company-owned cars over driver-owned vehicles causing a slump in their business. While taxi-hailing companies offered loan guarantee letters to the drivers via the Mudra scheme and that too without any verification, they are defaulting on repayments now because their costs are not covered. In Mumbai alone, there are 45000 cabs on these cab aggregators but due to the slump in the business, there has been a fall of about 20 per cent in the number of cabs running on these platforms in the city. "If our demands are not met, we will go on an indefinite strike," Naik had said.

Meanwhile as early as last year, after failing to get relief from Uber and Ola, drivers from Bangalore, Delhi and Chennai were mulling launching their own app with some wholeheartedly supporting the idea and others not warming up to it. Nearly 8000 cabbies were allegedly in support of the move.

Meanwhile in Chennai, to disrupt the near monopoly of Ola and Uber, nearly 3000 cab drivers had come together to launch their own app. According to media reports, Anaithy Maghzhundu Otunar Nala Sangam - associated with the Centre of Indian Trade Unions - planned to roll out the app, especially in the light of Ola and Uber coming under fire for collecting hefty commissions from drivers and charging cancellation fees and surge prices from customers. Sampath, one of the minds behind the app, said and we quote, "The idea is to ensure that the passengers are not fleeced and drivers too enjoy the benefits of app-based cab bookings. At present, cab aggregators collect 20%-21% of the total earnings of drivers as commission over and above the Goods and Services Tax (GST). In OTS taxis, drivers will be charged only 7% along with 5 % GST towards this head."

The people putting this app together have promised that fare will take into consideration only the distance covered. The app creators also promise to not charge any hidden fees or collect from the customer any extra charge for changing the destination point during the journey. The developers have approached BSNL for a memorable contact number and efforts are on to work out a fair slab according to the model of the car. The app was supposed to be launched this March but as of now, we are not hearing of any new development.

This is of course is not new to India. The resistance comes in the wake of Europe having already revolted against Uber.  Europe's resistance highlights once again how the European regulatory structures – in principle designed to protect customers – end up protecting entrenched suppliers and stifling innovation. The contrast also shows us how governments in Europe should amend their rules to encourage entrepreneurs to develop cutting edge business models at home rather than being forced to accept innovations only after they have become best practices abroad. Anti Uber protests by cab drivers have been part of a long tradition of established suppliers challenging new technologies that could cost them their jobs.

As we said earlier, Daimler and BMW are also joining hands to combine their cab-hailing apps to present a viable resistance to the monopoly of Uber.

So the emerging trend is of resistance across the world against monopolising monoliths like Uber and Ola. Will the trend find an Indian iteration? Or will the customer suffer under the tyranny of a monolith with no incentive for customer discounts? We will have to wait to find out.