Why these are taxing times for the Taxi Industry in India

One cannot begin to emphasise the importance of cheap taxi fare in a city where the streets are swamped with ‘kaali-peelis’ or the black and yellow taxis. Every morning and evening, during peak hours, if you pause for a look, you’ll see several hands stretched out to hail a cab to the innumerable destinations. The taxis lend life and convenience to a city, so where their fares stay low, the lives of commuters becomes easier. Let’s see some places across the world which have the highest and the lowest taxi fares, according to a study by taxi2airport.com which analysed data collated by Taxi-Calculator.com. (Image: Reuters)

By Neeraj Gupta, Founder and Managing Director, Meru Cabs

Not a day goes by when we don’t read an article on the Indian taxi Industry.

Traditionally, in India, the taxi Industry has been predominantly an unorganised sector. During the era of License Raj, right from proprietary permits being issued to individuals to conditions like the colour of the taxi, fare structure, meter, fuel type, everything was regulated.

Even the ability of a driver to speak the local language was not spared while issuing a taxi badge.

A large number of taxis and rickshaws operating in metros were vote banks for politicians and a great arm twisting mechanism for unions across the country.

Thanks to such a regressive policy it was inevitable that the quality of services kept on declining over time.

The poor urban commuter of our country had no option but to do with rickety old taxis and as he climbed up the ladder eventually buy his own car.

The congestion on the roads, poor infrastructure and lack of good public transportation systems is a recipe for disaster for any city but on the other hand, it encapsulates a great business opportunity for someone.

In the beginning of the new millennium, many state governments started realising the need of introducing large private players into the failing public transport system. Schemes like JNNURM were launched for Public Bus services and licenses were issued for Modern Fleet Taxis.

Shoddy implementation of schemes and red-tapism ensured that they could expand beyond a particular size. Although these companies bought some respite to the commuters, they struggled to scale their businesses and meet up to the consumer expectations.

For a country like India with a population of over 1.20 billion people, having over 2 million taxis and a market size of close to USD 18 billion is a number for anybody to start drooling over the opportunity. The first two numbers are based on data available but I fail to understand the basis of the ‘market size’ and completely disagree on this over exaggerated number.

Even if these are true, are these statistics really good enough for anyone to invest over USD 3 billion in this segment and continue to loose over USD 100 million every month?

Incentives & discounts being pulled back

And just when you start realising the maths is not adding up you start pulling back the large incentives to the drivers and discounts to the customers.

In a span of less than 5 years, we have seen close to a million tourist taxis that have been purchased across the country by individuals in order to be a part of this gold rush.

Middle-class average Indians who had a saving of Rs.1 lac or so were the ideal candidates for these companies.

Right from drivers to engineers, whoever had heard of this road to quick bucks, jumped into this fray.

Now the overall exposure of taxi industry is well over Rs 70,000 crores and signs of stress are beginning to show up across the spectrum.

The entire business model of Taxi Aggregation works on the theory of ‘The Network Effect’.

‘When we will make a taxi available to a customer in less than a minute, then the number of rides will go up and resultantly will the earnings of the drivers go up,’ is their argument.

On the face of it, this theory makes perfect sense but there are some hidden terms & conditions, that not everyone is able to decipher.

Just to put things into perspective, we only have ‘x’ Km of road in any city, then we have all forms of vehicles plying on these that slow down the traffic and hence limits the number of Km that a vehicle can do on a given day.

Now in these many Km, all operating costs of operating a taxi and the profits have to be taken care.

Hence, getting the economics right for the ‘Driver’ every time is the key and an unhappy driver will mean disaster for the business.

In most of the developed economies around the world as well in most parts of Asia, Traditional Metered Taxi services have been frantically expensive to use.

Profitability a challenge for taxi aggregators

Typically, a 10 km ride could cost you anywhere between Rs 1,000 to Rs 10,000. In markets such as these, with a choice of cabs and dynamic pricing available to the consumer on a click in their phones, these companies may survive and thrive.

Growth plus profitability is a possibility in these markets if they are able to overcome environmental challenges & manage competition effectively. Didi acquiring Uber in China is an example of things to come in the future.

Unlike these markets, In India, the traditional modes of transportation though not up to the mark, have been extremely cheap.

Let us not forget, the Indian consumer is extremely price sensitive and wants value for every rupee that he spends.

Ownership of a vehicle is a status symbol in our country and improvement in infrastructure and alternate modes of transport will shift our value conscious Indian consumers to these overnight.

Now coming back to the billion dollar question of what will be the fate of such companies? I think we have a lot to learn from what is happening in the international markets.

The initial euphoria of these companies is now fading out and fundamental questions of sustainable growth and profitability will be the next big answers they will have to be ready with.

The threat from uncertain regulatory environment stressed driver partners and competition coming from automobile majors also entering in a commoditised segment like this can wipe out the company from a market overnight.

And of course, next level of disruption from driverless cars & flying cars are not piped dreams any longer.

As far as Indian market is concerned, naturally due to the sheer size of the deemed opportunity, in the last years, we have witnessed a surge of tourist taxis being pumped into the system by the taxi aggregation companies.

Eyeing profitability at a time when the growth is tapering down might prove to be a double whammy.

Oversupply of cabs causing traffic

Oversupply of cabs is causing multi-fold damage leading to congestion on roads, less earnings, longer working hours and mounting frustration for the driver community. Also, uncertainty on the regulatory front is constantly keeping these companies on the edge.

Finally for these companies to survive, fundamental questions such as what is the right number of taxis required for a market, what is the right pricing for consumers and drivers, should the existing network of black and yellow be integrated and how this battle of last man standing should end, needs to be addressed quickly.

There are no easy answers and there are no quick fixes here. Out of those, who are a part of this roller coaster ride, many will lose their livelihood and much more will face the brunt of their changing business models.

In times like these, for companies like Meru that got caught in this crossfire, reinventing and remodelling their businesses could prove to be a game-changer for them. Maybe the next level of disruption will pave the way to end these taxing times for the Taxi Industry.

(Edited for Moneycontrol. Views are personal. )