Competition is stiffening as ride-hailing companies extend their model into emerging markets. Even Uber, the giant of the field, faces hard choices.
Less than a decade old, the global market for using a digital app to call for a car (called ride-hailing, different from ride-sharing) is experiencing explosive growth. This year, it’s expected to post revenues of $59.6 billion, according to Energias Market Research. By 2024, Energias projects that the sector’s annual intake will reach $148.7 billion, on a compound annual growth rate of 16.4%.
As an industry—and as an investment—such services already face a landscape very different from the one that a seat-of-the-pants startup called Uber gazed upon in 2009. The world’s largest markets all have their own big ride-hailing platforms. Some, including Uber, have been burned trying to break into markets where the competition is already stiff. Some, seeking alternate routes to profitability, are now investing in related businesses like food delivery and logistics.
The reality is that ride-app players like Russia’s Yandex.Taxi, Singapore’s GrabTaxi and China’s Didi Chuxing all want to expand outside their home markets in order to grow. But many of the biggest markets are already filling up fast.
The dilemma is all too real for the industry’s first great power, Uber. After establishing operations very fast on six of the seven continents (not Antarctica yet), Uber was forced to pull out of several key markets and rethink its international strategy. When it first ventured outside the US in 2011, the company moved aggressively, plunking its US technology and business model into numerous new markets. Apart from some regulatory issues, it worked well in European markets. But in other parts of the world, local players proved harder to wipe out.
“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,” CEO Dara Khosrowshahi wrote to staff in an email published on the company’s website last March.
In China, Russia and Southeast Asia, Uber burnt a lot of cash trying to compete and ended up selling its business. In each exit deal, Uber agreed to step out of the market but retained a substantial share in a joint venture with the local rival: 36.6% of Yandex.Taxi, 27.5% of Grab, and 17.7% of Didi Chuxing. From a customer’s perspective, both applications still function in all three markets; but they are integrated at the driver level.
Now Uber is shifting its focus to countries where it is convinced it can win—and while the company lost $4.5 billion on $11 billion in revenues last year, that does not seem to be slowing it down.
“We now have resources available that are allowing us to double down in critical competitive markets, in particular India and the Middle East North Africa [MENA],” Uber COO Barney Harford said in a recent interview with CNBC. “We are able to use the profits from those markets to allow us to invest on an indefinite basis in key growth markets such as [MENA].”
Uber is particularly interested in Saudi Arabia, a fast-changing market of over 33 million people with relatively robust per capita consumer spending. In 2016, the company secured a $3.5 billion investment from the Saudi government via the Public Investment Fund.
Last June, the kingdom was the last country in the world to repeal laws forbidding women to drive, and Uber executives hope this will support their entry into the Saudi market. “Saudi Arabia is in the middle of a huge transformation, and Uber has been working to understand the needs of female drivers and riders,” says Shaden Abdellatif, communications manager for MENA at Uber. Some of its Saudi-tailored products include female driving schools and a new button that will allow female drivers to select only female riders, something that emerged as a valuable recruiting tool.
However, a regional firm, Careem, already has the upper hand in the Middle East. With over 1 million drivers, this UAE-based startup now covers over 120 cities in 15 countries, with cars, tuk-tuks, motorbikes, rickshaws and soon buses. Careem has raised $770 million since its launch in 2012, from investors such as Daimler, Didi Chuxing, Rakuten and STC Ventures, as well as several Saudi funds including Prince Alwaleed Bin Talal’s Kingdom Holding.
For months, rumors have been circulating that Uber will buy Careem. According to several media reports citing anonymous sources, Careem’s current valuation stands between $2 billion and $2.5 billion. Uber refused to comment on the matter.
“Investors from all over the world are showing huge interest in Careem. They see that there is an untapped opportunity in the region,” says Mudassir Sheikha, Careem’s CEO and co-founder. “There is a lot of market speculation about our next move, but our focus now is to continue raising capital and launch a new, next phase of growth.”
Careem is, just like Uber, expanding beyond rides—into deliveries and payments, for example. In October, it secured $200 million from existing investors as part of a new $500 million funding round. Already in Morocco and Egypt, it recently launched operations in Oman and in Sudan. Other fast-growing markets for ride-hailing include India and Sub-Saharan Africa.
“We are going to be, I believe, the winning player in those markets,” Uber CEO Khosrowshahi said last May at the Code 2018 conference.
But here, too, established competition is fierce. In India, Uber raised $100 million from the Tata group in 2015; but it faces local competitor Ola Cabs. The Bengaluru-based startup is backed by Didi Chuxing and has raised $3.3 billion so far.
In Sub-Saharan Africa, the market is less developed; but opportunities are vast. The Estonian startup Taxify operates in six countries—Ghana, Kenya, Nigeria, Tanzania, South Africa and Uganda—and just raised $177 million in new funding from, among others, Didi Chuxing, to take its valuation to $1 billion. Uber is present in many of the same markets and is looking to expand in Rwanda, Ivory Coast, Senegal, Mauritius and Ethiopia. But local competitors are nipping at both companies’ heels: Zebra Cabs in South Africa and mobile-operator Safaricom’s Little Cabs in Kenya, for example.
New Money, New Products
Uber’s competitive advantage in these markets, other than longer experience, is its ability to raise cash. The company has raised a total of $24 billion since its birth, despite remaining famously unprofitable. This year, Uber raised $600 million on the secondary market and $500 million from Toyota. It sold $2 billion of junk bonds in October through a private placement, and although the company disclosed very little financial information, investors rushed in. Why? Brand recognition.
“The unorthodox deal shows how many fixed-income investors are willing to overlook less disclosure to get a piece of the world’s most valuable venture-backed tech companies,” news agency Bloomberg commented.
That advantage will grow. Uber is expected to go public in 2019; recent assessments from Morgan Stanley and Goldman Sachs value the company at $120 billion—twice its value last August.