On Grab’s Acquisition of Uber: Revealing The Three Key Successes of Outperforming The U.S Most Famous Ride-Hailing Company in Southeast Asia
Who is not familiar with a ride-hailing app called Uber? Perhaps, Uber is how we all first began to have a “rendezvous” with a stranger, taking us to a designated point, that you never thought you would share that location with a stranger, otherwise.
Uber — U.S-based most famous ride-hailing service — had to lose to its regional rival — Grab — due to the acquisition addressed to them. On March 26th, 2018, Uber ended its heyday in the Southeast Asian (SEA) market, resulting in Uber to give up their regional operations and assets in Cambodia, Indonesia, Malaysia, Myanmar, Thailand, The Philippines, and Singapore. In return, they received 27.5% stake in Grab. Prior to Grab’s acquisition, both companies were recognized as the two players in ride-hailing market in SEA with intense competition. Both companies offer an online application enabling users to arrange and schedule transportation. A user can create a ride request via Grab application that will be received by the closest driver who will then pick them up. Successful transaction is done upon completion of the request. Both companies generate profit by taking a small percentage off of the total fare.
After several years of fierce competition, both companies came to an end with one acquiring the other. This has raised one big question pertaining to their respective business models. How did Grab win the market with its business model to the point it is able to acquire the U.S most famous ride-hailing company in Southeast Asia? What are the key successes of Grab in winning this competition? In finding out the answers, this paper will incorporate the frameworks of strategic analysis. The answers to these questions would hopefully help shed a light on running a successful internet-based business for many companies and startups in SEA.
Market and Business Overview in SEA Market
Unlike ride-hailing market in the U.S, SEA market is different in two ways. (1) motorbikes are the main vehicles used in this market. This is because most SEA countries are still developing and the use of motorbikes is more appropriate in terms of price point for SEA customers. Heavy traffic jam also explains why motorbikes are more preferred as it is smaller in size and is able to slip through the congestion. (2) Family cars are commonly and widely used as taxi-hailing vehicles rather than luxury cars.
Ride-hailing companies generate profit by charging clients for rides. Both Grab and Uber have quite similar business schemes. Grab cuts 20% off of a motorbike-ride fare and 30% off of a car-ride fare. Whereas Uber takes 10% off of a motorbike-ride fare and 10–30% off of a car-ride fare. In addition, both companies also implement incentive-based payment. Grab gives extra IDR 20,000 (USD 1.47) to motorbike drives for every seven passengers during weekdays from 6 a.m to 10 p.m and weekends from 8 a.m to 12 a.m. Whereas Uber gives 1.10x fares incentive. The maximum incentive that Uber can give is up to IDR 50,000 (USD 3.58)
Industry Analysis
Rivalry: SEA ride-hailing industry consists of two giant players: Grab and Uber. They had been fiercely competing against each other in attempt to gain % of market share. Possessing higher market share is key to providing good services at affordable price. In order to do this, both players were actively engaging in promotion and price wars. For example, in Indonesian market, Grab offered up to 50% off for a single ride under several conditions.
Threats to Entry: The existence of these two strong giant players created a high barrier to entry resulting in low threat of entry. For new businesses that wish to enter this market, they will encounter several problems as to high capital funding and brand awareness. High capital funding is needed in this industry as price war and promotional activities are the two most-used strategies to lure customers. If new entrants fail to offer their services at such lower price than those of existing competitors, it will be difficult for them to gain market share. Brand awareness is also an important factor in luring customers to use the service. It is challenging for new entrants to convince that their services are better in term of quality than the existing one in the market.
Supplier Power: In ride-hailing industry, the suppliers are car manufacturers and drivers. In SEA, the drivers are required to own their own cars to join the company. However, in order for Grab and Uber to reduce the supplier power, they offer installment plans for drivers so that they can join as a Grab driver. Therefore, the supplier in this case possesses small bargaining power.
Customer Power: The customers in this industry are anyone who possesses smartphone with internet and applications installed in it. In SEA market, customers have high bargaining power as they can choose which apps to use depending on the price. This became the reason why Grab and Uber were actively engaging in price wars and promotions. One day the fare goes up, then customers most likely would switch to another provider, resulting the economy of this industry to be elastic.
Substitutes: The substitutes in this industry varies across SEA. For Indonesia, the substitutes are low since there is no public transportations as decent as Grab and Uber. However, in other countries such as Malaysia, Thailand, and Singapore, the substitutes are high since these countries already developed convenient and efficient public transportations such as subway and bus. However, the overall substitutes in SEA industry are small.
Grab’s Acquisition Rationales
Grab’s desired outcomes from this acquisition was simple: eliminating competition and leveraging their businesses across SEA. From the industry analysis above, it is clear that the competition in this industry is really tight that forced both companies to engage in price wars and promotions. While attacking each other with low price services can be a good strategy to attract customers, however, there is a certain limit where both players can compensate as one of the consequences of such activities is decline in profit margin for both companies and drivers. This ensured both players that the end of price war was coming to an end. Having less market share and less profit in recent years, Uber decided to raise the white flag and surrendered to its regional rival until they are back with better plan and strategy, if they decide to.
Grab’s Strategy in Winning The Competition
There are several ways pertaining to Grab’s success in acquiring Uber. First, Grab understood the importance of dominating the market. When Grab first hit the market back in 2012, they did not see yet a significant growth in market share as customers were not familiar with ride-hailing services, until Uber came to SEA in 2014, then people started to use this service. At that time, Grab only partnered with local taxi companies and did not have their own drivers. The cars used were also commercial taxis. On the other side, Uber was quite the opposite. They introduced themselves to the market with fancy cars as public transport. Their taxi-hailing cars were not commercial taxis and therefore it was more appealing to customers.
Grab soon also implemented the same ideas into their business model, however this time, in order to create a competitive advantage, Grab took a step ahead Uber. Grab realized the trends in SEA. (1) Time efficiency due to heavy traffic jam, (2) low price, and (3) comfort and convenience are the three components that can lure customers and retain their customers in the long run. Grab created their competitive advantage by lowering the cost of production (service). Instead of utilizing fancy cars, they decided to utilize family car (such as Avanza), as their taxi-hailing vehicles. They also realized that motorbikes are the most commonly used vehicles in SEA and immediately incorporated it in their business. When Uber realized that motorbikes play an integral part in this market, they also followed Grab’s footprints, however, it was too late for them as customers already perceived Uber as a fancy ride-hailing company.
As a result, Grab’s market share kept increasing over the years as they were able to provide services that tower comfort and low price while at the same time able to slip through the congestion during rush hours.
Expanding Their Existing Horizontal Services
One of Grab’s goals in this acquisition is leveraging their businesses across SEA. This is shown by their desire to double their food delivery services by taking over Uber Eats in Malaysia and Singapore. Before acquisitions, Grab only had market for food delivery in Indonesia and Thailand. Grab realized that if they were to expand to Uber Eats’ market in Malaysia and Singapore they would have to engage in the price wars and promotion with Uber Eats. This would be a nightmare for Grab if they were engaging again in price war in another sector as their ride-sharing sectors was already suffering from low profit margin. Therefore, this acquisition is a dream come true for Grab to finally be able to double their food delivery service to other market without having to engage in price wars.
Acquiring Uber also means that Grab can now set their service price for ride-sharing at a more stable rate, amidst free competition. That way, Grab can be more consistent with the quality of their services without having to worry that other competitors would provide similar services at lower price.
Conclusion
Grab’s acquisition of Uber points out three major things. First, amid strong competition, having higher market share is the key success for a business to surviving in the market. Second, in order to keep a high market share, a business should create competitive advantage through increasing willingness to pay or lowering cost of productions. Grab has successfully proven that they can achieve these two goals with one strategic move. They observed the market trends and situation in SEA, which led them to the three important components: comfort, low price, and time efficiency. They then realized that the trends in SEA is to use motorbikes as their ride-hailing vehicles. This caused them to have lower price than Uber. Grab was the first ride-hailing company that uses motorbike as their vehicles that leads us to the third thing that it is always better to be the first one that brings a breakthrough.
Grab came up with a solution of incorporating motorbikes as one of their ride-hailing vehicles. This is a breakthrough that Uber failed to come up with in the first place. Uber failed to differentiate the market trends in SEA and neglected the fact that fancy cars are not enough to lure customers to use their service in the long term due to high price services. It was too late for them to gain the market share through the use of motorbikes as Grab already stole customers’ attention and already gained their trusts in the first place.
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