Uber has attracted a $72 billion valuation, the second largest among unicorns in the world, because of its unquenchable thirst for growth.
But the ridehailing giant is likely going public this year and will face a new group of investors¬– those with less tolerance for big cash burns. If Uber wants to generate profits any time soon, it needs to control costs now.
To that end, Uber seems to be dialing back from its international ambitions. The company is reportedly close to exiting the food delivery business in India. Faced with soaring costs and entrenched local players, Uber has also pulled back its operations from China, Southeast Asia, and Russia.
But Uber, mindful of Asia’s enormous potential, is hardly abandoning the continent. Uber will reportedly take a 10 percent stake in Indian food delivery firm Swiggy, a move reminiscent of its investments in Didi Chuxing (China), Grab (Southeast Asia), and Yandexi.Taxi (Russia).
Overseas markets has been a huge cash drain for Uber. Part of the challenge is that there is no uniform template for entering a market. Each country and city boast a unique mix of characterstics, including local competition, regulations, and consumer tastes that Uber can’t simply overcome with brute financial force.
“The problem isn’t just one of physical expansion,” according to a report by CB Insights. “The problem is that each locale Uber expands into is different — they have different regulations, different technological needs, and different cultures around ride-hailing. These differences make for an intimidating set of everyday challenges for Uber.”
In particular, “competing in the Chinese market proved extremely challenging for Uber, which had little experience in Asia and was going up against a company, now Didi Chuxing, with the blessing of the Chinese government,” the report said.
For example, after entering Shanghai in 2013, the company was losing a lot of money in just one urban market. To attract both drivers and users, it was paying nearly 140 percent of its gross bookings (the top-line revenue number) to drivers in incentives, the CB Insights report said.
Uber ultimately paid $2 billion to enter China only to retreat in 2016. In exchange for it exits, Uber acquired a 17.7 percent stake in Didi. If you can’t beat ’em, invest in ’em.
After leaving Southeast Asia, Uber was able to generate a quarterly operating profit for the first time in 2018: $2.5 billion in the first quarter.
But Uber is smart enough to know that the future of ridehailing industry increasingly lies in Asia. The continent boasts emerging mega cities, faster growing economies, young populations, rising incomes, and governments will to spend far more on improving roads and highways than the United States.
“Rideshare companies generally benefit from significant secular trends, including the convergence of mobile and automobile industries and favorable demographic, cultural, and behavioral changes associated with a rising Millennial population,” according to SharesPost’s report on the global ridesharing industry. “However, after comparing these factors in Asia with the United States, we conclude that overseas ridesharing companies enjoy more favorable macroeconomic conditions over the medium to long term.”
For example, China in 2017 alone spent $323 billion (2.64 percent of GDP) compared to $87 billion (0.45 percent of GDP) in the United States.
“Infrastuture quality surely impacts consumer experience,” the SharesPost report said. “Bad roads and highways means delays and thus a lower chance people use rideshare firms again. Higher investment will help rideshare firms by reducing both maintenance and time costs to drivers and users.”
Smartphone pentration is also increasing in these emerging markets. China, home to Didi, boasts over 788 million smartphone users, according to the China Internet Network Information Center (CNNIC). India had 291.6 million smartphone users at the end of 2017 and will likely jump 68 percent to over 490 million users by the end of 2022.
In a recent report, CNNIC estimates 43.2 percent and 37.3 percent of Chinese Internet users have ordered a ride online and ordered a shared ride respectively. Already the dominant transportation platform in China, DiDi still has a lot of room to grow.
As Uber approaches IPO, the company must balance cost containment with exploiting growth opportunities. The company’s strategy in foreign markets bears this out.
Pulling out of China, Russia, and Southeast Asian countries will help Uber save money and appease cost wary investors. But retaining stakes in those countries’ most dominant local players will allow Uber to keep one foot in the door as the Asian rideshare market starts to live up to its vast potential.
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