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.
This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.
Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.
This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.
The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.
Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.
This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.
Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.
Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.
Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.
SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.
Copyright SharesPost, Inc. 2019. All rights reserved.