Ridesharing companies are starting to come to the public market in 2019. With Lyft planning an IPO in March, and Uber and Didi also preparing for an IPO this year, it’s important for interested investors to understand the competitive dynamics in this industry around the world.
A number of major players around the world have raised billions of dollars to compete fiercely in their respective regions, a dynamic that has resulted in heavy losses for every company involved. For example, Uber reportedly lost $1.8 billion in 2018, while Didi also lost about $1.6 billion in China largely due to rider and driver subsidies, drawing concern about whether these businesses will ever generate enough profit to justify their high valuation.
We believe there are two main factors (outside of self-driving cars) that will determine the profitability of ride-sharing apps around the world. First, the competitiveness of each company’s market will heavily impact their profit levels. If markets are maturing and a clear leader emerges, profitability will gradually improve as smaller players find it more difficult to compete on subsidies alone due to scale differences.
Secondly, the funding environment will also determine how aggressively these companies can spend to compete. If funding is readily available, companies will not shy away from spending to grow and capture market share; if funding becomes scarce, they will conversely have to be more conservative about the way they subsidize rides.
To help interested investors to assess where each of the major players lie regarding these two factors, we surveyed each app’s popularity in 28 different markets to assess whether the extremely competitive ride hailing industry has begun to mature.
After a series of deals between Uber and its Asian counterparts, the ridesharing industry has become more mature in developed markets, with one player emerging as the clear winner in each region. For example, Uber has consistently ranked as the top travel app in the US and Canada, while Lyft has not been able to contest the number one spot. Similarly, Uber has solidified its leading position in most of Europe, Australia, Hong Hong, and Taiwan, with very distant number twos like mytaxi, BlaBlaCar, and Cabify in each region. This bodes especially well for Uber, as it is becoming the de facto leader in most of its major markets.
In many parts of Asia, we saw a similar trend. Ola comfortably maintained its top position in the App Store’s travel category, ahead of Uber for the past four months (though it is struggling to gain traction elsewhere), while Uber continues to lead markets like Taiwan and Hong Kong. In South Korea, Japan, and Russia, markets that have been extremely difficult for foreign companies, local apps like KakaoTaxi, JapanTaxi, and Yandex.Taxi have consistently reigned as ridesharing champions.
In many emerging markets, the picture isn’t as clear yet. For example, although Grab acquired Uber’s Southeast Asia business in eight countries and has been maintaining dominance in markets like Philippines, Vietnam, and Thailand, it is now facing stiff competition from Go-Jek, an Indonesian company backed by Tencent. In fact, their download rankings in each other’s home markets (Indonesia and Singapore) are neck and neck already, suggesting vicious competition between the two firms.
Also, Didi Chuxing in China has been facing difficulty in fending off competition from Dida Chuxing. In fact, Dida’s download ranking in the Apple App Store has surpassed Didi’s for most of the past few months. This is rather surprising, given that Didi has already consolidated the market significantly after merging with Kuaidi and acquiring Uber’s China business.
This seems to be largely driven by Didi’s series of PR disasters related to murders of its customers by drivers, a problem similar to the one that Uber experienced when its PR problems resulted in tougher competition from Lyft few years back. While Didi should be able to maintain its dominance if it solves this quickly, Dida could be a thorn in its side if it is able to exploit this opportunity to raise a large amount of capital.
In other regions around the world, Uber is still facing stiff competition from companies like inDriver (Colombia), Beat (Peru), Didi (Mexico), Taxify (South Africa and Nigeria), and Careem (Saudi Arabia and Pakistan), though it has been able to dominate some of big emerging markets, such as Brazil and Argentina.
Meanwhile, the VC market has shown an increasing appetite for mega deals. For instance, both total VC funding and average deal size nearly tripled from fourth quarter 2016 to fourth quarter 2018, according to Pitchbook, driven by massive financing rounds ranging in the hundreds of millions. Essentially, while availability of funding still seems ample overall, we’re seeing the rich get richer among successful startups. In other words, investors show clear signs of preferring leading companies over their competitors.
For ridesharing companies, this means that the winners will find it easier to raise money than their smaller competitors. With a bigger war chest, leaders can more easily tolerate losses while waiting for their smaller competitors run out of money, and could even consider acquiring them.
What to expect
For Uber, our findings are quite positive. It doesn’t have a real challenger in most of its major markets, and the dynamics of VC market is also favorable to the biggest player in the world. In such circumstances, it could potentially start reducing subsidies to increase its profitability; if it does, its smaller competitors (i.e. Lyft) have incentives to follow the leader, especially if they are concerned about their own finances. After all, even the US is now essentially a two-player market where one is significantly larger than the other.
This also helps to explain why Lyft is in a hurry to complete its IPO before Uber. Investors prefer the biggest player in an industry, so Lyft’s best bet might be to be the only publicly available stock in the space before Uber also becomes public. One possible implication of this rationale is that Lyft’s goal may not be to spend its newly raised capital aggressively to compete.
For other ride sharing companies, the future is still somewhat unclear. Grab and Go-Jek seem to be having a knife fight, funded by immense pockets (Tencent invested in Go-Jek, while Softbank invested in Grab). In India, Uber is still a close number two to Ola, creating uncertainty for the leader due to Uber’s stronger finances. However, the rumor that Uber is in talks to sell its UberEats business in India suggests it may pull out of the country as it has previously in China and SE Asia, leaving the market to Ola. Even in China, where Didi still has the biggest market share and war chest, Dida’s sudden rise suggests it may be able to capitalize on Didi’s 2018 PR disasters.