Grab is a disaster in progress

Ben D. Kritz

ON Tuesday, taxi-booking company Grab Philippines released its 2017 financial report, and the news was even uglier than most people expected. Having not made a dime since its entry into the country in 2013 and posting a loss of P1.56 billion in 2016, Grab finished 2017 P2.91 billion in the red. It does not see the situation turning around in the next 12 to 18 months, it warned.

Grab is as otherwise sanguine about its prospects as it has ever been. As the company is “still in investment mode,” according to Grab Philippines country head Brian Cu, “the losses are still within our budget forecast.” If anything, they are expected to widen; with the company already foregoing its 20 percent commission on fares to fund incentives to drivers, Grab will start dipping into its investment funds to subsidize fuel for longer distance passenger bookings Grab drivers are presently unwilling to take.

Grab’s current financial state and its likely prospects are eerily reminiscent of the hundreds of overblown and overvalued startups that collapsed in the Dotcom crash of 2000-2002: It is a company with a fundamental business idea that is not actually innovative, and whose exponential expansion and diversification is not at all organic, but almost entirely fueled by speculative investment.

When Grab acquired the Southeast Asia business of ride-sharing rival Uber in early April, it at first appeared that Grab has taken a significant step toward the one thing that could guarantee its survival – establishing a monopoly over the ride-booking business, but most analysts regarded the deal as more of a win for Uber. The warning implications of that point of view have been so far overlooked.

Although Uber was popular in the region – Southeast Asia accounted for about 10 percent of the company’s rides on a global basis – Southeast Asia was the one place it was not making any money, and was certain it never would. This was largely due to Grab’s heavy subsidization of fares to keep prices low.

Grab did not so much as out-compete Uber in the region as it outgunned the latter in terms of investment; while Uber put about $700 million into its Southeast Asian business over five years, Grab pulled in $4 billion in capital, receiving backing from Japan’s SoftBank, China’s Didi (which pushed both Grab and Uber out of that country), Toyota, Hyundai, Tiger Global, Indonesian firms Emtek and Lippo, among others.

The flow of investment capital has pushed Grab’s valuation to over $6 billion, even though Grab has so far operated completely under water; its revenues are estimated at $80 million to $95 million a year, while its net losses are about $100 million per year. Except for “certain cities and verticals,” or so the company says, it has consistently lost money in every market it operates in. From Uber’s perspective, the $100 million in cash reportedly offered by Grab (the terms of the deal have never been officially disclosed, as Grab is not a publicly listed company) plus a 27.5 percent stake in the company—putatively worth $1.6 billion—was a pretty fair return on its $700 million investment in a loss-making region.

Even if Uber’s share in Grab eventually turns out to be worth nothing, that probably won’t happen so fast that the company can’t extract some value out of it; at worst, Uber will have recovered a significant part of its unsuccessful investment in Southeast Asia, and at best, could even realize a net positive return, all without the headache of having to operate in this difficult market.

That leaves the difficult market to Grab, a company with an inflated value that owes some heavy-hitting backers more money than it can ever hope to generate with its hamstrung business model. Its core business, the one it started with in Singapore in 2012, is a taxi-hailing app, which connects passengers and taxis more efficiently than standing at the curb and throwing up an arm. The concept is not particularly unique or beyond the capabilities of new entrants, and so there is more or less constant high level of competition, which Grab can either counter with price or superior service. Trying both options, it has failed to be successful with either.

The need to have drivers who consider the potential earnings enough to sign on with Grab establishes a floor on fares and Grab’s financial resources, while large, are not limitless, and so subsidies can only go so far. As a consequence, Grab fares are not significantly lower than any competitive service, and in some cases may be higher. Nor has Grab’s service been outstanding enough to justify those similar or higher fares, at least here in the Philippines; as almost any would-be Grab customer could attest—present company included—Grab drivers on the whole do not seem to be any less congenitally inclined to be abusive than any other taxi drivers.

Not all Grab drivers are extortionists, of course; many of them are perfectly honest and conscientious service providers. But a general impression of poor service is a difficult thing to overcome, and requires effort and additional resources Grab may not actually have, since so much of what should be its deployable capital is tied up in subsidies that can’t be withdrawn because of the relative inelasticity of fares.

That presents an even bigger problem: A rough analysis of the market suggests that it may not be possible for Grab to turn enough of a profit with its core business to provide its investors a return even under ideal circumstances. It would appear that Grab has already realized this, which is why the company has gone on a diversification spree, branching out into variations on the Grab Taxi model with the Uber-like Grab Car, Grab Bike, and Grab Hitch, bus services, services like food delivery, and even non-transportation ventures, such as an electronic payments app (Grab Pay) and a new venture that will offer micro-loans and insurance products. In none of these areas is Grab a first mover or significant innovator, and so its most likely prognosis is that it will simply continue to dig itself into an ever-deepening hole.

Which is precisely what happened to about half the startups that evaporated in the dotcom crash; I worked in San Francisco, the epicenter of the dotcom boom, in 1998-2000 when the frenzy was reaching its climax, and watching Grab’s drama play out is like watching a rerun of a familiar TV show. There are probably still chances Grab could shorten its reach, refocus its priorities, and give itself a diminished but reliable future like the half of the startups that survived the dotcom crash, but as time passes, those chances are quickly becoming fewer.

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