Uber just sold off another international segment — this time, in Southeast Asia to regional ride-hailing service Grab. Uber’s struggles during the last couple of years are well-documented, and while ceding operations to a rival isn’t necessarily a death knell, it does underline the fact that the ride-hailing industry needs to undergo change if it’s to be viable long term.
Uber’s shrinking global presence
Uber’s ride-hailing and food-delivery business in Southeast Asia will be taken over by Singapore-based competitor Grab. In handing over the keys to its assets, Uber gets a 27.5% investment stake in Grab, which was valued at over $6 billion during its last funding round in 2017. Uber CEO Dara Khosrowshahi will also get a seat on Grab’s board of directors.
The eight countries Uber is exiting — including Indonesia, Thailand, the Philippines, and Vietnam — have fast-developing economies and are home to over 600 million people. It may appear that a valuable future market is being given up, but the company still gets to participate in those economies through its new holding in Grab. Plus, Uber and Grab are both partially owned by Japan’s Softbank (NASDAQOTH:SFTBY) and Chinese ride-hailing giant Didi Chuxing. It makes sense that neither wants their two investments working against each other.
This isn’t the first time Uber has made a move like this. Its operations in China were sold to Didi Chuxing back in 2016 in exchange for an equity stake. In 2017, its operations in Russia and other former Soviet countries were merged into a joint venture with Russia’s Yandex ride-hailing services. Uber owns just over a third of that business.
The future of ride-hailing
Khosrowshahi reportedly said in an email to Uber employees that the Grab deal is not indicative of looming consolidation. That note was likely to assuage fears that layoffs are coming as the losses at Uber continue to mount. There will apparently be no dismissals due to this deal, although some Uber staff will transfer over to Grab.
Consolidation for the ride-hailing industry may be inevitable, though. One of the ways Uber has become so big, so fast is by undercharging customers for rides. Its success has spawned myriad competitors that do the same thing. As a result, Uber and the industry as a whole struggle with profitability.
Self-driving vehicles have long been touted as a panacea for the problem (not having to pay drivers is one way to keep operating costs down). But self-driving technology is likely a ways away from mainstream adoption, especially in light of Uber’s tragic accident in Arizona recently.
And if self-driving tech is on the verge of hitting it big, Uber isn’t alone in making a push for it. Alphabet‘s Waymo is just one of many businesses developing advanced self-driving systems — and it also happens to be part of a highly profitable company because of Google. Full disclosure: My bets are on Alphabet to achieve success first self-driving and ride-hailing.
For investors who have been eagerly awaiting an Uber initial public offering (IPO), this last move with Grab is a reminder that the ride-hailing industry’s issues may outweigh reasons for optimism.