By Durba Ghosh
The ride-hailing space in India is dominated by just two players – Uber and Ola – together accounting for nearly 90% market share, butting out earlier incumbent Meru. While the two rival companies have said that consolidation isn’t their strategy, common investor SoftBank is keen on merging the two entities in order to gain a wider market.
According to several sources, SoftBank, along with representatives from Uber and Ola have brokered a number of talks for a possible merger between the two companies to consolidate its investments. Softbank Vision Fund head Rajeev Misra had said last year that the investor is “hoping to make peace between them (Ola and Uber) at some point.”
SoftBank also orchestrated Uber’s exit from markets such as China, Russia, and a number of South East Asian countries. The investor wants Uber to focus on their core markets such as US, Europe, Australia and Latin America. Uber sold its China operations to local rival Didi Chuxing for a 20% stake, while in Russia it sold its operations to local search engine Yandex for a 36.6% stake in the combined entity. Earlier this year, it sold operations in Southeast Asia to Grab for a 27.5% stake.
In all these exit deals, SoftBank has allowed the local player to be in charge and a similar structure is said to be under works for Ola and Uber also. However, a possible merger between Uber and Ola has already hit a roadblock.
The Competition Commission of India (CCI) has said that the regulator will not give its go-ahead if cab-hailing company Ola wants to merge with archrival Uber, or vice-versa. CCI was reacting to a filing by Meru Cabs, which alleged a possible collusion between Ola and Uber to harm competition.
CCI’s contention is a big blow to SoftBank, as any deal between the two rivals will have to be in line with a number of legal and regulatory requirements, especially because the merger will result in a monopoly.
“The Competition Commission of Singapore (CCS) recently used a similar provision in the Singapore Competition Act to stall a Grab-Uber deal on March 27 2018 and launched a more detailed investigation, on the ground that such a deal would lead to substantial lessening of competition in the market,” Joyjayanti Chaterjee, an associate research fellow at Vidhi Centre for Legal Policy said.
While the CCI hasn’t ever blocked a merger, it still has the power to do so, she adds. The European Commission, for example, has blocked mergers in the past including the AT&T-Time Warner merger. However, CCI is not necessarily the final word on mergers. If the regulator rejects the merger the companies can appeal the decision before the National Company Law Appellate Tribunal and courts.
Even as the CCI and other incumbent players are resisting a possible merger between the sector leaders, the consolidation makes perfect sense for the Japanese conglomerate as increasing competition among Softbank-backed cab aggregators is draining its resources. The investor has backed Ola in India, Grab in Southeast Asia, and Didi Chuxing in China. It also became Uber’s largest shareholder in January this year after a 15% share purchase at a 30% discount.
According to independent sector expert Rajeev Suraya, Uber Ola merger makes sense even if SoftBank didn’t want it. “Arch rivalry between Uber and Ola has kept average fares rock bottom, disturbing the economies of scale. App installations are impressive, but revenues are suffering. Moreover, cost of operation is high in cab-hailing space, increasing cash burn,” Suraya says.
Ola’s cash burn rose 52% to Rs 4,011 crore in 2017, which essentially means, it spent Rs 3.40 for every rupee it earned, according to financial documents sourced from the Registrar of Companies. Uber’s global loss jumped 61% to USD 4.5 billion in 2017, as it poured millions in the India market.
Japan's SoftBank had also recorded losses of USD 1.4 billion from two of its Indian portfolio - ANI Technologies, which runs Ola, and Jasper Infotech, the parent company of Snapdeal.
Nevertheless, Ola has made major gains as far as market share is concerned and it recently bought food aggregator Foodpanda to take on UberEats, which is gaining traction in the country. Elsewhere, too, Uber has been pouring in money to take on rivals. According to estimates, Ola has 900,000 cabs with 60-70% market share, while Uber has about 350,000 cabs in a USD 15 billion market.
While Ola has clear market leadership and a more localised product, for Uber it does not seem to be an impossible task to inch up market share if it increases cash burn and expands to more cities here. And in terms of market share dynamics, Uber has done better in India as compared to China, Russia, and Southeast Asia. Uber’s gross revenues saw an impressive jump from USD 20 billion in 2016 to USD 37 billion in 2017.