Why the Grab-Uber Acquisition Could Save the American Company

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In a move reported over the weekend, Singapore-based ride-hailing firm Grab has confirmed the acquisition of Uber’s Southeast Asia services. This includes all business in Singapore, Malaysia, Indonesia, the Philippines, Thailand, Vietnam, Cambodia and Myanmar.

In return, Uber has accepted 27.5% ownership of Grab with CEO Dara Khosrowshahi gaining a place on the Singaporean tech company’s board. This sale comes after similar deals with Didi Chuxing in China – in return for 17.5% of the Chinese company – and Yandex.Taxi in Russia.

The move has been hailed as a step back for Uber. Although Grab President Ming Maa claims the deal was made independently, many media outlets have pointed out that Softbank is a major investor in both companies and had earlier stated that Uber might be better off getting out of Asia.

With Uber just coming out of a devastating year, facing stiff competition across the planet (including Ola in India and Australia), and fighting strong regulations in Europe, many are suggesting that this could be the start of the fall of the tech giant.

However, this fails to take into account one major point – this is potentially phenomenal business for Uber.

Creating a Monopoly – at Zero Cost

In light of the sale, Khosrowshahi wrote an open letter to Uber employees. While most media outlets picked up on the main headline – that Uber would not be selling off any other regional operations – one sentence went under the radar.

“This transaction [with Grab] now puts us in a position to compete with real focus and weight in the core markets where we operate, while giving us valuable and growing equity stakes in a number of big and important markets where we don’t.”

As he went on to say, Uber has spent around $700 million in Southeast Asia and was facing a never-ending fight against Grab and Go-Jek. Now, they own stake worth billions in one of those competitors. Considering the market share they will also be passing on to Grab, the Singaporean company is more equipped to win that fight.

This means that Grab can potentially forget about fighting for market share, and start focussing on increasing profit margins and expanding the company’s base. For example, Grab is setting up several potentially profitable side businesses off the customer and driver data they possess. The addition of Uber’s regional database can only help.

The 2016 deal with Didi Chuxing that forced Uber out of China is proof of these methods. Because of their 17.5% ownership of that company, Uber now owns a part of Grab, Ola and Lyft. Additionally, once they no longer had to worry about competition, Didi started raising prices and reducing cost margins in China.

With Didi doing so well in China, and Grab probably doing better in Southeast Asia after this deal, Uber suddenly has large chunks of two potentially monopolistic companies. All with zero costs in either region.

Uber’s $4.5 Billion Stumbling Block

Despite these perceived knock backs in China, Russia and Southeast Asia, and a 30% knockdown in valuation due to the toxic culture created by former CEO Travis Kalanick, Uber was still valued at $48 billion in their latest fundraising round in December 2017. In contrast, Grab is valued at around $7 billion after their Uber acquisition.

However, with a higher valuation comes higher costs – to the tune of a $4.5 billion annual loss according to the latest figures released by Uber in February 2018. While this has been touted as a reduction in loss rate by Uber, that is down to two unsustainable factors; a drastic reduction in driver bonuses, and a freeze on spending on Operations, Sales and Marketing, Research and Development, and General Administration.

The former has cost Uber drivers $2.2 billion in lost revenue, while the latter is unsustainable for any company looking to grow. In truth, with drivers flocking away from Uber because of low incentives, even the former seems unsustainable. Unless, Uber can find a way to continue to grow their assets while drastically cutting out costs and driver payouts – perhaps by selling off their heaviest loss-making regional businesses in return for a stake in the dominant company of those particular regions?

The only problem here is that even the Grab sale may not be enough. Which brings us to the elephant in the room. Khosrowshahi made a point of saying that Uber would continue to fight in India when he visited the country in February 2018. But with mounting losses – and fighting yet another Softbank-backed rival in Ola – would it be smarter for them to just sell out again?

Their decision in India will probably define the future of the company. If Uber decides to back out off another region, Khosrowshahi will have decided to prioritise balancing their books ahead of their potential 2019 IPO rather than maintaining a global presence. Is that a viable long-term solution? Hard to say with a company that is still struggling to make profits back home in America.

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