Grab has a word of caution to offer archrival Go-Jek as it spreads its wings outside its home market of Indonesia – the barrier to entry is high.
“I suspect going international is a nice thing on PowerPoint, but the actual execution of that is very difficult,” Grab president Ming Maa said in a fireside chat at DEALSTREETASIA‘s Asia PE-VC Summit 2018 last week.
Drawing parallels with Meituan-Dianping’s tumultuous ride-sharing journey, Maa said, “We saw that Meituan spent somewhere around $500 million in two different cities in China and got very low, single-digit market share with that spend. In that process, they spent a tremendous amount of capital on subsidies. For a company to spend so much on subsidies by definition means there are natural barriers to entry for this business.”
The market dynamics seem to be forcing Meituan to put its Chinese ride-sharing ambitions on hold. According to a recent regulatory filing, the Chinese company says it doesn’t plan to expand its ride-hailing business in the short term after conducting pilots in two cities, Nanjing and Shanghai.
“We regularly evaluate the synergistic value car-hailing services could bring to our platform…Based on current market dynamics, we do not expect to further expand this service,” it said.
Grab meanwhile, has been on the fast track across a multitude of fronts, whether it is capital raising, securing partnerships or launching new services. Just months after securing $2 billion from investors like OppenheimerFunds and Toyota, Grab says it is about to add an extra $1 billion to that – and intends to do so by end-2018.
“We closed $2 billion in our previous financing, we have commitments of another $500 million and we expect to close a little over $3 billion by the end of December,” Maa said.
That’s not all.
Grab also wants to be more than the ride-hailing app it’s been to its customers for a good part of its six-year existence. The company wants to be Southeast Asia’s “super app”, an everyday go-to platform that answers all sorts of mobility problems, whether it’s delivering food to the dinner table, or transferring money safely to an e-wallet. In time, Grab will also branch into peer-to-peer (P2P) lending and remittances, which has one of the highest friction use cases in the region today.
During the fireside chat, Maa said that Grab is focusing strongly on targeting online fraud to strengthen its payments system. Fraud rates on payments platforms can be as high as 20 to 30 per cent.
“Payment companies rarely talk about fraud because it’s a dirty word. As investors, it is also very difficult to assess fraud on a platform. We want to ensure we have the right systems in place because ultimately unless your customers trust your wallet, they will never adopt you,” he said.
The path to profitability is clear for Grab, according to Maa. Transportation in some mature markets is already profitable with ride-sharing revenue expected to double by next year. Meantime, the capital raised will be put to new areas like food delivery and payments.
Maa added that merger & acquisitions (M&A) are not the key focus behind Grab Ventures, Grab’s newly-formed venture arm. “I think acquiring is not the way to grow a business. The purpose of Grab Ventures is to enable, not acquire and control companies,” he said.
As ‘President’, what is your role at Grab?
I do multiple things at Grab, most of which I really enjoy. I spend most of my time on capital raising. The other half is spent on figuring out how to spend it. So I also spend time planning and budgeting for the company.
On capital raising, Grab is reported to be on track to raise $3 billion by the end of the year. Where are you on that front? What’s your progress looking like?
I sat on the other side of the table in my previous job at SoftBank. Sitting on this side with Grab has been a very humbling experience for me. We have been extremely humbled by the strong interest we’ve seen from investors around the world. We closed $2 billion in our previous financing, we have commitments of another $500 million and we expect to close a little over $3 billion by the end of December. I think a lot of this stems from a really wonderful and amazing 2018 for us.
What we saw was the consolidation of our business with Uber region-wide, we broke $1 billion of revenue for the first time – it’s the first time a technology startup has reached this level in Southeast Asia. In Indonesia, one of our largest markets, we achieved 65 per cent market share in the ride-sharing business. So it’s been a culmination of very exciting things and tremendous support from many people.
When companies are fundraising, a lot of them like to say they will close at a high number, but may still keep things open-ended because of increased investor interest. Are you doing the same thing at Grab with this $3 billion figure? Do you see yourself raise more than $3 billion?
We didn’t really have a specific number in mind but we see a clear path towards $3 billion right now. One of our core strategies is to make sure we always raise 3x in any business unit in the region. That provides us with the firepower to execute our vision, especially as we transition the business from ride-sharing to areas like food delivery. As we open our ecosystem and platform to payments and financial services, we can enable other companies in the region to be successful. The journey ahead is very long, and the capital stream has been very large.
With close to $3 billion of investment this year alone, would you consider capital to be your biggest moat?
Capital is a very huge moat for us. We’re very blessed to have very large, committed capital investors who have real conviction in our business. But capital raising is not the moat itself. I think the reason we’ve been blessed with this investor interest is because we have natural competitive advantages in our business today. I think our investors realise this as well. We have 100 million customers on our platform, we’re reaching a point where we’re on 105-106 million cellphones and the pervasiveness and the surface area that we touch in this region continues to expand over time.
On what you were saying about the Grab-Uber consolidation, could you give us an update on what’s happening on the regulatory side of things? What are the challenges, and has that slowed you down in any way?
First of all, I want to clarify one common misconception, and that is we acquired Uber. In reality, Uber had many different choices for this region and ultimately, they trusted their business to us. So the way that I think about this is Uber invested in Grab, as opposed to Grab putting them out of business.
I think, as reported in some media, there have also been some conversations around reducing subsidies around the region. It’s important to note that we started reducing our subsidies well ahead in advance of the consolidation with Uber. We have very positive conversations with all the regulators in the region and we’re positive about the eventual outcome.
When you look at the whole integration with Uber, there have been several negatives from regulatory challenges to customers saying that prices have gone up, to users complaining about the quality of services, and drivers being grumpy that their incentives have come down. Has all of this impacted the brand? People have been complaining that all of this is due to the fact there is only one major player now. Do you think Grab is fighting a perception battle in this region?
We’re always focused on how to improve services for drivers and customers.
One thing that happened from the consolidation was that we had so much customer demand, but the supply side did not ramp up as quickly, and this naturally happens in an imbalanced market like this where you see price increases offsetting that imbalance.
Some of our customers saw increased pricing because of this mismatch but every day we’re focused on how to improve the journey and experience for our customers. We want to ensure we have the safest, most reliable platform in the region.
If Q1 2018 was about consolidation of our business, then the rest of the year is really all about how to further improve the experience for our customers. At the end of the day, we want to be a one-stop mobility platform. For us, mobility encompasses many things. It comprises the ride-sharing part of the journey. For others who need to provide food for their families, for example, mobility means food delivery so they can spend more time at home with their families. For others, it may be e-commerce, doing a fewer amount of transactions, and getting their packages from the warehouse to their customer. All of these concepts are solving a mobility problem, so making mobility a better experience is what we’re focused on.
What will be your focus areas in terms of capital deployment for the next 12 to 24 months?
Hopefully, we’ll have a lot more interesting things to announce in the next 2-4 quarters.
If you look at our business today, we have 100 million-plus customers in our ride-sharing business. The frequency with which they engage with our platform is very high. If you look at our top quartile customers in Singapore, they use Grab almost twice a day. That’s a very high-frequency engagement. One of the core questions for us is how do we extend the core benefits of mobility beyond just ride sharing. One of the benefits of consolidation with Uber was that it allowed us to focus on the other parts of reaching out to our customers. We are very focused on investing in the food delivery platform. We’re very focused on expanding our mobile payments business and the financial services business off the back of that.
We will be one of the only companies in the region with payment licenses across our core markets. Very few companies have that capability. Once we have a sufficient footprint and surface area, the ability to roll out more innovative services to our customers will be a very huge thing for us.
One thing about payments in Southeast Asia – it’s an extremely fragmented market with multiple players from startups to e-commerce services starting their own e-wallets. Chinese strategics are also entering the scene with wallets like WeChatPay. How do you see yourself competing in this space?
I actually have a different opinion. I think there are very few truly mobile payment services in the region. The reason I say that is there are really three or four key things if you’re in payments.
The first is having the lowest cost for cash pay. I think having a low cost but very pervasive fund channel is a pre-requisite because in order to get cash from your pocket into your mobile phone, that can cost consumers 9 to 17 per cent, depending on the physical channels that are available today. Imagine if you’re leaking 9 to 17 per cent – that’s a lot. So first of all, we want to solve that problem. So if you think about the assets that we have, we have 4 to 5 million drivers, we have almost 3 million agents across the region. I think being able to turn on these points of presence to accept cash at zero per cent is the first step to enabling payments. I think that’s a core asset that most payment companies don’t have.
The second is ubiquity. You have to be able to use your payments system wherever you go. In Indonesia, we had the great honour of working with Lippo Group. If you go to any mall in Jakarta now, you can see our payment mechanisms in place. Whether it’s for lunch, dinner or shopping in a mall, online top-ups or even ride-sharing, that payment system anchors the experience for the customer. I think having that breadth of experience is very important.
E-commerce in Southeast Asia today is still quite small relative to China and India. What we ultimately believe in is being the driver of frequency and perpetuating more payments for more offline use cases like ride-sharing.
What’s really unique about our business is that we are one of the handful of companies with a regional footprint and capability to transact. That’s particularly relevant for high cross-border flows in P2P and remittance. All three of this combined together will lead to a very cohesive ecosystem.
The last thing I want to mention is we’re very focused on partnerships. We’re taking the approach of opening up our platform – whether it’s in the identification, fraud, routing – there are multiple partners who can benefit from these open APIs so we can better reach our customers. Having an open ecosystem will be the fastest way to drive adoption in the region.
You mentioned P2P lending and remittance. This is a totally new area for Grab. Is there any interest for Grab to get into this?
Absolutely. It’s also one of the highest friction use cases today. If you go to a local Western Union or small remittance shops in a mall, the fees you pay in order to remit are very, very high. We can bring that down to a very low cost because we don’t have the same infrastructure costs that our competitors have to invest in.
But there are quite a number of areas to deal with when you talk about P2P lending. Where do you see yourself in this space?
One thing that ride-sharing and payment companies rarely talk about is fraud because it’s a very dirty word. As investors, it’s very difficult to assess the fraud on a platform. P2P, and frankly any system with high subsidy levels, will always encourage a sub-set of individuals to conduct fraud on your platform. At Grab, we’re very focused on bringing down our fraud rates to best-in-class levels. If you look at some of our competition, fraud rates on platforms can be as high as 20 to 30 per cent. Imagine a platform where 20-30 per cent of your transactions are fraudulent or aren’t real.
So I think P2P is a very interesting space for us and we are very focused on making sure we have the right systems in place. Ultimately unless your customers trust your wallet and believe they will never lose a single penny in your wallet, they will never adopt [it].
On the revenue front, you said earlier this year that you are targeting $1 billion in revenue this year. Where do you see yourself end this year? What is the path to profitability looking like for you?
We made a very early decision two-three years ago to be laser-focused on one specific vertical – ride-sharing. We chose to be very focused on that vertical as opposed to expanding into multiple different services was because we believed that was the largest market opportunity in Southeast Asia.
This year we will do about a $1 billion in revenue. Given the low penetration rates that we have in Southeast Asia for ride-sharing, we can easily see that increasing that by 3, 4 to 5x in the short- to mid-term. So by next year, we would expect to see our core ride-sharing business to double in size. And remember, Southeast Asia is the perfect sweet spot for ride-sharing — very high-density cities, very low car ownership and very poor public transportation infrastructure.
Over time, we will start investing more in our food delivery business. While this business is large, it’s not the same as it is in China. China may be 1 for 1 between the two. In Southeast Asia, the market is a little smaller but still quite sizeable and is important for our customers and the experience that we can generate for them.
On your question on profitability – in many of our mature markets, in transportation, we are already profitable. It’s been quite a journey to get there. Over time, we will continue investing in very large growth areas for the business, whether it is food delivery or payments.
When we look at your cap table, one can see investors like OppenheimerFunds and Vulcan Capital. Can we, therefore, conclude you’re in the very early stages of preparing for an IPO?
No comment on the IPO.
What I will say is we’ve had tremendous support from large institutional investors in this round. I think if I were to summarise why, I think it was less driven by the certainty on timing for an IPO but more driven by the natural competitiveness of our business. If you talk to our other shareholders whether it’s Uber, Didi, SoftBank or Oppenheimer, what they’re focused on is the quality of the GMV.
This entire industry has gotten to a point where because the capital cycle has been very positive, we focus a lot on vanity metrics [such as] who has the largest GMV? But we’re very focused on is what is the quality of that. Investors like Oppenheimer really dig into the GMV figures, and more importantly, revenue — are you generating revenue from your customer base?
Where do you stand in terms of revenue for Grab?
For next year, just the core ride-sharing business will easily double in revenue. For our food delivery business, we will increase that exponentially, and our mobile payments business has grown about 3x over the same period of time. The underlying demand and market for ride-sharing continue to be extremely strong.
With the amount of capital and number of investors you’re getting, will Grab ever get to a point where you’ll raise capital for verticals? For instance, raise capital separately for your payments or food-delivery arms – we have seen standalone unicorns in these verticals in China and in India.
We would always be open to considering that. Although I would say most, if not all, of our investors see a tremendous value of the holding company because of network effects of everything combined together. It is more than just ride-sharing, it’s more than just food delivery. It’s the combined effect of verticals working together underpinned by a common ecosystem. That really creates value for the marketplace.
You’re fundraising at the moment now. You already have several strategic investors – is there a particular investor profile that you’re looking out for this round? How different is this compared to your earlier rounds?
I think there are different types of investors. A large part of them are strategic investors who see the value in the platform that we’ve built and the ability to leverage that platform where we can access customers in this region. On the other side are institutional investors like Oppenheimer who ultimately see a very large market opportunity long term and are investing for that.
What would you think would be the clear differentiating factor between you and Go-Jek as they expand? How do you see the competition as they come into the markets that you are in?
So what I can comment on is what I’ve been told by investors.
If we take a case study from Didi and Meituan in China, We saw that Meituan spent somewhere around $500 million in two different cities in China and got very low, single-digit market share with that spend. In that process, they spent a tremendous amount of capital on subsidies. For a company to spend such significant capital on subsidies by definition means there are natural barriers to entry for this business. If there were no barriers to entry, then you wouldn’t have to spend that to get to where you are. So I suspect going international is a nice thing to put on powerpoint, but the actual execution of that is very difficult as we have found out. So I suspect maybe similar things will happen.
Grab wants to be the everyday app for Southeast Asia. There are very few examples of this, apart from what we’ve seen in China. Players like Tencent had a unique set of circumstances in their market, but Southeast Asia is very different. How can Grab be the everyday app apart from just adding services like food delivery and payments?
I think Tencent did an amazing job in China in the context of the Chinese marketplace. The marketplace in Southeast Asia is very different. The diversity of customers is dramatically different. You have markets like Singapore where the per capita GDP is like New York, all the way to Cambodia where it is the exact opposite. So I think part of the challenge for Chinese expansion in Southeast Asia is understanding the hyper-locality of this region.
Thankfully, WeChat isn’t that strong here. But what really ties it together is the ability to solve a tangible problem for our customers, whether it is getting to a meeting on time, or getting groceries on a Saturday, or getting mobile payments done easily, something most of us here take for granted. All of these are real problems which if we solve or solve correctly, then what we want to do is to scale that very quickly across our footprint.
Now, we want to be very clear within ourselves. In fact, for example, we would never want to do e-commerce. That’s not in our DNA. But what we will do is partner e-commerce companies. That’s the purpose of opening up our platform, to enable startups to access the customers that we have on our network.
How many partner companies have joined since Grab started opening up your platform?
We announced that we were opening our platform for a month now, and since then we’ve formed partnerships with HappyFresh for food delivery. We also announced a partnership with Ping An Good Doctor for health consultations online. So in the span of one to two months, we’ve announced two partnerships. We’re very excited about the other new partnerships that we intend to form in the coming months.
A lot of this also looks like a potential path to building a pipeline of merger and acquisition (M&A) targets in the future. Is the idea behind Grab Ventures about building M&A opportunities for Grab?
I’m actually quite negative about M&A in general. I think acquiring is not the way to grow a business. The purpose of Grab Ventures is to enable, not acquire and control companies. Many companies find that the cost of customer acquisition, their cap costs in Southeast Asia is extremely high now. So what we’re trying to do is to lower their cap costs to our customers in a dramatic fashion so we can scale better, which will then help our customers and drivers and in turn enable growth.
You have a number of strategic investors, including Didi from China. Didi has been facing a slew of challenges in China on the security and safety front – What are some of the learnings for you, and how are you executing differently from them so that you don’t face the same issues?
The first thing that we learned from Didi was how to reduce fraud on our platform and I can’t emphasise this enough. What’s often overlooked as investors and what is one of the first things they always ask is – fraud activity. So what we learned from Didi is how to reduce this to zero on our platform.
One of our core philosophies is also we want quality GMV and revenues rather than vanity metrics for investors. Another area is safety. What we learned from Didi – which has been more than a mentor to us is – all it takes is one bad egg. This year we are extremely focused on rolling out safety measures to ensure that every single ride is as safe as possible.
Go-Jek has commented before that ‘imitation is the best form of flattery’ in response to Grab’s plan to roll out new services in its attempt to become an everyday app. What’s your response to that?
I think imitation is the best form of flattery. I think, to be honest, Uber was first in the market and we imitated a lot of Uber’s services, just like how Alibaba imitated Amazon. I think the key is not imitation, but how do you make it relevant and right for your customers.
How big is talent an issue for Grab?
Talent is a perennial issue for us in Southeast Asia. One of the core focuses for us as early as 4 to 5 years ago is how do you scale talent in a global manner. It’s very easy to roll out an online service. It’s very difficult to roll out a service that manages 2 billion transactions with the scale and frequency that we do. Part of what we’ve done is decentralise our engineering team. We have data centres in Seattle, Bangalore and Beijing. That’s helped us to really scale our product. We continue to hire great talent in Southeast Asia but if you look at global companies, whether it is Didi or Uber, part of why they decided to partner with us is because of the depth of the talent in our company.