Softbank’s latest investment in Uber could spark off a race to the bottom of the cash pile, and in the process creating a mammoth market.

Softbank is now a major investor in both Ola and Uber Is a merger inevitable
Atom Cab Aggregators Wednesday, October 04, 2017 - 19:04

In India’s $15-billion-dollar ride-hailing market, Ola and Uber have been the largest players, with nearly 50% market share each. Uber’s latest round of funding from Softbank – touted to be worth around $1 billion in a $10 billion round – has set tongues wagging in the Indian market, again, about the eventuality of a merger between two fierce competitors. Softbank is also a major invested in Ola, having invested $2 billion in it only recently.

Madhukar Sinha, founding partner at India Quotient, says that SoftBank’s investment in Uber is a reflection of its confidence in the global cab aggregation market. “The cab aggregator market is a $200 billion opportunity globally and SoftBank doesn’t want to miss out on this market. This is their way of hedging. They want to be investors in all companies because whoever wins, SoftBank wins,” he explains.

But what about India?

India is one of the biggest potential markets for Uber globally, with the company having bowed out of China with a merger deal with Didi. When it raised funds in June from Saudi Arabia's sovereign wealth fund, reports suggested that a significant portion of the $3.5 billion raised would go to the Indian market. Ola has not been behind. It has raised nearly Rs 2000 crore from various investors including SoftBank since the beginning of this year.

With Softbank having substantially invested in both these companies, what does this mean for the cab aggregator market in India? Could it spark a consolidation orchestrated by SoftBank, similar to what it attempted with Snapdeal and Flipkart? In fact, SoftBank is also an investor in Uber’s rival Grab Taxi, which operates in Southeast Asia, and all of this could be a part of its global strategy to hold on to the cab-hailing market.

Merge or die?

The possibility of a consolidation is not entirely unfounded. Rajeev Misra, CEO of SoftBank Vision Fund, had told the Economic Times in an interview that it hopes to make peace between Ola and Uber at some point.

“There will be short-term conflict but long-term benefits. There are synergies in R&D, autonomous driving but you are right, it would send conflicting signals to the trenches. We own more than 30% in Ola and we would own much less stake in Uber. We have owned the stake in Ola since 2014 and it does send conflicting signals. But we are hoping that we make peace between them at some point,” Rajeev told ET.

Madhukar says that for SoftBank, it is all about scale. “At some point if Uber wins the India market, then they may merge with Ola or if Ola becomes the larger player, then maybe Uber will vacate India and take some ownership in Ola like they did with Didi Chuxing in China,” he adds.

But given that Uber already has a significant market share in India, Sanjay Jesrani of Northwest Ventures says that it is unlikely that Uber will yield ground to Ola. So, it may depend on which of them starts losing market share, thus giving SoftBank a proposition to merge.

So, how long till we know who is going to be the winner? Siddharth Pahwa, ex-CEO of Meru Cabs, gives the battle 18 months. He says this period will be critical, as both will try to outdo each other in trying to gain market share and trying develop technology that is superior to each other.

Creating a mammoth market

And it is not just about who wins, but also growing the market, Pahwa points out. “As long as SoftBank sees that the money is not being spent unnecessarily, I believe it’s a good strategy to spend the money to grow the market,” he says.

Taking the example of large FMCG companies that sell different brands of soap, Pahwa adds that that’s how large enterprises think. To grow the market, multiple players must operate simultaneously. If there is just one player, the overall market may shrink.

“So, in my view, SoftBank will continue to push both player and watch both of them grow the market. When it creates a big enough market, it may consider consolidation,” he adds.

Sanjay agrees. He says, however, that he doesn’t see consolidation in the next 2-3 years. “In my opinion, India is a large market and SoftBank is okay with taking a dual stake in that. The Uber story is far more global so I think they will continue to support both and watch.”

There could be ancillary adjacent area expansion, he adds. Ola may focus more on electric vehicles and expand into three wheelers while Uber takes a more specialized view into maybe healthcare, according to him. “So, some specialized adjacencies may happen, but in my view, they will grow in parallel, I don’t see consolidation,” Sanjay says.

Softbank’s appetite for India is also encouraged by the fact that the average seat utilization in India is still only two seats, which means only two seats are occupied per ride on average. So, there is scope for 50% more utilization.

Both Ola and Uber will now be expected to invest in more superior technology and improve route and cost optimization, and it is going to be tough for Ola as Uber has a lot more financial strength.

The ride isn’t over yet.

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