Grab beats Uber, goes up against Alibaba & SEA Group in next battle

• Uber’s 27.5% Grab stake sign of how M&A, not innovation is way to market domination
• Grab now competes with Alibaba and SEA Group to be dominant digital ecosystem in SEA

ENTER the new business model for digital companies to gain market dominance. Merge with the No 1 or No 2 player in the market and rely on weak consumer protection laws and anti-competitive regulations to reinforce your position.

And so we have Grab Pty Ltd coming out yesterday and conforming the reports that it has entered into an agreement to acquire Uber Technologies Inc’s Southeast Asian ride share and food delivery operations in exchange for giving a Uber 27.5% stake in Grab. Uber chief executive officer Dara Khosrowshahi will join Grab's board.
Amid the reassuring PR statements from Grab about the opportunity to better serve customers and its drivers, Singapore’s regulators have come out immediately, yesterday itself, to reinforce their commitment to ensure fair play. A spokesperson for the Singapore Land Transport Authority has emphasised that, "We will ensure that no one single market player dominates the sector to the detriment of commuters and drivers.”

Over in Malaysia, where Grab’s main operations are and where it was launched in 2012, the Land Transport Authority or SPAD (its Malay language acronym) issued a similar statement. "We will work closely with relevant consumer and various regulatory agencies such as the Malaysia Competition Commission to safeguard passengers from unfair terms."

Meanwhile the Competition Commission of Singapore (CCS) was more aggressive saying it has reached out to both companies to seek clarity on the details. It notes that under Singapore’s competition law, mergers that may result in significantly lesser competition are prohibited.

"In the event CCS finds that a merger situation is expected to result in an SLC (substantial lessening of competition), CCS has powers to give directions to remedy the SLC," it said in response to local media queries.

Among the powers it has to remedy any SLC it finds, is to have the merger to be unwound or modified.

But don’t expect any strong response from Malaysia’s Competition Commission (MyCC), which has yet to issue any statement or respond to DNA’s questions sent to its CEO yesterday evening. A follow-up call this morning found the key executives at MyCC to be in meetings.

As noted by Eunice Chan Wei Lynn, partner at Lee Hishammuddin Allen & Gledhill, “while the Singapore competition commission has already said it will reach out to Uber and Grab seeking more details of the deal, but it’s been silent over here with MyCC.”

And while the CCS has the power to block the deal if it finds it will create a substantial market distortion that disavantages consumers and lessens competition, “unfortunately in Malaysia MyCC can only look at the deal after it has happened and can monitor for instances of market distortion and when consumers complain to them,” says Eunice.

While we wait to see how this deal plays out at the regulatory level in Singapore, Grab is moving quickly to integrate the platforms, targeting April 8 for when all Uber drivers will be on its platform.

From fierce competition to sweet market dominance

While the deal was expected with media leaks about it since last month, it is still a stunning reversal of fortunes for both players who have been bleeding money in their competition with each other. With one stroke of the pen, four years of fierce competition between the two turns into a sweet market dominance position in a region with a population of 620 million and with Grab’s investors having opened up a path for their eventual exit as well.

It isn’t supposed to happen this way though. It is supposed to be fierce competition between digital players based on speed of execution, rapid product iterations and innovation, backed by venture capital. But for Uber Technologies, with its global ambitions and with its dominance is its home market not assured yet, and with plenty of distractions off the field, the more practical path has been to sell its operations in markets where the competition has gone toe to toe with it.

As Manoj Menon, partner and managing director, Asia Pacific at Frost & Sullivan, notes, innovation will suffer, consumers and drivers will feel the pain – at least in the short term.

“In the near term this is not good news for the consumers and drivers.  The combined entity has a dominant market position and this will slow down the benefits that the market has seen since their inception.  The reduced intensity of competition will also translate to slower pace of innovation in the very immediate term.”

For Grab, with Uber now as its shareholder, and with Uber poised for an eventual IPO, though not likely this year, the race for monetization becomes even more intense. As Grab notes, “The acquisition accelerates Grab's path to profitability in its core transport business.”

Manoj agrees. “This should definitely accelerate their path to profitability. It also strengthens their overall play as a dominant digital player.”

Interestingly, Manoj also sees Grab now going toe to toe with Alibaba Group and SEA Group. Explaining this he says, “Grab is now a dominant ecosystem that will compete with the Alibaba ecosystem, the SEA Group ecosystem.  It will be interesting to see how their play will evolve beyond just mobility into other digital markets”

Indeed, all three are fighting hard to be among the winners in the digital payments space which is where the battle will be fiercest between them.

But beyond its path to profitability, the deal could also present Grab’s investors, which include Softbank and Vertex Ventures, with an exit path courtesy of the future Uber IPO. There is nothing to stop Uber from acquiring a higher stake in Grab through issuing it shares for its IPO.

As Manoj notes, “Uber now operates globally under multiple brands. That is what it will claim when it goes IPO.” That will be the pay-off for Grab’s investors.

Next: Is there space for a second player in the market?