Building Sustainable Business i

The Grab company has seen a 250-fold growth in GrabCar and GrabBike in Indonesia since mid-2015. Danung Arifin/BeritaSatu Photo

By : rudi_pandjaitan | on 3:16 PM August 31, 2016
Category : Companies, NEED TO KNOW

Anthony Tan, group chief executive and co-founder of ride-hailing service Grab, says his company will be in Indonesia for the long term to provide multi-platform services to help solve the country’s perennial problems related to inadequate transportation infrastructure. And, he admits, the subsidy-based business model has to end. By Muhammad Azhari

Anthony Tan is engaged in a battle. The chief executive of one of Southeast Asia’s upstart ride-hailing companies, he intends to take Grab to the top in Indonesia as well as in the company’s other areas of operation - Singapore, the Philippines, Malaysia, Thailand and Vietnam.

During a limited media briefing in Jakarta recently, Tan said he is convinced that Indonesia, the biggest economy and also the most populous country in Southeast Asia, offers long-term growth opportunities for the company.

Indonesia is already Grab’s biggest market, and Tan said he believes the country’s young population, chronic traffic jams in some of its biggest cities and inadequate infrastructure offer the start-up a variety of opportunities.

Grab was initially started as the app-based ride-hailing service known as GrabTaxi (MyTeksi in Malaysia) in 2012. It has since evolved into a multi-platform service, with its cash-cow businesses currently involving ride-hailing services for private cars and motorcycles. The company, now headquartered in Singapore, claims to currently have a combined total of around 320,000 registered “driver partners” in the countries where it operates. Its smartphone application has been downloaded by about 17 million users.

Grab Group CEO and Co-Founder Anthony Tan with Co-Founder Tan Hooi Ling. Paulus Nitbani/BeritaSatu Photo Grab Group CEO and Co-Founder Anthony Tan with Co-Founder Tan Hooi Ling. Paulus Nitbani/BeritaSatu Photo

Funding the subsidies

When asked about the company’s focus, Tan said: “We will keep our focus on transporting people. We think this business is sustainable for the next 10 to 50 years.” And Indonesia, he said, is where “the chunk” of the company’s driver partners are located. “The investment in Indonesia is also the most significant for Grab,” Tan said, without providing figures.

Having secured $700 million in funding so far from giant investors, including Japan’s Softbank, Silicon Valley-based GGV Capital, China’s Didi Chuxing and Singapore’s Temasek, company co-founder Tan said Grab has not touched the bulk of that money.

“We can’t say the same for our other friends in the industry, but for us, God is very kind to us, and again, thanks to a great team that allows us to use technology to scale up,” he said.

Sustainability is a big question in the new industry. The China market provides an idea of how painful competition can be. There, US-based Uber threw in the towel on August 1 in its bid to compete with local start-up Didi Chuxing. It accepted a deal under which it and its partners will get a 17.7% stake in the Chinese operator.

While that puts Uber in position to see good dividends in the future, the investment was costly. Reports say it “lost a fortune” trying to break into the Chinese market by paying aggressive subsidies to its drivers. With the deal, those subsidies immediately disappeared, as Didi Chuxing swooped to maximize the advantage of its market dominance. Passengers suddenly found themselves paying much more for their daily ride.

 

Sustainability is a big question in the new industry. The China market provides an idea of how painful competition can be. There, US-based Uber threw in the towel on August 1 in its bid to compete with local start-up Didi Chuxing.

 

In the same way, Indonesian drivers of ride-hailing services receive subsidies from their companies to ensure that they earn enough money, while also keeping customers happy with affordable fares.

Grab’s main rival Go-Jek in early August announced it had raised fresh funding of more than $550 million from KKR, Warburg Pincus and other investors. But in late April, Go-Jek founder Nadiem Makarim told Reuters that his company cannot afford to continue relying on subsidies as “you end up where you run out of money.”

While US-based Uber is also in the race in the Indonesian market, Go-Jek and Grab are the biggest contenders. Makarim and Tan, both graduates of the Harvard Business School, are likely to see their epic battle used as a case study by the school in years to come.

Tan insisted at the media briefing that his company is developing a sustainable business model, although he declined to disclose when Grab will completely phase out its driver subsidies. But, he said, he fully realizes that Grab must gradually remove the subsidies.

“How do you build a sustainable business model? The only way (to operate) without subsidies is to ensure (there are) many jobs for drivers,” said Tan, who prior to founding Grab was the head of supply chain and marketing at Malaysia-listed automotive giant Tan Chong Group.

Tan was keen to downplay the use of subsidies, stating that his company’s business model did not involve burning huge amounts of cash to attract regular users. He repeated Grab’s previous claim that the company has seen a 250-fold growth in GrabCar and GrabBike in Indonesia since mid-2015. Still, that’s not surprising for a company that started from nowhere.

“How much cash someone can burn is not a good relevant example to building a long-term solution. We have to solve a long-term problem,” Tan said. GrabBike in particular, he said, has seen 300% growth in its business since January, despite a 50% cut in its fare subsidies.

He declined to compare the company with rivals, but a leaked report about Go-Jek shows that the start-up had to burn massive amounts on subsidies to push growth in user numbers.

Technology

Tan repeatedly emphasized that the key aspects of his business were technology and people. Commenting on Grab’s financial outlays, he said “if we have $100, we have to put $90 in IT,” referring to Grab’s back-end technology business that includes its consumer application team, application design team, database team, engineering and infrastructure engineering.

“We invested a lot into mapping and routing technology,” Tan said. He mentioned Grab’s partnership with the World Bank to provide real-time traffic data to improve the start-up’s mapping technology. And, he added, he expects his drivers to indulge customers with a promise of a maximum estimated arrival time of six minutes after being hailed.

Grab is also not forgetting about security aspects. “Certain apps have been hacked, ours not,” he said, adding that gaining consumers’ trust is not only about “looking great in the application” or it being simple to use, “but also about your information, your credit card information. You have to be sure nobody steals it.”

Tan was proud to reveal that he snatched his IT team from Palantir Technologies, an American software and services firm, which has served clients including the US government and the Central Intelligence Agency (CIA), National Security Agency (NSA) and Federal Bureau of Investigation (FBI). Tan said Grab also operates research and development centers, with one in Singapore, one in Beijing and another in Seattle.

 

“How do you build a sustainable business model? The only way (to operate) without subsidies is to ensure (there are) many jobs for drivers.” -- Anthony Tan, Group CEO and Co-Founder Grab

 

Tan, who obtained an honors degree in economics and public policy from the University of Chicago before taking his masters in business administration at the Harvard School, said Grab is serious about tapping the “best talent” for the technology aspect of the business.

His engineers in Seattle have worked for major tech giants including Twitter, Google, Facebook, Alibaba, Baidu and Tencent. “They say it is more exciting to work for start-ups,” said Tan with a smile.

Regulatory minefield

A player in what he calls “constructive-disruptive” technology, Tan is fully aware that Grab must maintain a good relationship with the government and calm discontent among traditional players in the industry who feel that their businesses are under threat.

Protests have occurred in Indonesia, with taxi drivers turning nasty in one protest in Jakarta, and opposition from traditional motorcycle taxi, or ojek, drivers, accusing the company of introducing unfair business practices.

Attacks have mainly centered around allegedly unfair tariffs the start-ups have used freely, an option not available to the heavily regulated taxi industry and other forms of public transportation. Grab has also faced regulatory hurdles related to its cooperation scheme with driver partners.

A challenge to the use of private cars for app-based ride-hailing services is a regulation from the Ministry of Transportation that will require driver partners to transfer ownership of their vehicles from their own names to that of a legal entity that is lawfully registered to run public transportation services.

The deadline for this controversial regulation, expected to discourage driver partners from participating in the business, is October 31 this year.

Former Transportation Minister Ignasius Jonan at one stage tried to ban the app-based businesses, but President Joko Widodo then stepped in to defend the industry, saying it had public support. Jonan was replaced in the July 27 cabinet reshuffle by Budi Karya Sumadi, whose background is in property and who has yet to comment on the ride-hailing business.

When asked about the regulatory hurdles, Tan said he was largely unshaken by the challenge. “In the end, I believe the Indonesian government wants the best for the people of Indonesia. In the higher principle, I believe you are aligned, it is no longer me against you. We both want to help the Indonesian people have a much more efficient transportation system,” he said.

 
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