ComfortDelgro Corporation Ltd (SGX: C52) is one of the largest public transportation companies in the world. Many investors would see public transport as a defensive type of business with stable and predictable revenue streams. This may be a mistaken notion right now. Uber, a company that runs a vehicle-sharing mobile app, has risen from nowhere within seven years (the company was founded in 2009) and is creating huge competition for incumbent public transport operators around the world. It’s likely that most investors would think of Uber and other ride-hailing apps as a threat mainly for taxi companies. But, I believe there is way…
ComfortDelgro Corporation Ltd (SGX: C52) is one of the largest public transportation companies in the world. Many investors would see public transport as a defensive type of business with stable and predictable revenue streams. This may be a mistaken notion right now.
Uber, a company that runs a vehicle-sharing mobile app, has risen from nowhere within seven years (the company was founded in 2009) and is creating huge competition for incumbent public transport operators around the world.
It’s likely that most investors would think of Uber and other ride-hailing apps as a threat mainly for taxi companies. But, I believe there is way more with Uber.
I had listened a recent TED talk by Uber’s chief executive, Travis Kalanick. From it, I got the sense that he is quite certain that ride-hailing and car-sharing technologies would eventually displace traditional public transportation services that have been protected by regulations for many years.
Uber is an uber threat
With Uber, there is a direct feedback loop between the company’s drivers and passengers. What this means is that an Uber experience is generally more pleasant than a taxi ride. Kalanick also mentioned that Uber’s pricing is always competitive and in fact, generally cheaper when compared to taxis. Moreover, Uber launched its own fully-owned car rental company here in Singapore last year.
The rental firm, Lion City Rentals, rents out cars to drivers who want to be an Uber driver but who can’t afford to own their own car. Uber is pricing its rental rates at a much cheaper level than prevailing taxi rental rates, making its service an extremely attractive option for existing taxi drivers to switch and become Uber drivers as well. Uber seems to be beating Comfortdelgro at the taxi-renting game. (Comfortdelgro earns revenue partly by renting out its fleet of taxis.)
Due to the massive database that Uber has, it can price its rides at the optimal point where it is cheap enough to attract passengers who would normally use other modes of public transport. Now, this is the key.
From my own anecdotal experience, I am now an Uber convert. In the past, I would typically take the train when travelling. But now, more often than not, I see myself reaching for my phone and tapping on the Uber app.
At the moment (based on 2015’s results), Comfortdelgro’s taxi business only contributes to 36% of the company’s total pre-tax operating profit. If the taxi business were to disappear completely, it’d be very painful, but the company will still have hundreds of millions in operating profit.
But, if Uber – or other ride-hailing apps – starts becoming a viable alternative to say, trains, or buses, then even Comfortdelgro’s other businesses could be under threat too.
At the end of the day, Uber’s objective is to make transportation more efficient, to let more people share rides, drive less, and in turn, have fewer cars on the road.
And if indeed there comes a day when there is little need for the general public to drive – given that they can hail an affordable ride from anywhere at any time – then there would be lesser need for driving centres, lesser need for car rentals, lesser need for vehicle inspections, and lesser need for vehicle repairs. Did I mention that ComfortDelgro is in every one of those businesses?
Competition is heating up
Even if Uber does not succeed, competition in the ride-hailing space is heating up. In Southeast Asia, other players such as Grab and Go-Jek are all jostling for business. In China, there’s Didi Kuaidi.
These ventures are funded by some prominent investors with deep pockets, such as Temasek Holdings, Alibaba Group, Google Venture and Baidu Inc. The ride-hailing companies are also not content with simply being ride-hailing service providers – some are already looking at things such as logistics, motorcycle sharing, carpooling, car rentals, and others.
All that I’ve shared above does not mean that Comfortdelgro would certainly be in trouble. The company could fight back, or the business expansion plans for the ride-hailing providers could all fall flat. But, I think they are risks that current and prospective investors of Comfortdelgro may want to consider. I, for one, am starting to be worried for Comfortdelgro’s business.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.