Taxis Pick Growth Over Profits

Companies woo clients and drivers in consolidation drive, never mind the cost

Published: 18th January 2015 06:00 AM  |   Last Updated: 18th January 2015 12:26 AM   |  A+A-

Taxis-Pick

On January 14, Ola Cabs announced that it had crossed the 60,000 mark in the number of cabs on its platform. Four years ago, when the start-up announced its entry into the sector, the total number of taxi cabs operating in the organised sector was less than 55,000 across India.

The number says it all. The Indian taxi cab industry has witnessed unprecedented growth in the last two  years. The advent of the online aggregator and brands that have quickly become household names—like Ola, Taxi For Sure, Meru and Uber—have changed the dynamic of the industry. Accompanying the rapid rise of the ‘new age’ taxi cabs are fares that would have been unimaginable even a year ago. In their quest to entice and retain customers, aggregators have brought fares down to as low as `9 per km. On Saturday, Meru offered clients booking on its phone app a flat 25 per cent off each time. In some cities, taxis are now cheaper than autos.

But the meteoric rise of the nascent sector has come with its own share of problems. In the headlong rush to entice drivers, the cab companies have run over many of their own in-house regulations, including driver verification. The rape of an Uber passenger in Delhi has put the spotlight on the safety factor.

Another question is how far the constant quest to undercut competitors will take these companies. While the declaration that their fares and business models are sustainable is unanimous among market leaders, the question of profitability is not.

GROWTH SANS PROFIT

Take the case of Ola. The company has a 70 per cent share of the market and is still growing at a phenomenal pace of nearly 40 per cent a month. But its growth comes at the cost of profitability. “If we want to be profitable, we can be, right at this moment. But our focus is not on profits but on growth. We want to grow and scale up as much as possible in this market, which we think is huge,” says Anand Subramanian, director, marketing communications. Ola has announced plans to expand to over 200 cities by the end of the year from the current 50.

Aprameya-radhakrishna.jpgThe headlong rush for volumes and market share is resulting in massive outflows of cash. “Yes, some companies are bleeding,” says Siddhartha Pahwa, chief executive officer of Meru Cabs, without giving names, ”and I wouldn’t contest the term ‘price war’. But it is about attracting customers and retaining them. These price reductions are hugely beneficial to customers.”

Co-founder of the Bangalore-based TaxiForSure Apremeya Radhakrishna, agrees. “It is not about undercutting anyone. It is about realising the potential of the sector. Anyone who does will stay and do what is necessary,” he adds. But how far and for how long? Added to rapid expansion costs are the incentives that taxi cabs provide their drivers. Even with the deep pockets that venture capital funding has given some aggregators, the incentives make a dent.

TaxiForSure, for instance, ensures that its drivers do not earn below `200 per drive, even on its special `49/4 km offer. This means that if the total fare of the ride comes to, say, `140, the company pays the driver the remaining `60. This way, the driver earns `200 as a minimum per ride, however short the distance is. Other companies also do the same, in varying degrees and methods. “You need to handhold drivers through the transition phase. Till they get more than 10 -12 rides a day and begin earning more on volumes,” says Radhakrishna, in explanation about the incentives.

While the rational is sound, the costs are likely to be staggering. As is the diversification into the autorickshaw market by Ola and Taxi For Sure. Ola entered this chaotic segment in several cities, including Bangalore, Chennai and Mumbai, less than three months ago. The company says the service is still in beta but that at current count, there are more than 30,000 autos plying for them.

And while the company accepts that it does give certain incentives to get drivers to work for them, the scale of the incentives are noteworthy. In Chennai, Ola pays drivers `30 over the meter for every ride they accept. Drivers also say that for every continuous 12 hours that they are logged on to the Ola app, the company pays them `250. Taxi For Sure, having announced its entry into autorikshaws this Friday, is as likely to offer the same kind of incentives to drivers.

SAFETY AT A COST

Looming safety regulations, which are slowly becoming mandatory in several states, after the Uber incident, could also mount significant costs on the industry. Karnataka and Tamil Nadu, for example, are already in the process of drafting laws for these companies. The regulations are set to include panic buttons, on-board tamper proof GPS systems, increased background checks on drivers and maintaining biometric data records, all of which would result in additional cash outflows.

Anand-subramaniaN.jpgMeru’s Pahwa says he doesn’t mind. “For Meru, safety has always been a standing priority. We came out with our own regulations a long time back and keep to them stringently. I also believe the law of the land has to be kept, and increased safety can only benefit the industry as a whole. Even if it means a little investment now. ”  In any case, he adds, most of the impending regulations, like the (ICE) Button and the trip tracker, are already taken care of by Meru. The required on-board GPS, however, is not in place. Subramanian of Ola says, “We are closely working with the government to further strengthen the existing safety and verifications processes. We have also proactively installed an additional layer of GPS device in every car in addition to the phone- based GPS device already present. ”

Taxi For Sure’s Radhakrishna has some reservations. “Safety features are absolutely necessary. But the model of business has to be understood by regulators. Some regulations do not make sense for us. For example, why should we maintain a parking space if we do not own cars?” he asks.

FULL SPEED AHEAD

Despite all these issues, market experts say there is no stopping the growth of these new-age behemoths. According to a recent inhouse study by Meru, the transportation sector is the largest consumption sector in the country. “The total sector is about as large as $14 billion, of which the organised sector is barely $700 million,” points out Pahwa, and a shift among consumers indicates a move towards public transportation.

siddhartha-pahwa.jpg“We are set to effectively leapfrog the car-owning phase that the West went through. More and more people are already eschewing their cars for other transport, or are ready to,” says Subramanian. “The tier-II and tier-III cities constitute a huge market where we are seeing growth in triple digits,” he adds. 

The vitality of the markets, coupled with the immense potential that companies see, is what is driving these companies forward. Come profit or none!

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