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Is the ride-hailing app business model sustainable in Singapore?

The inspiration for this blog post came after I read an article on bloomberg which is titled "The Cab Ride That Nearly Killed Me Changed How I Think About Ride Hailing Apps".

As consumers in this sharing economy, we enjoy the conveniences of having a ride at our fingertips literally. However, nobody seems to be pausing for a second to ask if the ride hailing app business model is sustainable. I shall use two metrics to measure sustainability, namely safety and future profitability prospects.

Safety Risks Associated with Private Hire Car Rides Vs Taxi Rides

As we already know, the traditional taxi model is where the taxi company owns and maintains the vehicles, and rent it to taxi drivers, who are required to fulfil a set of training requirements. Under the rail hailing app model, the car is neither owned nor maintained by the ride hailing company, but a third party company, usually a car rental company. The regulator sets the criteria required to obtain the vocational license.

If we were to dig deeper, one would realise that by phasing out the vehicle ownership and maintenance portion in the private car hire service, the consumers may not be fully aware of the quality of the vehicle and maintenance standards, thereby putting them at a higher safety risk when the vehicle ages, or becomes highly utilised.

Furthermore, the vocational license requirements appear to be more lax to obtain than the full-fledged license for the taxi driver. Specifically, a private car hire driver only needs 10 hours to obtain a license, while the taxi driver requires 25 hours. All things being equal, there is a higher safety risk associated with taking a private car hire, as opposed to a taxi ride.

Perhaps the most debatable issue is the incentive pay given if a certain number of trips are being clocked. For instance, Go-Jek has the incentive pay of $12,000 per month (excluding the 20% commission) for drivers who completed 180 trips per week, provided they fulfil certain performance ratings such as low complaint rate and low cancellation rate. This may unwittingly create a situation where drivers get over-worked because they are chasing after the incentives, such that their driving concentration is adversely affected.

It is thus fair to suggest that the ride hailing app business has higher safety risks for the above-mentioned reasons.

Potential Profitability Prospects of Ride Hailing Apps in Singapore

Both Go-Jek and Grab have not achieved profitability yet, though it's worth considering that their larger counterparts in the US, namely Uber and Lyft are planning for initial public offering that would probably value Uber at USD120 billion.

The business model is clearly enticing because ride hailing companies are asset-light, because they do not own any vehicles nor maintain them. This has endeared them to venture capitalists who see them as highly scalable platform-as-a-service business, and have poured billions into the businesses. Most notably, SoftBank has invested billions of dollars into Uber.

Autonomous vehicle technology is the future of transport, which is compatible with the platforms of ride-hailing apps. Moreover, these ride-hailing apps are expanding into other consumer verticals, such as food delivery (as seen in GrabFood), thereby turning it into a super app.

Go-Jek recently entered into the rail hailing app space, following the merger of Uber and Grab in Singapore. Go-Jek has thus far avoided direct price competition with Grab, as seen in the discipline of cutting out weekly promo codes. As for the driver incentives, it is likely that they would be reduced once a clear market leader is established.

As Go-Jek and Grab are still in the midst of expanding market share in Southeast Asia, it is inevitable that they would put profitability on the back burner.

Therefore, the issue of potential profitability will depend on the range of consumer verticals they can provide to enhance user "stickiness" to their apps, which will ultimately determine the defensibility of the business model.

For further questions on the competitive landscape of the ride hailing app industry and its evolution as an overall utility app, you may consult our Principal Economics Tutor, Mr Clive Foo during his economics tuition classes conducted @ Toa Payoh Branch.

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