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The ride-hailing industry’s drive has come to a screeching halt. Can Ola survive?

Mounting losses, imperfect bets and tough lessons. The taxi company was just about to prove its worth, when the pandemic threw a spanner in

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The thrill of driving at top speed is unparalleled. Ask Ola of ANI Technologies. Founded in 2010 by Bhavish Aggarwal and Ankit Bhati, the radio taxi service turned ride-hailing app became a unicorn in less than five years. Today, that company is valued at $6.45 billion, with major investors including Tiger Global, Matrix Partners and Softbank, which has also backed its biggest rival UberAnd on its home ground, it has first mover advantage over the US pioneer, which operates in 71 countries and entered India in 2013.

 

Besides a three-year headstart, Ola also understood local consumers, and expanded to more than 250 cities while Uber restricted itself to 58. “From expanding service to customising product to suit local needs, like accepting cash payments, were things that Ola did right from the onset,” points out Jaspal Singh, co-founder of Toronto-based transportation consulting firm Valoriser Consultants. In December 2019, the Bengaluru-headquartered company held 41% market share, according to Vumonic Datalabs.

 

Ola had the lion's share earlier but Uber now claims to have more than 50% of the market. Even though Ola adopted Uber’s model of a ride-hailing app, Satish Meena, senior forecast analyst, Forrester Research believes Ola was nimble-footed in rolling out services first. “Products such as Ola Play (in-cab entertainment) and Ola Pass (loyalty programme) were first launched by Ola and then Uber followed,” he says. 

 

FINGER IN TOO MANY PIES
But to achieve scale and win market share, Ola had to compromise its profitability and participate in an intense price war with Uber (See: Steady ride). Besides pricing its rides at par with Uber, at Rs 130-150 per ride, it also offered discounts more often. After all, the Indian consumer loves a good discount and Ola obliged by dipping into the funding it had raised.

Gaurav Vangaal, associate director, IHS Markit says, “Most Indian consumers are not loyalists, only switchers. Companies have to ensure they build a relationship with consumers through superior experience rather than just keeping them hooked with good deals.” So Ola had to discount at least until Uber was doing it. Anand Lunia, founding partner, India Quotient concurs, “They knew that at some point Uber will opt for an IPO and will have to stop discounting because they will be under pressure to show profit.”  

 

The discounting strategy worked for a while and Ola sped into several regions that Uber wasn’t considering. But then things started getting a bit tricky. When Uber stopped discounting a few months before its IPO, Ola did too, and its fares increased by 15-20%. Losses narrowed from Rs.49 billion in FY17 to Rs.26 billion in FY19, but the move led to an immediate decline in user baseIncome generated from subscription services such as Ola Select and Ola Pass also fell from Rs.422 million in FY18 to Rs.272 million in FY19.

 

Meanwhile, it was also struggling with its acquisition of Foodpanda’s India business. With a cash burn of Rs.7.5 billion in FY19, the company couldn’t keep the business afloat in a market dominated by the likes of Swiggy and Zomato. It had to suspend operations within 18 months. The ordering options, toowere limited on Ola’s food vertical and Singh says though it acquired Foodpanda paying a big premium, it failed to integrate it and take full advantage (See: Bad Panda). Although Ola has re-entered the market through cloud kitchens in 2019 with brands such as Grandma’s Kitchen, Khichdi Experiment, Flrt and Lovemade, it is too early to say if this experiment will be successful.

 

Ola’s ambition didn’t stop at the food aggregator space. It also launched its financial unit, which was spun off into a separate vertical called Ola Financial Services in November last year. What started as a simple wallet to pay for Ola cab rides has become a service that allows post-paid options to pay for anything from rides to mobile bills, electricity and gas bills. The same vertical also offers health insurance and credit cards to its customers in partnership with Religare Health Insurance and SBI, respectively.

That may have clicked with its some of its users, but the constant shift in focus and the pressure to turn profitable resulted in a spate of top-level exits. Media reports mentioned about a rift between co-founders Bhavish Aggarwal and Ankit Bhati which the company denied as “baseless.” According to Entrackr, Ola’s chief operating officer Vishal Kaul, chief people officer Susheel Balakrishnan, marketing director for Australia and New Zealand Natasha Daly, chief of staff, Akshay Alladi and several other vice presidents and product managers exited the firm in 2018 due to reasons including “change in job descriptions and mounting work pressure”.

This was followed by reshuffling of roles in 2019. Some of these include Ankit Jain, VP and head of Ola Play, who was made co-founder of Ola Electric Mobility. The other co-founder, Anand Shah, was senior vice president of strategic initiatives at Ola prior to the change. Meanwhile, Sanatan Kaul, former senior project manager at Foodpanda now manages sales at Ola Electric. Outlook Business reached out to Ola and its major investors for this story, but they declined to comment.

COVID-19 CHAOS
Even as Ola was battling all these challenges, the ride hailing industry had started to show signs of stagnation. Growth for Ola and Uber crashed from FY16-18, from 90% to 57% to 20%. “The market has reached a saturation point and will expand only if the economy grows. The growth in 2019 was less than 5%,” says Singh of Valoriser Consultants. So, when the pandemic hit, neither Ola nor Uber were prepared for the disruption, especially since the former was trying to make inroads into its rival’s key market in London. The company did not even get time to build its brand in that country it entered less than a year ago. Thus, the crisis could not have come at a worse time for Ola. “Once you go global, you need time to stabilise,” says Yugal Joshi, vice president, Everest Group, which Ola clearly did not get.

 

Back in India, both players have seen revenue growth coming to a halt, while expenses continue to mount (See: Riding the hump). And as social distancing becomes the new normal for the foreseeable future, experts believe the road ahead might remain rocky. Travel seems to be the last thing on people’s mind and corporates are adopting work-from-home policies. “People are aware about the importance of social distancing. This pandemic is definitely going to impact shared mobility for a while,” says Vangaal. He adds that it is going to be a tedious process for shared-mobility players to disinfect or sanitise vehicle with every ride. It could cost anywhere between 2% and 5% in terms of total cost, says Singh. In Australia, Ola recently launched Ola Pro with its fleet of specially fitted cars that follow stricter hygiene and safety standards. These vehicles have a transparent shield between the customer and the driver, and are sanitised after each trip by the driver and every week by a professional service. The drivers also have to take regular temperature checks. For all of this, Ola charges a fee of $4.50. Even then, consumers might think twice before trusting their sanitisation procedure. At the same time, Ola may not be able to hike fares proportionately to keep rates attractive for consumers.

Already, the lockdown caused by the pandemic has resulted in a whopping 95% revenue drop for Ola in April and May. In FY19, it lost Rs.11.60 billion in its core operation. If FY20 performance has similar bleed, then it would have ended up burning through much of the capital it has recently raised. FY21 hasn’t started on a great note and could further corrode its cash balance given slowing growth, impact of COVID-19 and poor uptick in other businesses. Ola usually relies on multiple rounds of funding (See: Funding galore) every year to stay afloat and that’s a lifeline not easily available this year.

The setback in its core business has had a domino effect on all its other businesses. First, of the two million vehicles on Ola's platform, 90% is operated by drivers who take loans, according to data shared by TechSci Research. These loans are procured from Ola's financing partners like SBI and Cholamandalam. As the government announced a moratorium on repayment until August 2020, the leasing business, which owns 100,000 vehicles, is also taking a hit. Not to mention the effect this pandemic has had on its drivers who have experienced a complete loss of income and thus, will be unable to pay their EMIs. Even if demand picks up, there is no assurance that some of the drivers will return to Ola, thus creating a demand-supply mismatch.

 

Second, its lending business has gone for a toss. Already, there are dozens of companies trying to lend to the same profile of customers — the blue collar workforce. “Micro-lending works at scale, when you have a massive loan book. Only then can you make some money. At this time, it is going to be challenging for Ola to scale it without the core business growing,” reiterates Meena. 

Then there is Ola’s electric dream, which is still in R&D phase. In February 2019, the company launched a dedicated EV business called Ola Electric, which operates an advanced technology center in Palo Alto to design and build electric mobility solutions as well as related accessoriesEven during the crisis, it acquired an Amsterdam-based electric scooter manufacturer Etergo in the last week of May 2020. In a media statement, Aggarwal said, “The post-COVID-19 world presents an opportunity for us to accelerate the adoption of electric mobility globally.”

 

However, while Ola Electric became India’s first EV unicorn by winning funding from big names such as Softbank, Tata Sons, Matrix Partners, Kia Motors, Tiger Global and others, success is still a long way off. “The success of this vertical will depend on the cost of vehicles and infrastructure. But it is a good segment to bet on in terms of govt incentives as well as sustainability,” says Joshi but reiterates that Ola has to revive its core business. He believes that it will take at least a year for Ola to return to its pre-Covid revenue. 

Even though Ola can take comfort in the fact that it has exposure to fewer regions when compared with its main rival, what’s not working in its favour is that the Indian company missed out on a few opportunities. It never explored partnerships in the international markets like Uber did. Uber managed to form some successful partnership such as Didi, Grab, Yandex and Careem. This gives some advantage to Uber. Further, they have more cash available to face this storm. Ola will need to make sure that they have sufficient cash to manage this situation for the next six to eight months,” says Singh. 

 

Hence, it is aggressively cutting costs where it can, including resorting to layoffs. On May 20, it announced it was laying off 1,400 or 25% of its employees in a “one-time exercise”. Even so, to tide over the crisis, the company is going to need fresh capital, but it is unlikely that investors will now rush in. “Under the current circumstances, no VC has the appetite to take part in big funding. Most of the investment is going into predictable business like Reliance Jio. I may not be surprised if Jio announces an investment in Ola in the coming days at a lower valuation,” he quips.

 

An Ola IPO was on the cards but now the grapevine is once again abuzz with talks of a possible merger between Ola and Uber. After all, the fierce competitors share a common investor — Softbank. Ola had stalled the merger recommendation a few years ago, but whether it can afford to do so now remains to be seen. “If Ola requests additional funding, Softbank might suggest merging with Uber so that they don’t lose money on both entities. Softbank is also not in a position to fund a lot because their other bets, like WeWork, have misfired,” says Meena. Meanwhile, Joshi believes a merger between Ola and Uber would benefit both players, as their business is complementary in terms of technology, customer base and service. 

Interestingly, a lot of consolidation has taken place in the industry globally over the past few years. In China and South East Asia, Uber sold its business to Didi and Grab, respectively. The former decision was because it couldn’t hold ground in China, which is big on local services and products.

 

But Singh says an Uber-Ola merger will face statutory and legal hurdles as the Competition Commission of India will not give its nod. If Ola and Uber decide to push through it anyway, it will simply mean a long drawn out process, which is bad for both companies and good for Meru, which has been trying to regain market share.

 

REDRAWING THE BLUEPRINT
While merger plans may be uncertain, what’s certain is that Ola will have to redraw some of its business plans. One of them is the IPO. “I doubt Ola would have listed in 2021 even if COVID-19 did not happen, especially after what happened with Uber and Lyft,” says Singh as he refers to their dismal public debut. “Even if Ola lists, they won’t a get decent valuation as other two listed entities, Uber and Lyft’s stock prices have declined,” adds Meena.

 

But Lunia is optimistic and believes it will not be completely battered by the current damage. “Ola did not make any profit for the first ten years, but it changed behaviour. In the second and third decade, Ola can make money. That’s between them and their investors,” he argues and cites the example of Meru, which was profitable, but remained a small player despite starting out early. “Just because a company is profitable at some point, doesn’t mean it will stay updated in terms of technology. Ola is at the top of their league. I am sure they will regain lost ground across verticals,” he adds.

 

Nevertheless, it would surely require a rethink of their business model. A pivot to self-drive and corporate rentals may be on the cards. Ola had started on the self-drive business last year, in October 2019, by introducing a pilot named Ola Drive. The $100-million self-drive market in the country is largely underserved. Media reports that say that out of the 300 million motor vehicles registered, only 10,000 operate in this space. Zoomcar is the industry leader with 75% market share, and Ola is aggressively discounting (30% cheaper than Zoomcar and Drivezy) to expand, but analysts aren’t optimistic about its prospects. Joshi says that the concept hasn’t really taken off in India. Even in the US, a 102-year-old car rental firm Hertz has filed for bankruptcy after the pandemic. Tourism, which generally feeds this business, is also looking bleak.

 

Joshi instead sees more value in the corporate B2B market, which has been ailing for decades, with poor quality cabs provided by local car rental firms. Ola had a 20% market share in the corporate rental market, with 3,500 clients, according to a report. “Ola and Uber can manage trips well and assure quality and availability. It is also a more profitable business than ride-hailing,” says Joshi.

The food business could also gain traction if Ola plays its cards right believe analysts. Despite being dominated by Swiggy, Zomato and cloud-kitchen giant Rebel Foods, Ola can leverage its fleet to optimise logistics. “But Ola now needs to know that even a decade of discounting will not change the market size. They should design for the right size of the market,” Lunia says.

 

For now, Ola is trying to make most of the chaos. During the lockdown, the company partnered with the government of Haryana to facilitate emergency medical trips on its platform. It also launched Ola Emergency in Karnataka for essential medical trips in partnership with the Ministry of Health. But these are merely stop-gap arrangements and can in no way compensate for their usual business.

Hopefully, Ola has learnt from its past mistakes of going too fast too soon. “Considering the current losses and the recent expansion, they will need money in the coming year. The mobility sector is a seminal trend and this is just a near-term glitch,” asserts Joshi. Now more than ever, Ola needs to identify the right opportunities, budget its spend and move forward carefully. Because neither capital nor customer are easily available anymore. What’s clear though is that it will be long before the company can speed over potholes at breakneck speed and still survive to tell the tale. 

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