Deescalating War in App-Based Transportation

Kompas

Syarkawi Rauf

Since Uber and Lyft dropped onto the United States stock market with their initial public offerings (IPO) last May, the attention of industry observers is focused on similar companies in other countries, including Indonesia.Even though the two big players in Indonesia, Go-Jek and Grab, have no plans for going public in the near future, the market is questioning whether smartphone application-based transportation companies can produce sustainable business plans or will only continue to "burn money" to gain market share. This concern is understandable, because, according to the S-1 Uber public document submitted to the Securities and Exchange Commission (SEC), Uber posted an operating loss of US$3 billion in 2018 and $4 billion in 2017. FactSet predicted that Uber would lose $2.14 billion in 2019.

In Indonesia, the two app-based players have not claimed to have made a profit, because they are still focused on developing businesses by raising capital and "burning money" through aggressive pricing and discounts. There is nothing wrong with using investment funds for marketing, but if done continuously, it can lead to predatory practices to eliminate competitors.

”Predatory” strategy to dominate market

The Transportation Ministry has set a price floor for app-based car-hailing services through Transportation Ministry Regulation (Permenhub) No. 118 of 2018 to prevent predatory tactics; unfortunately, there is no similar rule for app-based motorcycle taxi services.

The position of Grab, which has more capital, makes it more flexible to make special offers to achieve market dominance. According to Henny Sender on Channel News Asia, Softbank CEO Masayoshi Son believes in the winner-takes-all principle in the internet business.

This means, Softbank as Grab\'s biggest investor will continue to pour capital into the sole winner and all opponents go bankrupt. In this perspective, the losing party is anyone who runs out of capital first, not who has the worse business model or an inefficient execution.

This means, Softbank as Grab\'s biggest investor will continue to pour capital until it becomes the sole winner and all opponents go bankrupt. In this perspective, the losing party is anyone who runs out of capital first, not the one with inefficiency in business model or execution capability.

The CCCS finally slapped a fine of more than Rp 140 billion on Grab.

When there is only one player in the industry, that single player could use its monopoly power to the detriment of consumers and suppliers in the value chain. As revealed by Singapore\'s competition authority, Competition and Consumer Commission of Singapore (CCCS), when Grab held the monopoly in Singapore, CCCS received complaints from the driver partners about an increase in commission rates taken by the app provider from drivers\' income. Grab also applied exclusivity obligations to taxi companies, car rental companies and partner drivers. The CCCS finally slapped a fine of more than Rp 140 billion on Grab.

In the Philippines, meanwhile, the Philippine Competition Commission (PCC), also found that, since Grab had become the dominant player in the country, the company failed to maintain healthy competition in pricing, special offers, driver incentives and service quality, prompting the PCC to impose a fine of Rp 4 billion.

KOMPAS/ADITYA PUTRA PERDANA

GrabBike drivers have a light moment at a shelter beside the Paragon Mall in Semarang, Central Java, Friday (29/3/2019). The shelter was set up to let drivers take a rest and recharge their mobile phone batteries as well as wait for orders in an orderly way.

Amid the danger of seeking market control by selling at a loss, we cannot continue to indulge the desires of consumers who always want to get the lowest price. The government must immediately lessen the intensity of the war in app-based transportation by setting rules for the two competitors, for example with restrictions on discounts, so that they are not used as a cover for predatory pricing practices aimed at eliminating competitors.

Victims of aggressive pricing

The first victim of the pricing war in app-based transportation is the drivers’ welfare due to a decrease in income caused by a decrease in demand. If price wars are not regulated, players who have more capital will have more flexibility to continue to subsidize service prices, thereby reducing demand for drivers at app providers with lower capital.

Furthermore, the practice of selling at a loss in the price war between the two giant providers in Indonesia creates a barrier for the entry of new players and inhibits the growth of new players or start-ups in the app-based transportation industry, unless they have as much capital as the incumbents. We know that Indonesia is not short of new players that want to challenge the old players, such as Bonceng, Ladyjek, Blujek and Anterin.

The last victims, who are the most invisible, are even the consumers. Although aggressive pricing is tempting in the short term, these benefits become meaningless when the low prices are accompanied by low service quality. This is an impact that is difficult to avoid, because a price war cuts the revenue obtained by the app provider, eventually causing a reduction in investment in customer services.

Government role in anticipating predatory behavior

In Indonesia, the government regulates app-based transportation through Transportation Ministry Regulation No. 12 of 2019 and Transportation Minister Decree No. 348 of 2019 through price floors and ceilings, but, unfortunately, excessive discounts evade these two regulations, which can result in unfair business competition. Ideally, the lower price floor set by the Transportation Minister will be a healthy reference for the app-based transportation industry.

The Business Competition Supervisory Commission (KPPU) needs to be more active in keeping an eye on loss-accepting practices and establishing policies that encourage fair competition.

The government needs to prevent predatory pricing practices and keep business competition in the digital economy industry healthy by reflecting on the practices that have occurred in neighboring countries, such as Singapore and the Philippines. Moreover, business competition with the goal that the winner takes it all or a concentration of economic power is not in accordance with the principles stipulated in Law No. 5/1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition. The Business Competition Supervisory Commission (KPPU) needs to be more active in keeping an eye on loss-accepting practices and establishing policies that encourage fair competition.

The government also needs to review Transportation Ministry Regulation No. 12/2019 to prevent loss-accepting practices. This would be a precedent for other supervisory authorities in the sector, because the practice of selling at a loss also occurs in other industries supported by private equity capital, such as the e-commerce or e-money industry.

KOMPAS/ADITYA DIVERANTA

Online motorcycle taxi drivers wait for orders at Palmerah Station in Central Jakarta on Monday (6/5/2019). Many residents rely on the online motorcycle service, especially after the implementation of the new regulations for modes of transportation.

The Transportation Ministry needs to emphasize that discounts offered by app-based transportation operators and/or parties related to these operators can be carried out by referring to the price floor but should be limited in quantity and time period to maintain fair market practices and avoid loss-accepting practices.

Muhammad Syarkawi Rauf, Chairman of KPPU from 2015-2018, founder of Institute for Competition and Policy Analysis (ICPA)