Coping with technological disruption in the taxi industry
Trying to save a business in an industry undergoing disruption can be like gnawing off a foot to save a leg.
Taxi companies in Singapore face the prospect of wrenching change as the Land Transport Authority (LTA) said it will adopt a “light touch” approach in regulating private-hire car services such as Uber and GrabCar.
Taxi companies still dominate the on-demand transport market in Singapore with close to 30,000 vehicles, but the number of private-hire vehicles that mostly ply for new entrants, such as Uber and GrabCar, has grown rapidly in the past three years to an estimated 10,000. This is more than twice as many as the 4,800-strong fleet operated by Trans-Cab, the second largest taxi operator.
Uber and GrabCar do not release revenue figures, but most certainly earn less per vehicle than traditional taxi companies, given that they do not (yet) derive much direct revenue from vehicle leasing.
The National Taxi Association (NTA) has spoken several times on this issue, calling for a more “level playing field” while insisting that competition is nonetheless welcome. The NTA has recently sounded the alarm that fare reductions by both Uber and GrabCar will hurt taxi companies, taxi drivers and, ultimately, commuters.
Is this true? It may be useful to take a step back and lay out how recent changes will affect these stakeholders. Their interests are not necessarily aligned, and many have made the mistake of conflating the interests of taxi drivers with that of the taxi firms.
Commuters are most concerned with getting to their destination in the cheapest and fastest way possible, and are agnostic about the mode of transport they use. Commuters are happy to take public transport where convenient, and many have come to rely on on-demand, private-hire vehicles to bridge the “last mile” of travel as the cost of these services has declined.
Flexible pricing of these services has also helped increase the availability of these vehicles during peak hours, reducing wait times and easing commuter frustration. In addition, both Uber and GrabCar offer simpler fare structures without the confusing surcharges that have long been the bugbear of taxi passengers in Singapore.
For most commuters, the arrival of new competition in on-demand transport has been an unmitigated good.
The impact on drivers has been mixed. They may have taken up driving for a variety of reasons. Those who were previously leasing taxis to satisfy personal travel needs, such as driving family members around, have most likely switched to cheaper private-hire vehicles. Such vehicles are cheaper to rent and now provide nearly the same income-earning opportunities. These cars are also not subject to daily minimum mileage requirements, making them more suitable for personal travel needs.
Up to 45 per cent of Uber drivers in Singapore work 10 hours per week or less, which shows that a number of these cars are partly used for personal travel.
Regular cab drivers who can cope with the technological demands of these new app-based services will benefit. Contrary to what the NTA has said — that the popularity of private-hire cars will hurt cabbies — drivers are in fact free agents who can switch between different companies as the incentives shift, although drivers who have signed long-term contracts with the taxi companies may have to wait for their leases to end.
Although recent fare reductions by Uber and GrabCar could possibly lead to lower per-trip fares, one has to investigate if drivers are making more trips per day, thus increasing their total earnings.
Ride-matching platforms operate two-sided markets that finely balance the supply of drivers to commuter demand. If fares are so cheap that they negatively impact driver earnings, drivers hold the power to switch companies, reducing car availability and in turn deterring commuters from using the previous service.
In a report on its three years in Singapore, Uber pointed out that even as it has reduced fares, the average time its drivers have been idle has dropped from 36 minutes per hour in 2014 to 27 minutes per hour in 2016, indicating that they spend more time on the road generating income. This could also mean that lower fares have created an entirely new segment of riders by tapping on latent demand.
Taxi drivers who are unwilling or unable to cope with technological change may have to contend with reduced earnings when commuter demand shifts to private-hire cars. This would be an incentive to learn new skills in a technologically disrupted industry.
The arrival of new companies competing for a limited pool of drivers has mostly increased the bargaining power of cabbies against taxi companies.
Taxi companies such as ComfortDelGro and SMRT are most at risk in the upheaval.
An organisation’s capabilities also define its disabilities, and previous competitive advantages have now become the proverbial millstone around the neck. Legacy systems contribute to fixed costs that new entrants do not have to bear in an age when everyone carries a pocket-sized general purpose computer. To become taxis, cars need corporate paint jobs, dispatch/payment terminals running on 1990s software and LTA-regulated fare meters.
Although taxi companies may grumble about their new competitors, the reality is that some taxi regulations, such as area- and time-based surcharges and daily mileage requirements have become outdated in an age of technology-facilitated ride matching and dynamic pricing.
The most urgent challenge facing taxi companies in Singapore is their cost structure. Leasing costs for taxis need to be quickly cut from the current S$100-plus per day to something more reasonable given that a brand new private-hire sedan can be leased for as low as S$60 per day. The hundreds of inactive taxis in depots around the island are testament to the fact that the companies’ leasing cost is misaligned with driver demand.
Taxi firms should also explore profit sharing as a way of making up for reduced leasing revenue. Profit sharing would be a much more equitable way for the taxi companies to split fare revenue after decades of offloading fare risk onto taxi drivers. This would make them more “partners” and less “leasers”. The terms should also be structured such that drivers will be motivated to offer good service.
At the same time, fares and other surcharges should be reviewed to regain competitiveness with the new services. Lower leasing costs combined with lower fares may not necessarily mean smaller drivers’ earnings if there is growing ridership.
The reluctance to make needed changes may come down to a desire to defend current profitability. The taxi business remains profitable, contributing 36.4 per cent of operating profit for ComfortDelGro last year (across all geographies) and 11.9 per cent of non-fare EBIT (earnings before interest and tax) for SMRT.
Although taxis still retain many legacy advantages, these, too, will be quickly eroded. The ability to pick up street hails will be rapidly matched by app-facilitated trip-chaining and ride-sharing. Some organisations such as those in the Civil Service will still reimburse only work trips taken on taxis, but this too will change as private-hire cars gain legitimacy and popularity. Taxi firms need to act expeditiously to defend their market share even if it means a short-term drop in profitability. Implementing changes now from a position of strength is better than doing so than when playing defence.
As disruption rampages through the industry, taxi companies face the unenviable choice between sacrificing the foot and losing the leg even as most commuters and some drivers rejoice.
ABOUT THE AUTHOR:
Hawyee Auyong is a Research Associate at the Lee Kuan Yew School of Public Policy.