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Today, because India is so weak in making even simple products, a country with a quarter of the

world’s population accounts for only 2 per cent of world trade. However, even allowing for China’s dominance, ‘there is scope for India to be part of the global value chain and be part of the supply chain linkages’, argues Mr Tharman ShanmugaratnamHENNY SENDER • 16

TODAY • TUESDAY 3 MAY 2016

Coping with technological disruption in the taxi industryTrying 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” ap-proach in regulating private-hire car services such as Uber and GrabCar.

Taxi companies still dominate the on-demand transport market in Sin-gapore with close to 30,000 vehicles, but the number of private-hire vehi-cles 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 sec-ond 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 com-

FIRMS MUST EMBRACE CHANGE WHILE STILL IN A POSITION OF STRENGTH

petition 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 stakehold-ers. Their interests are not necessar-ily aligned, and many have made the mistake of conflating the interests of taxi drivers with that of the taxi firms.

THE COMMUTERS

Commuters are most concerned with getting to their destination in the cheapest and fastest way possible, and are agnostic about the mode of trans-port they use. Commuters are happy to take public transport where con-venient, 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 availabili-

ty of these vehicles during peak hours, reducing wait times and easing com-muter frustration. In addition, both Uber and GrabCar offer simpler fare structures without the confusing sur-charges that have long been the bug-bear of taxi passengers in Singapore.

For most commuters, the arrival of new competition in on-demand trans-port has been an unmitigated good.

THE DRIVERS

The impact on drivers has been mixed. They may have taken up driv-ing 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 op-portunities. These cars are also not subject to daily minimum mileage re-quirements, making them more suit-able 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 num-ber 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 in-centives 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 in-vestigate if drivers are making more trips per day, thus increasing their to-tal earnings.

Ride-matching platforms operate two-sided markets that finely balance the supply of drivers to commuter de-mand. If fares are so cheap that they negatively impact driver earnings, drivers hold the power to switch com-panies, reducing car availability and in turn deterring commuters from us-ing the previous service.

In a report on its three years in Sin-gapore, 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, indicat-ing that they spend more time on the road generating income. This could al-so 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 re-duced earnings when commuter de-mand shifts to private-hire cars. This would be an incentive to learn new skills in a technologically disrupted industry.

The arrival of new companies com-peting for a limited pool of drivers has mostly increased the bargaining pow-er of cabbies against taxi companies.

TAXI COMPANIES

Taxi companies such as ComfortDel-Gro and SMRT are most at risk in the upheaval.

An organisation’s capabilities also define its disabilities, and previous competitive advantages have now be-come 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/pay-ment terminals running on 1990s soft-ware and LTA-regulated fare meters.

Although taxi companies may grumble about their new competitors, the reality is that some taxi regula-tions, such as area- and time-based surcharges and daily mileage require-ments have become outdated in an age

CONTINUED ON PAGE 17

HAWYEE AUYONG

Hawyee Auyong is a research associate at the Lee Kuan Yew School of Public Policy.

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 here. TODAY FILE PHOTO

comment analysis TODAY • TUESDAY 3 MAY 201617

buy a fake integrated circuit at half the price and the quality from China is as good as a Fairchild IC from the US. They make much more complex ICs than we Indians can make.”

Why then did Mr Kapur shift from importing from China to essentially reinventing the wheel in India? Much of his explanation has to do with the obstacles that befuddle foreign busi-nesses operating in India.

One big challenge came from deal-ing with Indian customs. Its charges nullified the original price advantage of Chinese-made goods. “Customs is a big pain unless you go the under-the-table route,” Mr Kapur says. Consign-ments from China were held up for weeks. In some cases the duties and penalties exceeded the value of the shipment, leaving Mr Kapur to aban-don the imported parts.

Importing also became impractical over the long term because transporta-tion in India is both costly and slow; the average freight train speed is 25kmh.

Still, the transition to locally sourced parts was not easy. It took Mr Kapur 18 months to find the right suppliers for some of the parts he re-quired, such as printed circuit boards and plastic injection moulds.

Nevertheless, for all the difficulties and the huge gap between Chinese and Indian manufacturing, it is an effort worth making. Even when a foreign company wins the contract to produce the locomotives for the Railways Min-istry, the project will generate jobs in the depressed northern state of Bihar and have multiplier effects.

It is late, but not too late. FINANCIAL TIMES

Coping with technological disruption in the taxi industryof technology-facilitated ride match-ing 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 pri-vate-hire sedan can be leased for as low as S$60 per day. The hundreds of inactive taxis in depots around the is-land are testament to the fact that the companies’ leasing cost is misaligned with driver demand.

Taxi firms should also explore prof-it sharing as a way of making up for reduced leasing revenue. Profit shar-ing would be a much more equitable way for the taxi companies to split fare revenue after decades of offload-ing 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 oth-er surcharges should be reviewed to regain competitiveness with the new services. Lower leasing costs

CONTINUED FROM PAGE 14 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, contrib-uting 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 inter-est 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 re-imburse 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 profitabil-ity. 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.

CONTINUED FROM PAGE 16

Henny Sender is the chief correspondent for international finance at Financial Times

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.