Grab is looking heavier by the day. Thanks, Toyota: Tim Culpan

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(Dec 20): Six months ago I warned that Grab Holdings Inc may ditch its asset-light model in favor of owning more inventory.

The Singapore-based ride-hailing company had just landed US$1 billion in funding from Toyota Motor Corp, and the deal looked a little like vendor financing.

A press release from the two companies on Tuesday shows this to be the scenario that’s playing out:

Toyota … is offering Total-care Service for 1,500 Toyota vehicles owned by Grab Holdings, Inc (Grab) in Singapore through its subsidiary GrabRentals. (emphasis added)

Furthermore, the two companies said they plan to boost the number of Toyotas in Grab’s fleet by 25% by 2020, or another 375 cars. That’s just the cars owned by Grab, not those by its rental partners nor those owned by drivers themselves. Grab refused my request for numbers on the size of its fleet.

Owning cars isn’t new to Grab. It’s been buying vehicles since it started six years ago. But the decision to add to its fleet is bucking a trend in Singapore where the total pool of commercial passenger vehicles — taxis plus private hire cars — is on the decline after peaking in December last year.

While the fall in Singapore’s taxi fleet is well-known, a drop in both taxis and private-hire numbers in November means that the combined fleet has fallen 10 out of 11 months this year. That can’t just be blamed on Grab’s takeover of Uber Technologies Inc’s Southeast Asia operations because the trend was underway before that merger happened.

There are plenty of stories of drivers trying to get out of the business because the reduction in subsidies is cutting their pay. And yet Grab wants to go deeper by building up an even bigger inventory.

My concern is one of basic economics. The ride-hailing business model was originally based on the notion of matching idle supply (drivers who had a car and spare time) with pent-up demand (consumers who want to get home safely late at night).

But mission creep has muddied that model, and not just at Grab.

Lyft Inc and Uber have taken it upon themselves to play matchmaker between driver and car-rental company or manufacturer while also building their own fleets. One writer even speculates that China’s Didi Chuxing Inc will go a step further and buy a carmaker outright.

By lowering the barrier for drivers, or even owning the car, ride-hailing companies want to make sure there are plenty of vehicles available when consumers want them. This active recruitment could upset the balance by artificially adding supply to the market.

More supply, in theory, could increase competition and push down prices. This would actually make it harder for drivers to turn a profit, while at the same time saddling them with the debt from owning a new car. Economists would argue that lower prices might boost demand, which could actually mean more revenue for drivers.

Whether drivers will be better off depends on whether the increased number of journeys is enough to compensate for the lower fare per ride, a phenomenon known in economics as the price elasticity of demand.

I suspect that while adding more supply will help consumers find drivers more easily, it won’t push up total business enough to ensure that individual drivers have more money in their pockets. It will also add to the burden on those who own cars — whether driver owners or fleet owners — because their debts don’t decrease with passenger revenue.

Not to worry, I have been told, demand still outstrips supply. This means that more cars can be added without hurting those already on the roads. I’d love to see the data on this, so Grab: You have my number.

If supply really can’t keep up with demand (warranting more cars), then Grab’s entry to Singapore wouldn’t have hurt the existing taxi market too much because it was just soaking up excess demand.

Data from Singapore’s Land Transport Authority show this not to be the case. Not only has the country’s taxi fleet declined, average rides per day have also fallen. In aggregate, daily taxi rides fell 30% in the two years through October 2018. Consumers are choosing ride-hails as a substitute for taxis, not as a supplement to them.

Which brings us back to the 25% more Toyotas Grab plans to add in the next two years. It doesn’t appear that market dynamics warrant more cars being on the roads in Singapore — especially with a boost in public transport infrastructure — so this fleet expansion looks more like a land grab than an attempt to fill a gap in supply.

That’s just fine for carmakers that get to sell Grab all those new vehicles, but a bigger inventory won’t do much for those shareholders who aren’t named Toyota.


Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.