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Innovations developed in one country take time, sometimes decades, to be adopted and used in others. But platform business models in mobility and transport services have been adopted in many countries and in various uses. What about them makes this possible? Can a first-mover face effective competition from newcomers? The answers are evolving as are the policies countries adopt to guide outcomes.
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Transcript
Roumeen Islam: Welcome to Tell Me How, an infrastructure podcast from the World Bank.
If you read the news and Taka Bangladesh today, you will find not only Uber but a number of national ride-sharing companies. There's Pathao, for example, which is not only car sharing, but a food delivery business and a motorbike-sharing business. Then there's Move and there's Sam, both motorbike-sharing businesses.
There's also a truck-sharing business called Truck Lagbe. It's a trucking logistics company that was started in 2017. Its main objective was to connect people who need a trucking service with those that offer them. The owner got this idea because he saw that the distribution costs for his existing consumer goods business varied hugely even for the same route and load at different times. He couldn't understand it. Then, he found that a major reason for this was poor coordination, so trucks often had to travel routes completely empty. And this was costly. So, he and his partner established their own transport company using an Uber-like digital technology to manage costs. Around the world, often inspired by innovations and other countries, disruptive technologies are taking hold. Let's find out how! Good morning and welcome. I'm Roumeen Islam, host of Tell Me How. And today, we have with us Edward Hsu, our resident expert on disruptive technologies and shared mobility. Hello Ed.
Ed Hsu: Hi, Roumeen. It's great to be here.
Roumeen Islam: Very nice to have you here, Ed. So, Ed there's a lot of excitement about disruptive technologies and their promise for society, particularly in terms of increasing efficiency, higher productivity growth, or simply because there's so many choices available to consumers. So, what is a disruptive technology? And, could you give me some examples?
Ed Hsu: Sure. When we talk about disruptive technology, what we mean is a technology that changes traditional business models or markets in a fundamental way. In some ways, there's nothing new about disruptive technologies. You've seen them in the past. Electricity is a great example. But what we're seeing today is the convergence of a couple of different technologies, AI, internet of things, 3D printing, material sciences, robotics, to name a few. And when they all come together, they do something very disruptive by leading to dramatic cost reductions or coming up with completely new goods and services that replace old ones.
And also, what's interesting is how quickly these technologies are advancing. And that's primarily because they're all based on computing power, which continues to double every 18 to 24 months.
Roumeen Islam: That's actually amazing: every 18 to 24 months. All right, so in terms of market niche, do you view these disruptors as solving a particular problem or just creating new markets and choices where none existed before?
Ed Hsu: I would definitely say both. So, in terms of solving problems, one good example is in finance. So, we know that many people still don't have bank accounts or access to credit. And this is an area where FinTech has done a lot to provide new solutions that now people can get bank accounts or credit that they couldn't have before.
And that's because of technology. Now, in terms of creating new markets or new goods and services, I think a great example is information. And we see that Google has completely revolutionized and changed the way in which we find and use information. And that market didn't exist a couple of decades ago.
Roumeen Islam: And in terms of new markets, one market that's grown tremendously is the online video gaming market where players actually have virtual identities and don't have any idea whom they're playing against. It's literally a virtual world. You live there, you eat there, you buy clothes there... and do all other essential activities.
I was surprised to learn how fast this market has grown. And while there are many types of disruptive technologies, a prominent type that's emerged is platform-based business. So shall we talk about why these models have become disruptive? What about them as disruptive?
Ed Hsu: Sure. When we talk about platforms, it's particularly when we talk about global digital platforms. What they do is bring buyers and sellers together, much better than any physical space could. And by doing so they also eliminate the middleman. And this, when you eliminate the middleman, you really disrupt the market structure and you also really change the cost structure. You can make things much cheaper for the consumer. You can also make it much easier for new companies or new players to enter the market and reach buyers and they a lot more buyers than they could before.
Another interesting thing that platforms do is they bring buyers and sellers together of assets that before were underutilized. And so, when we talk about an underutilized asset, a good example is your car. And your car probably spends most of its time sitting in a garage or taking up real estate. And what a ride-sharing company tries to do is get your car on the road and earning money. And you have the same principle for Airbnb taking a room in your house, getting it productive, or you can use it for trucks, bikes, and even tractors, but you do see some concerns around these platforms. When they come into the market, they tend to be anti-competitive or raise some concerns around monopolies.
Roumeen Islam: Yes. I've been thinking about this, the fact that my car spends most of its time sitting in my garage. And I'm wondering how I'd feel about renting that out the rest of the time. I don't know yet. We'll see. Now on the tech side, the success of these companies... the success doesn't just rise on digitization and the numbers gained from digitization, but another numbers game because they're based on AI or machine learning techniques to gain a cost advantage. They process information much faster than any human could, and in innovative ways,
Ed Hsu: Sorry, I think that's the other advantage that platforms have that not only did they bring buyers and sellers together, but they also collect a lot of valuable data on what these buyers and sellers are doing and how they interact with each other. And then as you were saying, they can use advanced analytics, AI machine learning to process this information. So Uber does this. It's collecting a lot of data on its platform and then it uses it to constantly improve its service and change its pricing. And this makes it harder for new players to come in.
Roumeen Islam: All right. So, let's go back to something you mentioned earlier. These companies have first-mover advantages as their form of natural monopoly. You just said, it's hard for a new player to come in. So, you do get a small number taking over the market. And in fact, even one player taking over the market. And I don't mean just the national market, but global market. In your example, who are the main players globally?
Ed Hsu: So, as we've been talking, Uber is the largest and the most global player. But you do see regional or country level players around the world as well. You have Kareem in the Middle East. In Asia, you have DiDi in China and Grab in Southeast Asia. So, you do see regional models occurring as well.
Roumeen Islam: So, what you're saying is the first-mover advantage can be eroded. There's competition. Emerging and developing country players can adopt this technology. And that's very good to know. But a question I had is how are these new entrants funded? Because funding can be a problem in many emerging and developing countries, particularly if you've got a competitor that does not have this problem.
Ed Hsu: I think we've seen that in regions where there's deep, local, or regional venture capital and private equity markets, that the new players are able to tap that. And there are two ride-sharing companies in Asia that I mentioned: Grab and DiDi. They both had Singapore sovereign wealth fund back then, as well as some Asia-based venture capital firms.
And what's interesting, continuing in Asia, we see Toyota investing in Grab. So now we see interest from auto manufacturers, and this is also diversifying the financial base that these companies can tap into.
Roumeen Islam: Yeah, I find that very interesting, the case of Toyota, and I'm sure there are others. Sometimes existing companies launch their own logistics arms as did Lagbe, the company I mentioned at the beginning, which means that there are the sources of funding when VC funding may not be available. Now, what about these models? Uber, for instance, makes it so easy to transfer the product across borders so that countries like, the much poorer countries, can adopt these technologies. What is it about them?
Ed Hsu: A few reasons that this technology and this business model can cross borders more easily, particularly in developing countries: So, the first reason is that these digital applications, they don't often need high levels of investment and capital or financing or skilled labor to get going. And particularly when you already have the app, as Uber did, it was easier for them to take that app and move to another country. But it also makes it easier for domestic entrepreneurs to adopt this same business model and develop their own app. The second reason that this technology can cross borders is data.
We talked about this before, about how data becomes a competitive advantage. And so it's fairly easy for Uber, for example, to go into a new market, take data from that new market, but use similar algorithms and then customize its pricing or services in that new market. And the third reason I would say is that you now have widespread connectivity and mobile phone usage in developing countries as well. And you also have a common mobile platform, either Apple iOS or Android, and this allows the same app to quickly scale across countries.
Roumeen Islam: But first movers in one country can't prevent people from copying their ideas once they're in. So, can you give some examples of where Uber got in first, where others came in, or has Uber just placed small competitors out of the market?
Ed Hsu: No. A great example is Grab in Southeast Asia and Singapore as I was mentioning before. So, they went head-to-head with Uber and it was a very competitive battle that they had. And when I met with the management team, they were telling me a story of how the founders personally went on the streets and recruited drivers away from Uber and signed them onto their platform on the spot. And what they also did was they developed new features that Uber didn't have, they accepted cash payments. And they also integrated motorbikes onto their platform. Uber, did not, they had the advantage of where they had their app, that they were able to move into this new country, but that's also a disadvantage because their app didn't accept cash or have motorbikes.
So Grab was able to localize and now they're continuing to evolve and they have some financial services, they have hotel booking, they have on-demand video, ticket purchasing. It's really becoming now what we call a super app model, which is quite interesting.
Roumeen Islam: Okay. A number of things changed the economics: They didn't try to move customers away. They didn't compete on prices in other words, but they competed on the drivers. That's very interesting. They competed for the labor. I guess that's novel. Then they immediately went into doing a one-stop-shop service that, having many other things on their app, and then, they customized, the payments. That's three different things they did! Now, let's talk quickly about how the Uber model transferred to trucking logistics. I mentioned it in an example in the introduction. Logistics is an important part of economic activity and I understand that there are startups providing on demand, trucking services around the world in Africa and South Asia. Why are they so important?
Ed Hsu: When you think about logistics, it does have a huge impact on a country's economic growth. And the reason is as we know, trade and investment are global in nature. So, the better your internal logistics are within your country the more competitive your country is going to be. Now, unfortunately for developing countries, oftentimes the logistics system is fragmented, it's outdated, it's inefficient. For example, in Africa, you have the same logistics system that, you know, for the past 30 years where you have an agent who operates by phone, sometimes by email, but it's completely manual. And this results in delays of three to 10 days for trucks to get their assignment.
So here as we were talking about, we see a lot of inefficiencies, we see a middleman — it’s a perfect opportunity for a digital platform to come in and disrupt this market. So, you see that in Africa, you have a company called Kobo360, you have a company called Black Buck in India, other examples you've mentioned that are now Uber for truck models. And in fact, the World Bank Group, the private sector, and IFC also are investing in these companies as well.
Roumeen Islam: Three to 10 days is a very long time. And if you're going to be delayed by three to 10 days, there goes your competitiveness. So, these companies need to get people on to the platform. Are these individuals that own their own trucks or are they trucking companies. Who are they?
Ed Hsu: So, what's interesting about this industry is that most of the trucks are owned by either an individual or part of a small business of maybe one to five trucks. And in India, we can see that this is 75% of the trucks on the market that are individuals and small businesses. So, they sign up directly on these platforms because they're waiting around and they can see that if this platform is working for them, they can get their trucks on the road much faster and they can earn more money.
Roumeen Islam: So, it's partly word of mouth and I'm sure they get some sort of attention in the town or in the media or something. So, people get to know about it. Now, let's talk a bit about regulation. How did Uber and ride-sharing cross borders without regulation?
Ed Hsu: Typically, when Uber came into a country, the regulations were not broad enough to cover them. So, the regulators were slow to react. And it's understandable what happens with new technologies — the government's not sure what to do with it. In particular, these digital platforms, they raise some difficult questions. So, Uber drivers, are they employees? Are they independent contractors? Are Airbnb hosts, hotel operators? It's not clear and countries are coming to different conclusions on this question.
Roumeen Islam: You make some important points? It's very hard to regulate a business that doesn't yet exist in your country. But over time, those who make policy the rest of society, those who pay the costs and those again, they stop thinking about it. And that is when regulations take off. We've seen this many times in history policies influenced after a bit. And we see competition policy becoming much more important now. Authorities everywhere are thinking about how to properly regulate to ensure competition. And now you also see policies covering labor and employment standards. Could you speak a bit about that?
Ed Hsu: That's right. So, I think that maybe an interesting example is in South Africa when Uber entered. They entered in 2013. And right away as they entered, it became a very controversial move and you started to see violent fights, fist fights between taxi drivers, Uber drivers. So, it's really quite remarkable. You'll go to the airport and you would look over at the taxi stand and you would see just drivers having physical altercations. And this was because Uber's entry was so disruptive. And it was a huge threat to the existing players and it wasn't until early 2020, that South Africa put into place regulations around Uber and other ride-sharing companies and required them to operate on the same basis as the taxi industry and required them to get licenses, and also had similar restrictions, but not all countries regulate the same way because they have different preferences.
So last week, we just saw that the UK ruled that Uber drivers are employees and have to be treated as employees, but in November, California in the U.S. voted to allow Uber to classify them as contractors.
Roumeen Islam: Right, market mechanisms that are at work, society's preferences are at work. Companies change standards along with consumer preferences. Uber started screening drivers much more carefully when you know, some time ago there was an uproar over safety. I don't know if you remember that, Ed.
Ed Hsu: That's right.
Roumeen Islam: So, shall we talk about employment? What do you see happening to employment?
Ed Hsu: Here, I think the evidence is mixed and it's heavily dependent upon local context, but we do see that, the drivers and a platform, they talk about how much they love the flexibility, how much they like the extra income, and how low the barrier is to entry for them to come onto the platform.
And for example, we saw that in New York taxi medallions used to cost over a million dollars. But however MIT did a study here in the U.S. and after you factor in all the vehicle costs, so fuel insurance, maintenance, and repairs, they found that drivers earned a median profit of about $3 and 37 cents per hour.
And that meant that most were earning less than minimum wage. And another big problem that people have noted is that when you're a contractor and not an employee, you don't have health insurance. And you also don't qualify for unemployment protection that you would if you were formally employed.
And we saw that was a big problem during COVID that many of these ride-share drivers, they didn't get unemployment benefits from the government. And this is a problem for many workers across the gig economy. At the same time, people do continue to be willing to drive for Uber.
Roumeen Islam: That's right. And the truck drivers are also signing up voluntarily as we discussed, I guess it depends on the alternatives available. And we also see that sometimes you get labor getting employment as through Uber, but sometimes they lose it as through the trucking logistics middleman. And that's how it is with structural changes. Some people lose and some people gain. And it's very difficult to manage that. The difficulties that happens sometimes. Is there anything else you'd like to say before we end this episode, Ed?
Ed Hsu: Yeah, I think that even though we've seen a lot of disruption in existing markets from these global digital platforms, I feel we're still at the beginning of what these platforms can really do.
One interesting example is matching global supply and demand of talent. And we saw how this COVID-19 really accelerated this trend of remote work. And we're also seeing that a lot of work, particularly in the technology industry can be done remotely, whether we're talking about coding or software development or data cleaning.
And so you see these new work opportunities that are really opening up for those that have a mobile phone and have connectivity that they can develop a new skill and that sell that skill to companies all around the world. And I think that as this continues to develop, it's going to be really interesting to see how developing countries can take advantage of this as now a pathway for economic growth. In the past, if you wanted to grow economically, your pathway was perhaps through light manufacturing or textile manufacturing. Now, maybe it's going to be through coding and selling out coding skills to companies all around the world, but you have to have the right foundations. You have to have the right connectivity in your country, and you have to have the right skills.
Roumeen Islam: We see some of that already as substitute for labor mobility. I think we'll be seeing, as you say, many more things that we could never have imagined before. So, thank you, Ed. That was very interesting. And I'll sit here and try to imagine all the things I could never have imagined.
Thank you, Roumeen. And it was really great to be here.
Roumeen Islam: In this episode, we learned some things about disruptive technology and mobility. An important point was that technologies that don't require very large capital investments or very high levels of human capital can be adopted more easily. There are entrepreneurs everywhere, just waiting for a chance to use a technology that makes them some money.
Secondly, even global platform-based companies can face effective competition from home grown ones and a number of things help here, financing, knowledge, awareness among those who buy and sell the product.
Thirdly, customization to local conditions is quite important. And the domestic firm may have the advantage here. For example, where car ownership is limited and motorbikes are a popular form of travel, ride-sharing on motor bikes grew on Uber-like apps.
Finally, regulation evolves with technology... sorting out property rights, externalities, and other important issues. You simply can't foresee everything! Till next time. Bye for now.
If you have questions or comments, we’d love to hear from you. You can reach us at tellmehow@worldbank.org. Don’t forget to subscribe and thanks for listening!
This episode was recorded in May 2021.
View all episodes on our Tell Me How: The Infrastructure Podcast Series homepage