The Mobility Revolution: Relevance for Emerging Market Investors
This is the second of four Infrastructure Ideas columns on the impact of new mobility technologies. On June 3, we outlined how new technology and associated business models are driving rapid and far-reaching changes in how people move, especially in urban areas. This is the first of two follow-on columns looking at how these changes impact infrastructure investors and lenders. Today we’ll look at the investment needs of TNCs, the ride-sharing companies that are dominating streets, but not yet infrastructure investment pipelines. Our next column will look at other aspects of implications for investors, while a subsequent separate column will outline implications for policy-makers.
The headline: Emerging Markets ride-share companies, or TNCs (for transport-network companies) could by 2025 absorb half as much private capital as all Emerging Market transportation infrastructure does today.
For many infrastructure investors, the traditional big problem is lack of investment opportunities. Infrastructure assets have tended to perform well, and their long-term, generally stable, nature has made them particularly attractive to institutional investors such as pension funds and insurance companies. This has typically been the case for both equity investors and for lenders, as can be observed from widespread announcement of intentions by institutional investors to increase the share of infrastructure assets in their portfolios. The same has been true of IFIs, International Financial Institutions such as the World Bank Group or the African Development Bank; IFIs and their public-sector shareholders have been consistently striving to increase the share of their emerging markets funding allocated to infrastructure. But both institutional investors and IFIs have been stymied for some time by the lack of infrastructure assets seeking funding. The arrival of new technologies in the infrastructure space is changing this dynamic.
We have already observed, in the communications and the energy space, how the advent of new technologies has dramatically changed the situation for investors. In both these areas, the disruptions brought by technology have created a whole range of assets for investment and lending which did not exist before. The infrastructure pipelines of infrastructure funds and IFIs alike are today dominated by renewable energy players and projects, a category either completely absent or barely marginal only a decade ago. We are seeing the beginnings of the same in the transport space. However, unlike the early years of disruptive technology in the communications and energy space, which featured the growth of large single segments around a single technology – cellular phone companies and wind and solar generation respectively – the early years of disruptive technology in transport already feature multiple overlapping segments around very different technologies. In that sense, the mobility revolution will look – to investors as well as to policy-makers – more complicated and challenging than preceding revolutions in communications energy. The disruptions in both the communications and energy space have moved beyond their early single-technology focus to what are now opportunities (and further disruptions) from subsequent generations of technology development, gaining complexity as change continues. The new era of mobility will start with that complexity from the beginning: shared transport models, electric vehicles, autonomous vehicles, changing mass transit models, and more will all create a host of new opportunities in parallel.
Let’s unpack some of these segments, starting with shared-services companies, or TNCs. Ride-sharing companies have become – virtually overnight – the first big target of investors in this new space. The $50 billion projected valuation for Uber already makes it one of the most valuable infrastructure firms in the world. Bechtel and Fluor, in comparison, have market values in the $20-30B range. This very large valuation reflects how quickly the market for ride-sharing has grown, and disrupted traditional forms of urban transport: at an estimated $59B in global revenues, ride-sharing is already about 50% of the size of the global taxi market, and somewhere between ¼ and ½ of the size of the global mass transit market. With a lot of projected growth. While the globally known names of Uber and Lyft have room for only a few investors, it is clear that emerging markets will spawn a large number of valuable shared transport companies – many of them looking for capital. Already today Didi in China, Ola in India, Grab in Singapore and East Asia, and Go-Jek in Indonesia are each worth over a billion dollars. Yandex paid over $1B to buy out Uber in Russia, while Go-Jek is investing $500m to expand beyond Indonesia.
As we look at the current state of ride-sharing (automobile-based – we’ll get to bike-sharing below), three big things stand out which are relevant for investors:
(1) growth in new geographical markets once they open has been fast, large and valuable.
(2) the number of countries where ride-sharing has penetrated is far smaller than the number of countries where it has not yet gotten going
(3) local companies – or at least regional ones – seem to have an advantage over global companies.
The first two of these observations imply that a lot of value is going to be created in the relatively near term, especially in large markets with relatively low penetration to date. These include Indonesia, Pakistan, Bangladesh, South Africa, Turkey, Egypt, and most of Latin America. The last one – based on seeing Uber’s underperformance in Asia and Russia where it has faced strong local competition – Ola in India, Go-Jek in East Asia, Yandex in Russia – implies that we’re likely to see national (or perhaps regional) players capture much of this new value. For investors looking to put capital to work in the infrastructure space, this is potentially great news.
One might say, looking at the way Uber’s business model started in the US and Europe, that the TNC business model presents only limited opportunities for investors. The initial TNC model has been very capital-light, compared to others forms of transportation services, as drivers are essentially financing Uber by buying their own vehicles. The TNC in this early model is primarily financing data and communications investments. However there are four reasons why this business model is evolving in ways that will consume more capital, and create more opportunities for investors and lenders to participate in this growing business:
• As TNCs emerge in lower-income markets, the proportion of the existing vehicle fleet on the road in these markets which meet TNC standards will be much smaller, pushing the TNCs into buying vehicle assets themselves and leasing or lending them to drivers;
• A large number of players are being attracted into starting up TNC services, given fairly low barriers to initial entry, while the importance of scale over time creates incentives for consolidation. This means we can expect to see large M&A activity – which is exactly what we already see across newly opened emerging markets: the purchases of Uber’s Russian and East Asian businesses by Yandex and Grab, Ola’s $200m purchase of Bangalore-based Taxi for Sure are examples among others;
• The arrival of Electric Vehicles, and the cost-advantages they will increasingly have, will create incentives for TNCs to purchase EV fleets as soon as they demonstrate cost advantages – before their competitors do the same, and without waiting for a protracted process of individual drivers eventually trading their ICE assets in for EVs;
• And in a decade or two, when driverless vehicles become sufficiently tested and cheap, there will be very large incentives for TNCs to purchase AV fleets. It will make their vehicle assets cheaper than those of slower-adopting competitors, and then will further reduce costs by eliminating the need for drivers in those areas where AVs can function.
All of these developments will lead to significant changes in the financial model and Balance Sheets for ride-share companies. Investors and lenders who see the early phase of TNCs as being of limited relevance should think again.
Numbers? Hard to tell, especially as few TNCs have public ownership, and so detailed financing and capital expenditure data is hard to come by. Infrastructure Ideas estimates that by 2025, when most Emerging Markets have opened to ride-sharing, capital expenditures for car-based TNCs in Emerging Markets may total about $25 billion per annum – half in China, half elsewhere in EMs. This number is most sensitive to the vehicle-sharing model. If one assumes correctly that in smaller and lower-income markets TNCs need to bear a larger share of financing ride-share fleets, then capital funding needs will be higher in these markets than in higher/middle-income markets – not the intuitively obvious outcome. As EVs become more widely available, and cheaper, we can expect the share of TNC-funded vehicles in ride-sharing fleets to increase. So we estimate that annual expenditures for TNCs in Emerging Markets will roughly double, to about $50 billion per annum, once vehicle fleets become more EVs based.
Bike-shares. As discussed in the first column in this series, ride-sharing is no longer only about cars. Bike share has become huge in China, along with the US and Europe, and “EVs” are arriving in the bicycle segment as well. In the US, at least a pair of bike-share TNCs have market values in excess of $200m, while the big two Chinese players are valued at over $1 billion. While these numbers are a fraction of those for the car-based TNCs, they are still impressive, and likely to grow substantially. The business model for bike-share companies is also different than for Uber: while the assets themselves – both vehicle assets and data/communications assets – are cheaper than for Uber or Lyft, bike-share companies cannot rely on drivers to fund the vehicle assets, so there is a regular need for capital. Infrastructure Ideas estimates that capital expenditure to date by bike-share TNCs exceeds $20 billion.
Each new market, even each new city to be entered by a bike-share TNC requires additional capital. In most emerging markets, bikeshare is just arriving or about to arrive. In India, early bike-share entrant Mobycy currently has one ten-thousandth – that’s 0.01% — of the volume of Mobike in China. Even with road conditions in much of India, at $1 or less a ride, that ratio will change in a hurry. In the mostly-untapped Indonesia market, Singapore-based oBike has entered in Bali and Bandung, while Banopolis tries to become the first local start-up. Experience shows that once launched in a capital city, players can move into new cities in a matter of weeks, once data, communications and procurement systems are established, and entry permits obtained. We can also expect that asset life-cycles for bike-share companies will be fairly short, shorter than for car-share TNCs. This implies that TNC-owned bicycle fleets will have to be rebuilt, and recapitalized, every 3-5 years. Bikeshare is an area with lots of growth left, and a lot of investment ahead of it. A broad guess at capital needs? Perhaps in the ballpark of $5-10 billion per annum.
As “EVs” arrive into the cycle segment, further needs for capital will arise. Already we see Bird, the flagship electric scooter company, having a market value of $1 billion. While “scooters” and “electric bikes” may sound quaint, or like an old fad, for those who don’t use them, they are visibly capturing untapped value in the markets where they are being rolled out. A key characteristic of these “new” products is that they have much greater differentiation in capacity relative to their non-electric counterparts; in particular the difference in effort involved makes them a greatly preferred option for longer commutes. In growing and far-flung urban areas across emerging markets, we can expect demand to grow quickly as they become available. From a financing model standpoint, “cycle EVs” can be differentiated into the “bike-sharing type” segment, where the TNC needs to finance all the vehicle assets, and the “car-sharing type” segment, where the TNC may in some markets be able to utilize driver-based financing. Motorcycle or rickshaw based shared-services, as we see emerging in places like Pakistan and south-east Asia, will have to find the right balance between the possibility of driver-based financing and the impact of vehicle standards on their brands. One can expect that in most markets brand value will be of high importance, pushing TNCs to the TNC-purchased vehicle financial model. While the number of vehicles needed by “EV bike-share” companies is likely to remain well-below those of regular bike-share TNCs, the cost of individual assets will be higher. All-in-all, another new segment of the infrastructure market likely to require annual capital in excess of $1 billion.
Adding it up: Infrastructure Ideas projects that capital needs for TNCs in Emerging Markets could reach between $30-60 billion by 2025.
Car-based ride-sharing companies $25-50B
Bike-based ride-sharing companies $ 5-10B
These are large numbers. Very large numbers.
If one unpacks global infrastructure spending today, total spending on transportation in Emerging Markets is probably between $250-300 billion. But while ports and airports are mainly financed by private sector capital, highways, urban transport and rail are overwhelmingly government financed. As a result, total private investment in transportation infrastructure in Emerging Markets is only around $50 billion per annum, with peak years going up to $100 billion. Investment by TNCs, notwithstanding the small share of public ownership in some bike-share enterprises, such as Ecobici, TNCs are by contrast overwhelmingly privately financed. Ride-sharing capital investment, therefore, can be expected by 2025 to equal more than half of all current investment in Emerging Markets transport infrastructure. For investors and lenders, TNCs may well represent a greater share of future investment pipelines than ports, airports, or highways.
As implications go, that’s significant.