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From the Concept Library, concepts for this article are:

• Marketplace Platform for Services
• SE Asia
• Engagement Products vs. Margin Products
• Economies of Scale: Geographic Density

From the Company Library, companies for this article are:

• Grab Holdings

Photo by Grab Media Resources

——–Transcription below

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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, will Grab become Meituan or Didi? And Grab, which is one of the major shortlisted tech unicorns, digital unicorns of Southeast Asia, massive in the region, everyone from there pretty much uses it for something or other like. mobility, ride sharing, ordering food, things like that. Very, very big. Well, they’ve gone public now. They did a reverse merger via SPAC with Altimeter Growth. But you can find it on the NASDAQ under the ticker symbol of Grab. So really interesting company. Been waiting for this one for quite a long time. Anyways, the numbers are out, so I thought I’d talk about that one and my take on it, which is sort of the topic for today. is it’s kind of equally broken down between something that looks a lot like Meituan and something that looks a lot like Didi. And the difference of course there is both of those get lots and lots of usage and demand and growth, but one of them is profitable, Meituan, not right now, but generally speaking. And one of the other one, which is ride sharing mobility, Didi is not, and has not been in most geographies where that business model has been tried. So it’s an interesting mix of those sort of two products and services, i.e. business models. So there’s a good strategic question there. And that’s what I think I thought would be a good topic for today. Let’s see, housekeeping stuff. Books are out, number one and number two, motes and marathons. Number three is, I’m sort of churning away on that right now, should be out in a couple of weeks, I hope. That will be probably three of five ultimately. You can get those on Amazon if you’re curious. Link in the show notes and standard disclaimer, nothing in this podcast or in my writing or the website is investment advice. The numbers and information for me and any guests may be incorrect. The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. Okay, let’s get into the topic. So I’ll do a bit of an introduction on Grab for those of you who aren’t familiar. And I don’t think the basic idea is gonna be too shocking if you’ve been listening to me for a while. It’s a lot about marketplace platforms for services and how those can be very, very different in terms of their strength, their economics, their growth, their network effects, depending on what type of service you’re doing. All marketplaces are not equal. They can vary significantly. And we can see that within Grab. So I’ll talk about that. I don’t think that’s gonna be a big surprise. The ideas that are more new was basically two concepts, and these will be the two concepts for this talk. Number one is engagement services versus margin services. And I’ve started to use this term kind of recently, which is the idea that, you know, so much of our thinking about products and services is about a transaction. Let’s sell something that people want. and we will make a margin on that, and then we will look at the cost of producing it, and that’s our business. And that makes a lot of sense in a physical world, because everything has a cost. So you need a margin. But when you move into the digital world, you can do lots and lots of things that don’t have really any costs. You know, zero marginal production costs, reproduction costs. So you can do products and services, mostly services, where… You don’t really need to make money because you don’t have a cost. So you can kind of do it anyways, and you don’t have to think about the return on invested capital of every single product. You can have products and services that are about making a margin, a gross margin, which gets you profit, sort of traditional business thinking. But you can also have services or products that are about getting engagement, where they get you users, or they get you participation. something like that and then the resulting data. And that stuff can be very, very valuable in a digital business. And sometimes you get all of those at the same time. And a lot of the companies we talk about, you’re getting all of that at once, like e-commerce for products. E-commerce for products tends to be fairly profitable. You make money, but you also get engagement users and data. You get it all at once. But you can also separate it. you can have certain products that make you a margin and other products that just get you engagement and they can be pure breeds in either form. And I’m starting to think about that a lot more as a way to think about it. So that’s sort of one concept for today, the idea of engagement services versus margin services, or we could say engagement products versus margin products, which is a little cleaner, I suppose. So that’s kind of concept number one, and we can see that with Grab for sure. The other one is economies of scale. based on geographic density. And I don’t, well, I think I’ve talked about this a little bit, this is coming up in book number three, I’m gonna talk about this a decent amount. But I mean, I’ve talked about economies of scale on the cost side, on the supply side, quite a lot, it’s a big phenomenon, a lot of digital businesses, a lot of traditional businesses go for economies of scale. And that tends to be synonymous with economies of scale based on fixed costs. which is one type, which is hey, 15% of your spending per year is marketing. So therefore, that fixed cost, if I’m a bigger company than the other company, that 15% of my revenue is bigger than their 15% of their smaller revenue. I have economies of scale based on a fixed cost. And other ones we talk about a lot are logistics costs tends to be a big fixed cost, R&D can be one. There’s a decent number of those. But generally people tend to equate economies of scale as an advantage, and it’s a competitive advantage with fixed cost. That’s really just one type. There’s actually several that are important. And one of the ones that’s important when you start talking about logistics, express delivery, and things like food delivery is geographic density, which is the idea that If I get more geographic density, if I get more users within one part of town, or if I get more trips being sent, or packages, or meals being delivered, within one specific geography, if my density is greater, I start to get an advantage by having superior density. Usually that means I can do things cheaper. Sometimes it’s faster, but also cheaper. Because you’re loading up your dude on a scooter, and your scooter dude going out to pick up at five different restaurants to deliver to five different people, because your density’s greater in that region, you can generally do it faster or cheaper if you’re sort of managing those people in real time with a lot of data, as opposed to someone who has fewer customers or fewer rides in a certain area. And that by and large is true, and that’s what Meituan has been taking advantage of, is geographic density economies of scale. And it plays out in convenience, speed of delivery, but cost is usually what we’re talking about with economies of scale. So that’s the other idea for today, is economies of scale by virtue of geographic density. If you want to know more about that, book three will talk a lot about the types of economies of scale on the supply side. Now on the demand side, we’d call those network effects. On the supply side, we’d usually say economies of scale. Okay, so those are kind of the two ideas for today. And with that, let’s talk a little bit about Grab. Now Grab is an interesting company. There is a lot to like about this company. For those of you who are subscribers, I sent you an article on this the other day, part one. I’m gonna send you part two in the next couple days. Go into this a bit more. But there is really a lot to like about this company. It’s basically got three businesses and this has been its plan really from the beginning. It was founded in 2012, but you go back to 2014-ish and you read what they were talking about, they were pretty much talking about the same game plan. And the game plan was, we are going to be a digital company building platforms in Southeast Asia, which means eight plus countries usually. And we’re gonna focus on three areas, mobility, which is taxi hailing, scooters, ride hailing, a lot of motorcycles in Southeast Asia. You can even do tuk tuk. I mean, they have tuk tuk hailing in Vietnam and a couple other places, but mobility. Number two business, food delivery, which starts with restaurants, which is an interesting business, but then has expanded to convenience stores. grocery stores, some marts, some cloud kitchens, things like that. And food delivery was kind of a natural adjacency to mobility, which is where they started. And that’s kind of the word that Anthony Tan talks about the founder, co-founder. He always talks about food deliveries and natural adjacency. And then the third one is payment and financial services. So you go back three, four, five years, you know, they talk about our goal is mobility, food delivery and payment, financial services. Okay, that’s kind of an interesting mix of services. You know, Meituan does food delivery and lots and lots of other services. Gojek has the same, but they don’t really do mobility. Uber and Didi, they almost exclusively do mobility. So it’s interesting that Grab is kind of straddling both. Now, why would they do that? Well, I think because when you start to look at frequency of services used, Generally, the most common frequency, the highest frequency services an average consumer uses are mobility and food delivery and payment. Those are generally the top three. So they’re going for the stuff people use most, regardless of whether they’re profitable. And you can kind of make the same argument. That’s how Uber launched. They focused on a high-frequency service. That’s what Didi did, high-frequency service, and so on. Okay, so those three businesses lines, interesting, lot of growth. Let me give a little bit of background, but I’ll give you sort of the short list of what I like about this company now, and it’s a pretty good list. And this is kind of the so what. All of those businesses, if you read their 10k and all this stuff, they have a description for what they’re doing. I don’t really like it very much. I think it’s a little bit, they talk mostly about we are sort of a logistics platform, we are a delivery platform. You know, if you’ve been following my writing for a while, you will see my graphics, I do these same graphics. And I always put the platform at the top and the supporting capabilities at the bottom of the graphic, usually in yellow. The blue diamond is a platform, the supporting capability might be warehouses, delivery, IT systems. So they’re kind of referring to their, what I would call a supporting capability, which is their army of delivery dudes. Or, you know, they kind of describe that as their platform, which I don’t really buy that, or they call it the ecosystem flywheel. I think it’s a lot easier to understand this company as two to three platform business models. They have two clear platform business models. One is for mobility and one is for food delivery. Fine. Those would both be marketplace platforms for services. I’ve talked about that a lot, but they’re different. The mobility one, what are the two user groups? Well, we have drivers and taxi drivers on one side and we have consumers on the other. And we are in the interactions business and we help them interact and connect and complete a transaction in real time. You know, that is actually a decent difference between this type of marketplace for services or products and something like a Taobao or a MercadoLibre. These have to be real time matching. You know, you have to find a driver right now who’s available as opposed to you can place an order with the merchant and they’ll get it when they get in in the morning. So that bit’s a little bit different. The services are different and you could argue there’s a network effect between the two user groups, let’s say for mobility. But those are also gonna be different depending on what business you’re talking about. But generally speaking, I would describe this as two platform business models, one for mobility and one for food delivery. Both of them are marketplaces, both of them are marketplaces for services. Both of them are pretty much real time interactions. Both of them are local, where you’re really looking for restaurants near you, or you’re looking for grocery stores near you, or you’re looking for drivers near you. And these are high frequency but simple services. If you start thinking about things like hiring a lawyer or hiring someone to redesign your webpage, which you could do on a company like Upwork, that would be also a marketplace for services, but it’s not local. If you don’t know Upwork, Upwork is like, you can hire graphic designers and people who fix your webpage and people who make your book covers. One, it’s not local. Those, the people who create those things, when I do my book stuff, like, you know, the person who edits my books I found on Upwork and they’re in the UK. Person who does the book design was in Sri Lanka. The person who did the book cover for my second one was in Nigeria. person who fixed my kind of dumpy webpage when it has problems is in India. I mean, that’s Upwork. So it’s global, not local, and the services are more complicated. It’s not something like send me a driver or get me dinner. You have to actually talk about the project and what they’re gonna do and there’s interaction. So when you look at these marketplaces for services, there’s a lot of dimensions that actually are important. And there’s a pretty wide spectrum of these platforms. marketplaces for products and for services. I mean, you’re talking about a very large list of types of companies that would all be under that heading. Okay, so that’s kind of how I describe it as two platform business models, which would make them complimentary platforms, which for those of you who’ve been following, that’s one of my favorite business models of all time. You know, I like one platform that is powerful, but I like multiple platforms much, much better. That’s Tencent, that’s Google, that’s Alibaba, that’s what C is building. I like complementary platforms. Now they are building a third platform, which is their payment system. And GrabPay was kind of following the same path as we saw other payment platforms start to do. Now that’s not a payment, that’s not a marketplace platform, that’s a payment platform, one of my five types. And you can see them kind of doing the Ant Financial Playbook. We’re going to do payments. We’re going to start by doing payments within our own services, mobility and food delivery. And then we’re going to expand outward and let people use this payment platform for anything in life. And once we get payments on board, we’ll start to add credit. And then maybe we’ll go into other financial services like insurance or whatever. So we saw that playbook tried by Ant Financial. See money was doing the same thing. That is a bit of a question market in my mind at this point. I think the whole financial system, these platform models, MasterCard, Visa, MoneyGram, PayPal, Stripe, Ant Financial. I mean, there’s just a lot of technological disruption happening there with Web 3.0, decentralized finance. You know, a lot of that business seems like it’s gonna get seriously disrupted. So. I’m putting a big asterisk by that now. But generally, okay, I would say, look, grab to me looks like two solid complimentary platforms and one sort of interesting platform that’s maybe being disrupted. That’s a simple explanation. And these are all high frequency, simple services that are largely local. Okay. That’s, I think, a solid description in using my own little language. Okay, what do I like about this? Kind of a lot. There’s kind of a lot. I’ll give you some more data on Grab, but a lot of stuff. I like that they are, they position themselves as high-frequency services in Southeast Asia, and that has been branded from top to bottom, and they’re becoming sort of one of the, if not the most well-known. digital brand in consumer minds across Southeast Asia. And I think that’s true. I think they’ve pulled that off. That they call themselves the everyday everything app, which I don’t find that very helpful. And then they call themselves a super app, which I also don’t really, I don’t know what that means. And then they say, we actually are, they actually say there are three super apps. They say we’re a super app for drivers, we’re a super app for merchants, and we’re a super app for consumers. Okay, that doesn’t help me at all. but they have established themselves as one of the top, let’s say, three to five apps that are used frequently across all of Southeast Asia. And their brand is huge. So that’s no small feat. So I like that. And number two, within the two categories that I think are clear, mobility and food delivery, they’re pretty much the leader. I mean, you have to kind of go country by country in Indonesia, its own situation because of Gojek there. But generally speaking, they’re number one or number two. They say they’re number one. And some of the numbers they cite, they say they have 50% of the delivery market for food in Southeast Asia. And the number two player behind them has 20%. I’m not sure I buy that. But I would concede without question they’re in the top two to three in all of these markets, probably number one in most of them. They say they have 70% of the mobility market. And again, I don’t really, I think you have to kind of look at these country by country, but either way you cut it, they are very, very strong in the two categories they focused on, no question. Okay. Number three, they are building two to three complimentary platforms. I think that is a phenomenally strong business model. I love that. You know, the payment one obviously has an asterisk next to it. Within that playbook, they have focused on scale and engagement as opposed to making profits, which I think is the right approach. If you’re going to try and build a dominant platform business model, it is sometimes a very good move to forgo profits in order to go for the bigger prize, which is getting to scale with a platform business model. I think that is sometimes true. I don’t think it’s as true as everyone thinks it is. But I think if you’re going for two to three complimentary platforms, that prize is so big that it’s worth foregoing profits to go for. And that’s kind of what they’ve been doing. They’ve been going for that. And the one statistic they threw out, which I do believe, is they say 55% of their consumers use more than one of their services. So in the idea of a complimentary platform, that’s what you’d look for. How many of your consumers are using both of your platforms? because you want them to help each other. And that obviously decreases your customer acquisition costs, you share IT, there’s a lot of benefits to that. One thing that I was thinking about, which is kind of interesting, they are interestingly diversified. Because they’re in eight plus countries, one of the issues that’s happened in the last year is the political risks. of platform business models, because we’ve seen quite a few countries crack down on these companies. Europe just did it this week. China did it pretty seriously. The US is probably not going to do anything. India has been very active. Well if you’re dominant in eight different countries, you’ve kind of diversified your political risk a little bit. Now that’s not, when you actually break down their numbers, you realize that two thirds Most of their activities actually coming out of mobility. I’ll give you some numbers on that So they’re not you know as diversified as I’d like but that’s not an uninteresting Situation the flip side to that argument is because these are local platforms In the sense that people in Malaysia don’t really care about grab in Vietnam so much These are mostly local services that does open the door to a local player with a more customized service coming after you. So if you’re gonna be diversified across a lot of countries, and these are local sort of fragmented markets in terms of the services, you’re probably better off being a utility without, like mobility is just a utility. There’s no way to differentiate yourself on getting a ride across town. The more these things are a utility, the more probably protected they are. from a local pure Vietnam mobility player coming in with a very specialized service that is better tailored to Vietnam. If it’s a utility, there’s less ability to differentiate. If it’s more customized like gaming or something, then that can be a problem. Okay, so that’s kind of my short list. Last one would be, they’re very well positioned for continual innovation and continual growth into new products and services. I mean, when you’re in that front dominant position and you have the consumers of Southeast Asia using your app every day, that’s a tremendous position to start to launch new products and services, to start to continually improve the service because you have scale. And Alibaba has been doing that in China for literally 15 years. You know, they were dominant in China, let’s say 2007, 2008. Okay, but then they’ve been continually adding to that dominant position forever. And you can do that. And I think they’re well positioned to do that. Okay, so that’s the shortlist. I’ll go through some of the background here. I probably maybe should have done this first, but I think it’s a pretty easy to understand business. Now, background of Grab is kind of a cool story. The person everyone always talks about is Anthony Tan. But there is another person, Tan Hoi Ling, H-O-O-I. I think it’s Hoi, let’s say Tan Ling. You know, two co-founders actually, founded the company in 2012 in Malaysia. Everyone thinks this is a Singapore company. Nope, it was founded in Malaysia. It was originally called MyTexi, T-E-K-S-I, kind of an interesting word. But basically Anthony comes out of a family that was Malaysian and was had basically an authorized distributor for Nissan in Malaysia. So they were kind of in the car business anyways. And, you know, the company lore goes, which I’m not sure I totally buy this. The company lore is that like, you know, Anthony one day noticed that he was having a hard time getting a taxi in Malaysia. You know, maybe couldn’t flag it down or whatever. And that’s a little bit like the Travis Kalanick story was the same. So hence he looked into the taxi hailing model. Okay, maybe. I tend to think a more obvious explanation was he probably heard about Uber. Like, you know, this is a pretty clear, you know, like Didi was the same. This was a pretty clear copy of stuff that came out of the West. He was at Harvard Business School. He worked on this as a project. His business plan that was basically this company won the project, or got second place. in the business plan contest. I think they gave him some startup capital. 2012, he ends up basically sort of quitting his firm at his job at the family firm where he was doing marketing in Kuala Lumpur. He launches MyTaxi with Tan Ling, who was an HBS classmate, and I think at that time was a McKinsey consultant. Okay, so they say we’re gonna go into taxi hailing. Now that’s not unlike what happened in China where mobility didn’t start with ride hailing. it started with taxi hailing. And that had a lot to do with the fact that ride hailing was definitely not legal. They ended up doing it anyways. And the story is actually similar in Uber, that there was a lot of moving into the gray areas of what was legal and illegal. And pretty much across the board in every country, everyone sort of just went into what was definitely not legal, and they just did it anyways, and then it all worked out fine. So anyways. He goes into taxi hailing, or they go into taxi hailing, focus on Malaysia, they go pitch the taxi companies, you should have your drivers use our service, and then, you know, well, that’s your chicken and the egg problem. How do you get drivers? Well, you need consumers. How do you get consumers? You need drivers. Well, go to the taxi companies and try and get them to sign up, and that gets you a bunch of drivers, and then you can go offer it to consumers. Story goes that the fifth taxi company he spoke to, which had only about 30 taxis running, so way down on the list. they decided to try it. That’s actually a pretty common scenario when you’re coming in with like a new sort of tech. Usually you end up going to a second or third terror player who’s looking for, who’s a little bit more desperate, who’s looking for a way to maybe jump up. You know, going to the leaders, I don’t know, it doesn’t work that much. They’re, you know, they’re, my standard thing is it’s like trying to date the prettiest girl in school, like, It’s just too hard. Like, you know, so you go to the third or fourth tier company and you know, often they’re willing to take a chance. So, okay, so that’s kind of the story. They start with taxi hailing and it’s just, it’s just a rapid, rapid expansion. Like if Anthony Tan has a skill in life, it’s raising capital and growing. I mean, they just took off. So. 2012 was Malaysia, but 2013 Singapore, Philippines, Thailand, 2014 Indonesia, Vietnam. So within a couple of years, they’re in six countries. 2017, they went into Cambodia, Myanmar, and along the way they just start rolling out the products. So they start with taxis. 2013, they do their geographic expansion, Singapore, Philippines, Thailand. 2014 they launched Grab Car, Grab Bike. 2015 Grab Express. 2016 Grab Share. 2017 Grab Pay. 2018 Grab Food. I mean it is just, then 2019 Grab Mart, Grab Finance, Grab blah blah blah. I mean it’s just, they’re very good at raising tons of money and then deploying it and growing in both geography and service. And that’s not a bad strategy. I mean, if your business plan from the early days was to build two to three platform business models that cover Southeast Asia, as I said, that could justify this sort of blitzkrieg like approach. Cause you know if you get there first, the market’s gonna close up and you’ve got it. In theory, it turns out that’s not really what happens in mobility. It happens in other types of platforms much better. So that’s kind of it. 2018, they ended up doing a deal with Uber. I actually remember when this happened because 2017-ish there was the big fight between Uber and Didi in China, and that was pretty fun. We were all getting free rides everywhere in town. And then sort of, you know, end of July-ish, Didi basically ended up merging with Uber in China. Uber basically closed up shop there. They moved their operations over. Didi, that was it. I literally wrote that week an article that was basically saying, look, this is not over. This is just the end of round one. Round two is going to be in Southeast Asia. All eyes are going to turn to Southeast Asia now that the China fights over. And literally the next week, one week after the deal of Uber and Didi in China, like Didi announced along with SoftBank a massive investment into Grab and Uber was also there. And the question I had raised at that point was who is Grab gonna go with? If Grab were to partner up with Uber, that would have been devastating for Didi. Well, SoftBank’s kind of backing everybody. But if Grab had partnered with Didi, that would have been an over for Uber. So they were kind of like. the in-between party there. And that was gonna be a really cool fight. And then around that exact same time, there was a bunch of cultural and legal issues at Uber. And then Travis ended up sort of leaving shortly after that. And basically Uber just never really showed up to the fight. It was just kinda like, we thought there was gonna be a big fight and it didn’t really happen. And Grab ended up basically buying out Uber’s business in 2018. And that was kind of the fight that everyone, at least I thought was gonna happen, and then it kind of didn’t happen. March 2019, companies, I don’t know, these valuations are all pre-IPO, so they’re kind of private and not too serious. Let’s say $15 billion at that point. But at that point, Grab had already raised $9 billion. So this was a who can raise money and outspend their rivals sort of strategy. Which I generally don’t like that strategy, but in this case I think it made a lot of sense. And then now they describe themselves as we are Southeast Asia’s leading super app. I don’t like the term super app, but I think it’s fading away. I don’t think anyone’s using it besides Grab anymore. Here’s how they describe themselves. Quote, we are Southeast Asia’s leading super app. operating primarily across the deliveries, mobility, and digital finance services sectors across eight countries in the region, the eight countries you think. Our platen goes on to the, our platform enables important high-frequency hyper-local consumer services, which I think is right on. One, it’s a platform, true. I don’t know about important, but high-frequency hyper-local. I would have said simple consumer services, but I think that’s about right. And they call it the Everyday Everything app. And they say we are the category leader by GMV in food deliveries and mobility. And we are the category leader by TPV, which would be total payment volume in e-wallets, which is a subset of financial services. Okay. Five million registered drivers. Two million registered merchant partners. although it’s a little different when you look at Indonesia because it’s a little different. And then basically 25 million monthly transacting users. And that’s really the key number, right? 25, okay, 25 million active consumers across Southeast Asia, 300 cities, eight countries. All right, that’s kind of the, I mean, it’s not that complicated of a business in that sense in terms of what we’ve been talking about, but then you look at the financials. Okay, so everything I just said was pretty, I think pretty, ah, that’s pretty good. And then you look at the financials and they are not good. I mean, it’s really six months ending, so half a year revenue ending June 2021, about 400 million dollars in revenue. So if you annualize it, let’s say 800 million, assume some growth, let’s say a billion dollars in revenue. 2021, somewhere in that range. Cost of revenue for six months, it was $500 million. So $400 million in revenue, $500 million in cost of revenue. OK, that’s not awesome. So they’re not making money at that level in terms of just gross margin. is negative. And then when you look at sales and marketing, well, that’s another hundred million dollars. These are six month numbers. R&D expenses, that’s another 167 million dollars. G&A, 240. So, you know, that’s at least another 200. It’s about another 500. So on $400 million in revenue coming in over six months, they’ve got 500 million in cost of revenue and another 500 million in sort of fixed costs spending. Okay, so this is a seriously negative company in terms of operating profits at this point. And that is obviously the crux of this matter and that tees up the question, the topic for today, is is this company going to, how is it gonna address the fact that it is seriously operating profit negative? Is it gonna be successful in that or not? and I can point to one company that was in a very similar situation, which was Meituan, and then I can point to another and turned it around very quickly and became profitable, and I can point to another similar company, which is Didi, which was also like this and is still sort of slowly trying to grind its way to profitability despite being an effective monopoly in the world’s largest mobility market. Now for those of you who read my first… Motes and Marathons, part one. One of the things I talked about is, when people talk about these Web 2.0 companies, which is most of what we’ve been talking about, they’re often talking about three different things at the same time, when you can actually tease those apart. They’re looking for these high growth, high profit, competitive fortresses, like Facebook, like Google. That’s generally what we’re talking about. And if you ever read the Hamilton Helmers Seven Powers, that’s generally what he’s talking about. But most companies don’t get all three of those things at the same time. You know, you can have a company that has market size and or growth. Okay, maybe it’s not a huge business, but it’s growing very fast. Or maybe it’s not growing too fast, but it’s a massive market. Either way, if you get a percentage of that business, it’s probably gonna be very attractive. It’s gonna become a big, big business. And this is one of the things you look at with digital operating basics. When you’re gonna build a digital company, one of the great strengths of anything digital is its ability to scale easily, without a lot of cost often, and usually without any capacity limits. So if you’re doing anything in digital, One of the first levers you wanna pull is, we wanna go for a 10X opportunity. We wanna go for a 100X opportunity. We wanna go after something big because this type of business can go big easier than anything else. If you wanna build stores across Southeast Asia, it’ll take you decades. But if you can build an e-commerce company, you can get there in a couple of years. So this first factor we’ll call market size and or growth. You know, most digital companies were talking about that. The second factor, which is competitive strength, that’s what my books are about, is I’m looking at, you know, how strong is it? Okay, you’re going after this, it’s a big market, but are you defended? And that’s a subset. And some businesses can be very well defended, but not have growth. If you have a nice hotel, on Central Park West in Manhattan, you have a great competitive barrier because there’s not that many places to put a hotel. So if you get one of them, you can charge a premium forever and you can make a larger than normal return on invested capital on that business. But what you can’t do is grow. So you get a competitive barrier, but there’s no way to double or triple or 10 extra revenue because you’re a building. So competitive strength, which is what I talk about. And then the third factor is attractive unit economics. You can have a very dominant, fast growing business of huge scale that doesn’t make money. And I would argue that is kind of what Uber has. And that is kind of what Didi has. You know, Didi dominates all of China. And Uber dominates country after country after country. They have massive scale. They have, I don’t actually think they have that much competitive strength. They have some, but not as much as everyone thinks. But what they don’t have is they don’t have economics that throw off a lot of cash because you have to hire people to drive those cars. That costs money. If you decrease the amount you pay them to make more profits, they leave pretty quick. It’s very hard to decrease the amount of money. If fuel costs go up, you have to pay them more, which is what’s happening right now. If you try and charge consumers more, the problem you run into is they can take public transportation. There’s low cost substitutes available and some other factors. And it also turns out there’s fairly low barriers to entry. It’s not that hard to jump into this business at the regional level. I could start a ride sharing company in my neighborhood in Bangkok fairly easily. So it’s kind of like this combination of like the labor costs, the difficulty of retaining drivers, the presence of low cost substitutes like public transportation and the low barriers to entry make it very hard for these companies to either raise prices or decrease costs and they’re kind of stuck. And that’s kind of where Didi is. It’s stuck in this dominant growing but not really profitable business. So what’s happening in that scenario, which is Didi, and they’re basically trying to get to profitability slowly by growth. Where look, if we’re only gonna make a 3% take rate, And Grab is making about a 5% take rate, something like that. It’s hard to get ahead in life if you’re only taking 3%. So they’re going to just try and grow their way there. If we can double our revenue and go from $1 billion to $2 billion, eventually we’ll start to move into the operating profit positive territory. So they’re sort of slowly grinding their way there, which is really what Dee Dee’s game plan is, as far as I can say. So that’s kind of a question. Is Grab, which has a fairly low take rate, it’s not that profitable, and most of its business is actually in mobility by revenue right now, is that the playbook to do the DD Playbook? I would say don’t do that. I would say what you wanna do is you use mobility as an engagement service, and then you split that out. and focus on a margin service. I should use product, product sounds better. So let’s say mobility is their engagement product, and then they need to start shifting over to their margin product. And just accept that look, mobility is a very low margin business, but consumers do love it. It’s a great service for consumers. It’s pretty good for drivers. So just accept it is what it is. It’s a very good engagement product. If you want to try and grind your way there with scale to profitability, okay, good luck. We’ll see. I think you just accept it for what it is and say, okay, then we need a margin product and we’ll use one to support the other. And that brings me to Meituan. Now, when Meituan went public in Hong Kong, I’m blanking on the year. Was it 2018? I think it was 2017 or 2018. Their picture looked very much like this. Now they weren’t doing mobility. They were mostly known as a food delivery company, but they had also expanded into hotels. They had basically expanded into a suite of services. Hotel reservations, restaurant reservations. And some of those services, they were all services, so people called them the Amazon of services. Some of those services depended on their fleet of delivery people, but a lot of those services did not. So if you ordered food and had it delivered, okay, that was one case, but you could also make a reservation at the restaurant and go and sit down, like making a reservation at a hotel. And they had a whole suite of these services, like beauty treatments, spa appointments, getting movie tickets, getting train tickets, you know, plane tickets and things like that. They never really went into mobility very much. They did end up buying Mobike, the bike company, and that was basically a mobility service, but that was never really a profitable thing, and they kind of did that a couple months before they went public. So I think they were just kind of using their pre-IPO money to do that. It was a very good deal by Mobike, by the way. But they had a whole suite of services, and that was their play. And they focused a lot on cross-selling these services. So, you know, if you’re trying to get mobility, they would offer you movie tickets and they would bundle them in this. And they also spent a lot of time working with merchants who were their other user group, mostly restaurants, to provide them various types of software to help them run their businesses. So they almost sort of became the operating system for a lot of restaurants and small businesses, sort of small local service businesses. And that was their play and they went public and the financials were not good. They were strongly operating profit negative, even though they had a compelling business model. Almost it looked like the grab scenario. Compelling business model, lots of engagement, platform business model, network effects, but they were operating profit negative. So again, the same scenario is Deedee, the same scenario is grab. And I was not optimistic. partly because I didn’t see how they were gonna get to profits, and also because that same time, Alibaba was being very vocal about launching a quote unquote war against Meituan, because their company, Olima, which was the main competitor, you know, they were gonna go and try and take market share for them, and everyone knew that they were operating negative. They could see their unit economics were not positive. And once you’ve gone public, it’s harder to raise money. So there was kind of those two factors. This doesn’t look good, and they have the world’s biggest competitor gunning for them openly. So I was not too optimistic about it. And one year later, they surprised me, and a lot of people, but definitely me, by announcing that they had reached operating profitability. And the numbers looked good. You know, they had. tremendous usage on a daily basis, usually 20 plus, usually 20 to 30 million orders per day of some kind, mostly food delivery and ordering. So tons of usage, tons of engagement, people will cross buying one service or another and they were operating profit and they’re, you know, everyone was quite happy with them. Hey, this is a really good business after all. And the question is, how did that happen? Which sort of brings me back to the so what. The two concepts for today. The first one was engagement products versus margin products. Now what Meituan did, they clearly had a distinction between certain products we use get us engagement, they get us users, they get us activity, they get us data, but we don’t try to make money off them. like mobility, like some aspects of food delivery. And then we have other products like hotel reservations where we make significant margins. And that’s where a lot of their profits started to come from was these reservation services are purely digital. There’s no people, there’s no operating component. It’s just software connecting a hotel with the person taking your money and then you get a negative working capital. So they had certain products within their suite of services. They had certain products that were margins products and certain ones that are engagement products. So that was part of it. And that was, they really did move those hotel numbers pretty good. But the other thing they did, which is the one I didn’t see coming at all, is they started to get economies of scale in geographic density. They had superior order density within various cities in China. and they started to apply all their data tech to that and make their drivers more and more, their delivery people more and more efficient and deliver the orders faster and extract efficiencies. And you know, suddenly one delivery guy is picking up from multiple restaurants and taking complicated paths to deliver them to different houses. But you have so much density that you start to get a scale advantage. And that’s kind of what I came up as a. When I looked at this, I’m like, I think that’s what’s going on here. I think it’s those two things. And then management was also part of it. They have really good management. You know, you don’t wanna under count that. But in terms of strategy questions, those were my two takeaways. This idea of pairing engagement products with margin products and cross-selling and going for geographic density in this type of business. And then also it turns out the CEO, Wan Xing, is just really, really good at what he does. and Ullama has had some problems and they ended up moving Ullama under AliPay and there was management changes and some other stuff. So that was probably part of the equation. But they did get to operating profit in a way that Didi and others haven’t. So, you know, when we look at Grab and let’s, I’ll sort of finish up here. When we look at Grab, we can see that part of the business looks a lot like Didi and part of the business looks like MateOne, a simpler version of MateOne. So are they gonna pivot and say, we’re gonna become the Amazon of services, we’re gonna copy Meituan, which is pretty much what their competitor in Indonesia, Gojek has done. Gojek offers like 21, 23 services, very localized for Indonesia. Instead of three services, they have like 20. But Grab has always stayed within its three core products, more or less. They have some little initiatives, but they’ve never really moved beyond that. So are they gonna go that route and try and become Mat1? Or are they gonna sort of stay focused on mobility and talk about delivery, you know, we’re the delivery platform. That capability is our core asset, which I don’t really think it is. I think that’s actually relatively easy to replicate. Building warehouses. When we talk about digital physical hybrids, an e-commerce site with tons of warehouses, it actually takes a long time to build warehouses and trucks and get those to run efficiently. It doesn’t take that long to put a hundred dudes on scooters in one part of town and start getting them delivering food. In terms of digital physical hybrids, that one is pretty weak in my mind. So I think their engagement and their services are more interesting than their… their delivery fleet. But anyways, that’s kind of where they are. And I’m sort of curious to see what they’re gonna do next. I suspect, here’s a guess. I think they’re gonna keep doing what they’re doing. And I think they’re gonna sort of grind away and go for scale and try and get themselves up to 1 billion, 1.5, 2 billion, and then turn into operating profits that way. Because I haven’t seen them. innovate this way too much. I’ve seen them be aggressive in terms of their operating performance, but not in terms of the kind of stuff we see coming out of Meituan, where they just jump into different stuff all the time. Anyways, that’s kind of my takeaway on that one. So the question is, are they going to become Didi or Meituan? I suspect they’re going to, for right now they’re a little bit of half and half. I suspect they’re going to stay where they are for the most part. and do sort of incremental changes as opposed to more Maytwan like aggressive changes. And, but we’ll see. The next company I’m gonna work on, which is tomorrow on the airplane, I’m gonna start going through Go-Jek, which has now gone public with, you know, they merged up with Tokopedia, so now it’s called GoTo. I’m going to try and go through that tomorrow and look at when we start looking at them in Indonesia. It’s an interesting playbook. So that’s it. Anyways, that’s sort of the idea for the day. The two takeaway concepts, economies of scale based on geographic density, engagement products versus margin products. As for me, this is my last night here in Sao Paulo. I’m flying out. It’s been a long, it’s been kind of a long trek. two more talks and then I’m head back to Thailand. So home stretch. It has been 2.5, almost three months on the road, which is, it used to be nothing for me. I used to do like six months, eight months, but I’m a little out of practice. So COVID made me a little bit weak in terms of my travel endurance. So anyways, I’ll be back home next week, which I’m really looking forward to it. I’m not gonna do anything. I’m gonna… take my little scooter and buzz around Bangkok and maybe go down to Ko Chang and hang out there for a little bit. It’s gonna be great. So looking forward to that. But yeah, that’s it. And then I got about three weeks, four weeks, and then I go out to Serbia for some stuff. And it looks like I’m going into the UK. A couple talks and then a lot of company meetings. So that’s great. But if anyone knows any companies that are worth touching base with in the UK, let me know. I really enjoy sort of meeting with companies and seeing what people are doing in digital. And a lot of it’s, I spend a decent amount of time talking with media, retail, healthcare, and these are companies that are not necessarily, they’re not digital companies themselves, but they’re trying to become, they’re being transformed. So those tend to be really interesting conversations. Been doing a lot of that the last couple weeks. Anyways, that’s it for me from Sao Paulo. I hope everyone is doing well and I will talk to you next week. Bye bye.