Uber is leaving the Southeast Asian market. Will it make a profit or a loss?

It only takes a trip to Jakarta to realize that Uber has missed a golden opportunity.

Go-Jek Indonesia PT, an Indonesian ride-hailing and car rental service provider, and Grab, a Singaporean ride-hailing software service provider, started out as imitators of the U.S. ride-hailing pioneers and have now grown into much larger companies. Not only have their main car rental businesses flourished, but they have also developed super apps that cater to a wide range of personalized needs, such as paying bills, ordering food, finding cleaners, and more. These advantages have made them two of the most valuable unicorns in Southeast Asia.

Uber's upcoming IPO, valued at $84 billion, is expected to be the largest U.S. IPO this year, suggesting that the company gave up a gold mine when it sold its Southeast Asian business to Grab last year. Southeast Asia's emerging markets have much greater potential than the U.S. market.

To understand the dynamics of supply and demand, we can ask two broad questions. First, is Uber's salary high enough to attract drivers? Second, does it make sense to use a ride-hailing service compared to owning a car or taking other forms of transportation?

When is it more appropriate to buy a car yourself?

The United States scored poorly on both questions. HSBC Holdings Plc estimates that the average hourly wage for U.S. drivers is $12 after expenses, about two-thirds higher than the federal minimum wage of $7.25. Even in developing countries, this wage level is several times the minimum wage. At the same time, if you travel more than 685 miles, or 1,100 kilometers, in the United States in a year, you'd better buy a car. Taking Uber is not the best option.

Drivers' wages are not high

Compared to drivers in other countries, Uber and Lyft drivers in the United States do not make much relative to the minimum wage.

The Indonesian capital of Jakarta is behaving very differently, with millions of people gaining employment opportunities and entering the workforce for the first time thanks to ride-hailing apps.

A recent investigation by The Jakarta Post showed that about a third of drivers hired by Go-Jek and Grab had no income before joining.

On the demand side, only the rich can afford cars in Indonesia. Few have access to consumer credit, and household debt is just 10% of GDP. Meanwhile, Jakarta’s first mass transit system, called the MRT, which opened in March, is not extensive enough to serve a metropolis of 10 million people.

The nightmare prospect for investors is that ride-hailing apps could become stuck in a classic prisoner's dilemma, creating a race to the bottom that kills profit margins. In the US, Uber has been trying to squeeze smaller rival Lyft out of the market through various efforts. Although the two companies sharing their respective duopoly positions may lead to higher profits, there is little that can stop Uber. There are so many ride-hailing apps on the market that passengers can easily compare prices on their smartphones and choose the better deal. It is also easy for drivers to sign up for multiple apps.

Uber offers bigger discounts

Uber’s $84 billion valuation puts the company at a steep discount to Grab in terms of market value to gross bookings.

Super apps allow drivers to keep working without subsidies. Is your rush hour trip over? No problem, it’s almost lunchtime, and drivers can use the app to deliver to restaurants. In the afternoon, they can continue to deliver until the evening commute arrives. Rewards programs for drivers also help build customer loyalty. For example, Grab now offers points for users to spend on its app. Indonesians can redeem points for flight miles on flagship carrier Garuda Indonesia, cash vouchers at KFC, or ice cream from Cold Stone Creamery.

Go-Jek has slashed driver incentives in Singapore, dashing users’ hopes of a price war since the Indonesian company entered Grab’s home market in December. In December, a Go-Jek driver might have earned 2,400 Singapore dollars ($1,786) for 120 trips; as of March, that figure had fallen 22% to 1,865 Singapore dollars, according to Goldman Sachs Group Inc.

Competitors were too busy spending money on their super apps to bother with the original cash subsidies. They figured that with each incremental feature they added, user acquisition costs would go down. So Go-Jek and Grab got greedy and acquired small startups that could enhance their apps.

There’s more to come. Mobile payments, pioneered by Go-Jek and now ubiquitous in Jakarta, are similar to Ant Financial, an affiliate of Alibaba Group Holding Ltd., creating another potential giant. The companies are also getting into online consumer lending. Grab’s new “pay later” feature is similar to an online credit card. In a country where plastic penetration is just 2%, it could prove popular.

It’s hard to see a similar game-changer for Uber or Lyft. Americans shop online at Amazon. Self-driving cars appear to be the main hope, with the phrase appearing nearly 100 times in Uber’s IPO prospectus. Drivers make 40% of gross bookings for U.S. ride-hailing companies. The question is whether consumers are ready to ride in self-driving cars? Asia’s unicorns appear to have a more viable path to higher earnings.

Uber says leaving Southeast Asia will allow it to double its growth, but in reality, it may be leaving its best growth prospects on the streets of Jakarta.