Why Did Uber Spend $3.1 Billion On A Middle Eastern Rival?

Why Did Uber Spend $3.1 Billion On A Middle Eastern Rival?


2019 was a rough year for Uber. After the ridesharing giant’s disastrous
IPO, big losses, leadership shakeups and major layoffs kept the
company in the headlines and rattled investor confidence. But a mere month and a half
before the negative news started rolling in, Uber announced a major
acquisition, paying $3.1 billion for the Dubai-based ridesharing
service Careem, giving many investors hope that the Middle East
and North Africa region could represent a major growth
opportunity for the company. By acquiring Careem, Uber can claim
a significant region outside of North America, where they are
the dominant player. They’re not the dominant
player in China. They’re not the dominant
player in Latin America. So they really needed that
win in the Middle East. Even though Uber’s had really a
train wreck situation since the IPO, Careem’s been one of the bright
spots over the past year. It was not only Uber’s largest acquisition
to date, but the biggest tech acquisition that the region had ever seen,
by more than a factor of five. It’s prompted hope that other
homegrown companies will follow suit. Pending regulatory approvals, the deal is
expected to close in the first quarter of 2020. While this deal marked
the first time that many in the U.S. had even heard of Careem, in
the Middle East, it’s a household name. So Careem started in a number
of countries ahead of Uber. So they had a head start. They understand the culture. Careem built a very strong brand and
I could tell you that’s something that was becoming more and more
difficult for Uber to compete with. So what exactly is Careem’s brand, and how
did it help them to become so valuable? Careem was founded in 2012 by Mudassir Sheikha, who grew up
in Pakistan, and Magnus Olsson from Sweden. Both are ex-consultants
at McKinsey and Co. And they’ve managed to get some
major backers on board, like Saudi Arabia’s richest man, Prince
Al-Waleed bin Talal. Overall, the company stands out
in a region where entrepreneurialism generally lags behind the
rest of the world. It operates in 87 cities in
14 countries, including some politically unstable areas like Iraq and Palestine,
where Uber previously had no presence at all. Typically, only a local
firm can do business in such environments because the team and the
stakeholders would be used to this. This is the environment in
which they grew up. Careem also had an advantage over Uber
when it came to customizing its offerings on the local level. The local teams that Careem had in
the various markets had a more entrepreneurial approach and they were able
to negotiate and talk with the regulators and work out deals on their
own, something that is, you know, fairly difficult to do in a company
like Uber, who’s trying to standardize everything that they do worldwide. Along with local knowledge, Careem brought
the tech know-how to build out much of the basic infrastructure that
ridesharing companies in the U.S. or Europe may take for granted. So if you go to many of the
cities and countries that we’ve gone to, and these include places like Pakistan, Iraq,
Palestine, Sudan, we’ve had to build our own locations database, our
own maps, our own payment systems, our own messaging systems,
our own call centers. In many of these places, businesses
and homes lack formal addresses, the economies are largely cash-based, internet
access can be slow and intermittent, and the older generation
isn’t as comfortable with smartphones. We realized that the maps
in the region were not accurate. So we decided that we have to
actually build maps of the region. Then we decided that even when we had
the maps, there were times when a lot of the captains, who come from
places like Pakistan and India, were not able to speak in the
same language as the customers. So communication was a
bit of a barrier. So we set up a call center
through which we could intermediate that communication and make
that more effective. But most importantly, in certain countries
such as Saudi Arabia, Careem understood, you know, the need
to have cash payments. They enabled that feature
before Uber did. Additional regional touches include allowing
users in low bandwidth countries like Iraq to order a
car via the international messaging service WhatsApp, and calling drivers “Captains”
to counter the regional stigma that driving is
a low-skilled profession. Careem has also made a point
of recruiting female “Captainahs” in places like Pakistan and even Saudi Arabia,
where women were banned from driving until mid-2018. They wanted to create
a platform that was Middle East-centric, not viewed as something that
was coming from, whether it’s Europe or the U.S., into the Middle East. As a part of the deal,
Careem will maintain its independent brand. The two companies will continue to
operate separately in the region, allowing Uber to leverage its name
recognition with expats and tourists and allowing Careem to build
on its local appeal. Basically, it’s a way of dominating
the market, but making consumers think that they have choice. The deal isn’t
the end of Careem, it’s just the start of chapter two. And I think that was a big part
of the negotiations, that they could carry on their journey and keep
the essence of Careem going. Careem has a user base of over 30
million in a region with lots of untapped potential for
digital services. The Middle East is probably one
of the fastest growing internet markets around the world. Approximately 400
million people with very high smartphone penetration that reaches 97, 98
percent in countries like Saudi Arabia and the UAE. And hence, you know, the growth rate
and need for services like Careem and Uber is high indeed. This could explain why Uber paid $3.1 billion for Careem, even though the
company’s most recent valuation came in at only $2 billion. Yeah, I
think they needed to pay a significant premium to get them, because Careem
could have just stayed doing what they’re doing. You know, or potentially
gone down an IPO path. Acquiring a local competitor is a change
of pace for Uber, which has backed out of a number of
markets over the last few years. Uber had to show investors that it
wasn’t just retreating, but it was also making big bets to be dominant
in certain markets around the world. They chose the Middle
East to do that. Like Uber, Careem is
also expanding beyond ridesharing. Now that it’s built out the
necessary digital infrastructure, the company aims to become the region’s “super app”,
a one-stop shop for a variety of online services. If you really look at what has happened
in the region the last 50 to 100 years, we missed out on a lot of
development that happened in the rest of the world due to political
strife, due to conflict. The internet, and all the power that
it brings, gives us an opportunity to leapfrog our people into
the digital future. And we believe that we’re
uniquely positioned, as leading internet platform of the region, to
go after that opportunity. Careem already offers delivery for small
packages and food items, as well as digital payment
services and bike-sharing. In the future, analysts say we can
expect Careem to expand its delivery business to more cities and build
out its payment platform, potentially one day allowing unbanked users to send
and store money on their phones and digitally purchase a
wide variety of goods. So we want to become the app for
people in the region to run their daily lives in a simpler
and productive way. So as much as Uber acquired Careem
to be the dominant ridesharing player, it may also have acquired some
lessons, some talents, some knowledge about how to become a super app. Many also
hope the deal will spur more regional entrepreneurship and inspire investors to
take a chance on domestic startups. So I think what it means for
the region now is that there’s a template. And so investors can see that
they can invest in a local startup and that startup can not only survive,
but compete with the best in the world. Aside from Careem, the region’s other
major tech deal came in 2017, when Amazon acquired local
e-commerce company Souq.com for $580 million. It also, you know, shows people that
strategic sectors in the Middle East that are drivers for growth have
already been, quote unquote, taken by internationals and urges, you know, investors
in the Middle East to move much faster. We’re seeing some of that
money that was going to the international unicorns now being invested
locally for the homegrown ones. I believe that in the next maybe two
to three years, you’re going to see many Careems. Now that it has a
strong foothold in the Middle East and North Africa, analysts say Uber would
do well to follow Careem’s example as it expands further, leveraging local
expertise in every new market it enters. And I think you realize with
the model in the United States, or even parts of Europe, might not
be successful in other regions. And I think when you look at the way
Careem did it, I think that could be the blueprint they use to expand
into Latin America, South America, parts of Europe, potentially Africa
and other areas. In the meantime though,
Uber’s been hemorrhaging cash. It reported over $1 billion in net
losses in the third quarter of 2019. In spite of this, CEO Dara Khosrowshahi
projects the company will turn a profit starting in 2021, adjusted
for interest, taxes, depreciation and amortization. So we know that there’s
an expectation of profitability and we expect to deliver for 2021. Whether or not that timeline is
realistic remains to be seen. But if Uber is ever going to
reach profitability, Careem and the Middle East at large could be an
important arrow in the company’s quiver. If Uber plays it right, the Middle
East could be one of the most profitable regions for them
on the longer term. Uber has to find new streams of revenue
and it has to justify itself as a global platform for not just
transportation, but as Dara Khosrowshahi says, the operating system
for our everyday lives.

You May Also Like

About the Author: Oren Garnes

100 Comments

  1. Why is it a RIVAL? Why not an allie/partner? Why is CNBC always trying to separate and segregate everything? Oh I forget this a corrupt establishment MSM channel.

  2. Basically this company copied Uber and payed all necessary bribes to all official that was needed to start in these countries. Then they sold off to uber and got lots of money!

  3. I still hate Uber for leaving the SEA market and leaving us with Grab. Grab’s monopoly on the market’s hurting everyday consumers who rely on alternative transportation providers especially in cities like Manila where there is no reliable transport option. Zero competition means zero innovation.

  4. “I bought my brother some gift wrap for Christmas. I took it to the gift wrap department and told them to wrap it, but in a different print so he would know when to stop unwrapping.”

  5. I think the real reason is because Uber is owned at least 10% by Saudi's… Of course the next logical step is to move into the middle east.

  6. Except US and parts of Europe
    Uber is failing everywhere
    They are just opening a branch everywhere without understanding the market
    In India now very few uses Uber
    Everyone are using OLA cabs

  7. She said "Pakistan and Saudi Arabia where womens were not allowed to drive." Since when womens were not allowed to drive in Pakistan? Don't paint everyone in the same colour and also Pakistan is south asian country.

  8. I am just here to say India should ban youtube. Like China. People would then use vpn. Hence boosting vpn industry. Like NordVPN. Now at a 25 percent discount if u use the promocode NoFapNovember

  9. It seems they opened an open I.C.O T.e.l.e.g.r.a.m round on gcoininformation.com/open is some of you aware of it?

  10. Why mckinsey employee create a ride-hailing.
    Go-jek in South East Asia founded by ex mckinsey employee (Nadiem M)

    Careem in middle east

    both of them founded in 2012
    also they have big discount in their strategy

    what a coincidence :

  11. Uber, despite what the interviewed guy said, corresponds to the most used ride sharing company in Latin America, beating taxis too.

    P.S. I’m from Goiânia-GO (Brazil).

  12. Correction
    First Pakistan has never ever banned women to drive a freaking car dont know where did you guys get your informations.

    Second Pakistan is not in middle East but in South Asia and have nothing to do with Middle Eastern war and drama it's much more stable and progressive democratic country get your facts clear Boomers

  13. Uber one of greatest invention that incorporated everyday life with technology. The company is being managed by incompetent leaders.

  14. This year T.e.l.e.g.r.a.m t o k e n will grow up in price as well as bitcoin in due time. Now G.R.A.M costs $1.45, but in a year entirely possible it will cost 50 and 100 dollars! I advise to buy and hold the coin before floatation mytelwallet.com/whatis

  15. Because of no laws in middle east. No laws, no insurance, no drama. When accidents happen there will be no consequences or dramas for Uber

  16. ബിസിനസ്സ് ഇഷ്ടപ്പെടുന്നവർ👈 ഇൗ ചാനൽ കണ്ടിട്ട് അഭിപ്രായം പറയണേ 👈

  17. A company who is said to be losing money mysteriously has enough fund to spend 3.1billion dollar? But not enough when it comes time to pay its drivers.. Interesting!!

  18. It's a great deal for Uber buying market share, but allowing a local customer experience to prevail, which is what digitisation is all about. Both parties can leverage and learn from each other and this internal ecosystem will make the group stronger…. when you scale you automatically reach for process driven frameworks, but you need to retain that individual flair for local market knowledge… this deal has that structure both customer groups who travel know who they can reliably do business in different regions and continents because it's underwritten by the same core value experiences.

  19. I'm Arab and I'm happy and proud that a service that's needed in the Arab World is being provided. We need to take advantage of our demographics, our highly educated population and growing market for the internet/internet connection and continue with entrepreneurship and technological advancement. Business is in our blood.

  20. 4:30 just clarifying, women were only banned to drive in Saudi Arabia. Not in Pakistan.
    Pakistan is a democracy with 33% of women in the work force. We do need to improve to 50%. That'll take time.

    Learn grammar @ CNBC. Your sentence structure implies Pakistani women couldn't drive as well.

  21. If we take Careem as an example you can make an assumption of what will happen next with Uber. The Uber brand will push into Latin America and Sub Saharan Africa. They'll then acquire other companies, similar to Careem. Such as Grab in southeast Asia.

    Who knows, in 20 years Uber could be exclusive to North America and Europe whilst a collection if other brands tailored to their respective regions exist everywhere else. It's an idea that may one day come to fruition. Lyft will continue to be in a distant second place.

Leave a Reply

Your email address will not be published. Required fields are marked *