SINGAPORE -- In the past few years, Uber Technologies was a destructive rival for Singapore-based ride-hailing app Grab. Now, the U.S. company has become a strategic partner to Grab as the latter expands further in Southeast Asia.
On Monday, the two companies announced that Uber will sell its Southeast Asian business to Grab in exchange for a 27.5% stake in the company. As a part of the deal, Uber Chief Executive Dara Khosrowshahi will join the Grab board, they said.
"This deal will substantially strengthen Grab's market power in the region, and will lessen the self-destructive competition that has characterized the market thus far," said Walter Theseira, senior lecturer at Singapore University of Social Sciences.
He added: "Ride-hailing has grown dramatically in Southeast Asia largely because companies have been willing to burn cash to get market share, often at the expense of a competitor ... The main impetus for the Uber deal is to put an end to the destructive ride-hailing competition."
Uber's withdrawal, which results in less competition, will likely help Grab secure more resources for new investments in new areas. "Our combined platform with Uber is the leader in cost efficiency, and we now have a path to profitability in the transport vertical," Grab's spokesperson said.
However, the deal is not only about easing pains. "Uber will become a strategic partner to Grab in its next phase of growth," a Grab spokesperson told the Nikkei Asian Review.
Part of the reason for Grab to pursue this deal was to fend off increasing threats by Chinese companies. China's industry leader Didi Chuxing, which in 2016 bought Uber's China operation, is eyeing international expansion. Given that Uber now owns a stake in Didi from the 2016 deal, it is less likely that Didi and Grab will be competing head-on.
But Didi is not the only Chinese rival. To fend off the threat from Chinese players in Southeast Asia, Grab needs to focus on developing more integrated digital services. It is expanding into many areas such as payment, where it competes with rivals such as China's Alibaba Group Holding and Tencent Holdings which are expanding into Southeast Asia with their Alipay and WeChat Pay services respectively. Tencent has invested in Indonesia's Go-Jek, the ride-hailing app that also operates a payment service.
Grab CEO Anthony Tan said in a press release on Monday that the Uber deal would help in "improving people's lives through food, payments and financial services platform."
As far as Uber is concerned, controlling a large stake in Grab will bear long-term benefit. CEO Khosrowshahi said on Monday in his letter to its staff that consolidation is not "the strategy of the day," according to DealStreetAsia. Japan's SoftBank Group, who has invested in both Grab and Uber and is seen as a facilitator of the deal, will also gain.
Khosrowshahi wrote: "After investing $700 million in the region, we will hold a stake worth several billion dollars, and strategic ownership in what we believe will be the winner in an important global region."
Although the deal will change Asia's complex and competitive ride-hailing industry landscape, the question remains on whether Grab can achieve growth.
"The key question now is whether the ride hailing market is sustainable," said Theseira. "There is no market where a leading ride-hailing firm has been able to consolidate its position completely yet."
Nikkei staff writer Justina Lee contributed to this story.