Indonesia Transportation Bolt From The Blue

Indonesia transportation sector has been impacted by the slowdown in the Indonesia economy and also fierce competition especially from Uber. However, given the under penetrated of Indonesia taxi industry, lack of investment in public transportation, lowest taxi tariffs compare to other countries, and expanding middle class; we believe an improvement in the long run. Furthermore, the initiatives from the Jakarta Governor to discourage the use of private cars will benefit the growth in the industry. We initiate coverage on the sector with a NEUTRAL call and Blue Bird is our top pick.

Challenges to Indonesia Transportation Sector
Currently, Indonesia has experiencing the slowdown in the Indonesia economy with an estimated GDP below 5% in FY15. Furthermore, the competition is getting fierce from the new entrances like Uber, and Gojek. These new entrances have introduced a new business model and also applied an unfair competition in the market. Due to the challenges, we estimate the taxi industry will grow at 15%/20% YoY in FY15/FY16.

Near term intimidation from Uber
Uber has been applying an illegal move in the Indonesia transportation sector business by giving a lower tariff rates compared to the conventional taxis. The Indonesia taxi industry have been heavily regulated by ORGANDA. In our opinion, we believe that Uber does not bring a fair competition in the industry and the Governor of DKI Jakarta will not hesitate to take Uber car off streets – if they do not comply with the regulation soon.

Indonesia under penetrated taxi industry
Indonesia taxi penetration stood at 1.45x (taxis per 1,000 people) in 2014, much lower compared to Singapore at 5.24x, Hongkong at 2.5x, and Thailand at 17.65x. With the low penetration rate of taxis in Indonesia – potential riderships growth in Indonesia is still ample.

Game changing intiatives
Since last year, the Jakarta provincial government has launched series of initiatives (parking fees hike, removal of fuel subsidy, and ERP) to discourage the use of private cars. This will be done by making the cost of using private cars more expensive (we estimate 30% cost increase assuming full implementation). It requires more time for the Government to expand public transportation capacity and quality.

Initiating coverage
We initiate coverage on the Transportation sector with a NEUTRAL call. We have BUY calls on Blue Bird (BIRD IJ, TP: IDR8,300), and NEUTRAL calls on Express Transindo (TAXI IJ, TP: IDR750).

Risks
Include: i) a macro economy downtrun that could affect purchasing power, ii) fierce competition in the industry, iii) inability to secure the new licenses, depots, vehicles, and drivers could impacted their growth.

Investment Thesis

Momentarily hiccups in the industry
Historically, Indonesia taxi industry have been supported by high and stable GDP growth. In 2012-2014, the industry grew at a 31% average pa, inline with the stable GDP growth of 5.5%-6.2%. The industry growth has been declining since FY12 following the weakening of Indonesia economy (figure 7). Based on our opinion, we do not see the taxi industry revenue will be recovered in the near time, due to slowdown in Indonesia economy and fierce competition in the industry. We estimate the taxi industry will grow at 15%/20% YoY in FY15/FY16.

Challenges to the transportation sector
Currently, Indonesia has experiencing the slowdown in the Indonesia economy; as we mentioned above, the slowdown in the Indonesia economy has an impact to the taxi industry growth. Furthermore, the competition is getting fierce from the new entrances like Uber, and Gojek. These new entrances have introduced a new business model and also applied an unfair competition in the market (cheaper fare price).

Uber is the threat for the taxi industry in the near term
Competition in the taxi industry has been heating up since Uber arrived in Indonesia in FY14. The taxi industry has been dominated by Blue Bird (BIRD IJ, BUY, TP:IDR8,300), and the competition is getting fierce in Indonesia taxi industry. In order to grab market share in Indonesia, Uber applies an illegal move by giving a lower tariff rates compared to the conventional taxis in Indonesia. As we understand that Indonesia taxi industry have been heavily regulated by the Ministry of Transportation and Land Transportation Enterpreneurs’ Organisation (ORGANDA).

In our opinion, we see that Uber does not bring a fair competition to the table and do not follow several regulations, such as: Uber do not fulfill the Indonesia’s regulation on tariff structure, Uber do not fulfill the Presidential regulation no 36 of 2010 on the negative investment list – We note that the government prohibits direct foreign investment in the taxi business in Indonesia, Uber do not build the facility to set up a taxi business in Indonesia – such as taxi pools, and etc.

Positive on the long run
We are positive on the taxi industry in the longer term, due to following:
Indonesia has a low taxi penetration ratio at 1.45x (Greater Jakarta) as compared to Singapore (5.24x), Hong Kong (2.5x), and Thailand (17.65x)
Indonesia have a large number of populations that has become increasingly urbanised. Indonesia’s middle class is expanding and GDP per capita rises accordingly.

Game changing from the government to discourage the use of private cars will improve taxi industry growth in the long run. UBER will face a big headwinds from Indonesia Government that has not approved UBER to operate in Indonesia. Moreover, the payment methods using credit cards will limit their expansion. Lastly, supply of rental cars will be limited due to some of the big rental companies do not want to be UBER’s partner

Indonesia transportation sector trading at 7.6x-12x FY15F-FY17F P/Es
Indonesia transportation sector is currently trading at 7.6x-12x FY15F-FY17F P/Es. The transportation sector P/E has been dragged down by the poor performance of the Express Transindo (TAXI IJ, NEUTRAL, TP: IDR750), the stock has fallen 74% YTD with a heavy sell off in September 2015 – due to the cancellation of Saratoga’s deal. In this peers comparison, we compare the transportation sector with the domestic consumer sector which we believe is relevant comparison for transportation sector.

Valuation wise, the sector is already cheap given the potential growth in the long run (Indonesia under penetrated taxi industry). We believe the negative news have been priced in from the Uber competition and slower growth due to Indonesia economy. The cherry picking in the industry is possible given the cheaper valuation.

Momentarily hiccups in the industry
Soften revenue growth due to Indonesia economy slowdown
Indonesia taxi industry growth has been contributed by higher urbanisation, a rising middle class, and under developed public transportation. In Indonesia, most of the public transport are the buses and trains, is under develop with an issues of over crowding, unreliable schedulles, bad working condition, and social safety issues. Based on these reasons, most of the higher income prefer alternatives transportation like private cars or taxi services.

The other issues in Indonesia is the traffic jams, especially in major cities like Jakarta, Surabaya, have increased in the past few years. As we see from figure 5, the number of vehicles have increased at 11% CAGR between FY09-FY13; while we do not see any additional roads have been build. It resulted in the average speed per hours were dropped from 19km/hours in FY09 to only 12km/hours in FY14.

Historically, Indonesia taxi industry have been supported by high and stable GDP growth as well. In 2012-2014, the industry grew at a 31% average pa, inline with the stable GDP growth of 5.5%-6.2%. The industry growth has been declining since FY12 following the weakening of Indonesia economy (figure 7). Based on our opinion, we do not see the taxi industry revenue will be recovered in the near time, due to slowdown in Indonesia economy and fierce competition in the industry. We estimate the taxi industry will grow at 15%/20% YoY in FY15/FY16.

Regulated taxi industry creates a strong barrier to entry
High barrier to entry in the business. Indonesia taxi services industry are relatively have a high barrier to entry. From a regulatory perspective, the important factor for new players is the requirement to obtain both business and taxi operational licenses, which are required by law; for the companies to operate their business in Indonesia.

In Jakarta, operating licenses are awarded based on competitive merit based process, where the governor of each states makes a decision based on several factors: Financial condition, Fleet size, Number of drivers, The condition of taxi depots, Types of vehicles used for the fleets.
The taxi and road transportation services industry in Indonesia is regulated by the Ministry of Transportation. The regulations are regulated under:
1. Law no 22 of 2009 on traffic and road transportation
2. Presidential regulation no 36 of 2010 on the negative investment list
3. Government regulation no 41 of 1993 on road transportation
4. Minister of Transportation decree no 35 of 2003 on people transportation services using motor vehicles

In Jakarta, taxi businesses are regulated under Governor of Jakarta Decision no 1026 of 1991 on the Taxi Business in Jakarta, which requires companies obtaining a taxi business license, valid for five years and extendble, from the governor of Jakarta through the Head of Traffic and Land Transportation Office, with prior written approval from the Governor of Jakarta.

How is the tariff structure in Indonesia?
The tariff for companies operating charter bus or car rental services is determined based on the agreement between the user and the company, while taxi tariffs are determined with the prior approval of the respective local government institution with the following component:

Initial tariff or flag fall tariff: minimum initial price displayed on the fare meter at the start of the journey and may not change until a certain time and distance have been covered.

Base tariff or per kilometre tariff: amount of additional charge based on certain distance travelled
Time tariff: amount of additional charge based on the actual amount of time used during the travel

Distance tariff: the total charge that is applied based on the sum of the three tariffs above at the end of the journey
A professional organisation, as ORGANDA (Land Transportation Enterpreneurs’ Organisation) is entitled to give recommendations on tarrifs to the respective authorised local government institution. For regular taxis, local governments typically set two taxi fares that an operator may choose from a low fare or a high fare, c. 20% greater than the low fare.

Transportation licenses for taxi business
Transportation business licenses issued by the regent, mayor or governor; it depends on the domicile of the company/branch(es) and is required for reach operating company. The license is valid as long as the company conducts its business in transportation and the company has to provide an annual report on the business activities to the respective government institution who issues the transportation business license.

Transportational operation license is issued by the respective local government institution according to vehicle’s operating area and linked to a specific vehicle. The license and its extension can be obtained through tender/selection process held by the respective government institution and the company is required to have a transportation business license, roadworthy motor vehicles, and facility to park the vehicles while the vehicles are not in used and the company have to maintain the vehicles (pools or depots).

For the license business in Jakarta area, licenses are offered through a competitive merit based bidding process taking into account the financial condition, fleet size, number of drivers, and the condition of taxi depots. Licenses that are not utilised are generally valid for a period of six months and can be rolled over for up to three additional six month periods. Unutilised licenses may be revoked after this extended licenses period has elapsed. The license is issued for five years and can be extended for another five years. Licenses are not transferable and new licenses may only be obtained by acquiring new licenses issued by the local government or acquiring companies that hold such licenses.

The transportation license holders have the following obligations:
Compensate passengers for any losses suffered as a results of the license holder’s negligence. Insurance policies to cover the risk of such liabilities are required, Prevent the occurence of air and noise pollution.

New licenses is regulated by the government
In order for the taxi operators to obtain an additional number of new licenses, the taxi operators have to satisfy several conditions that was set by the Government. Normally, Government has categorised the taxi companies into three tiers, first tier taxi companies will have a priority in terms of allocation of taxi car/fleet (operational) licenses from the government’s tender process.

New player in the taxi industry will normally be placed in the bottom tier (“tier 3” or referred as category C) after they obtained the relevant company registration. This category will receive less priority on the allocation of taxi operational licenses from the Government. The company under this category will normally obtained 10-20% of what a “tier 1” company would receives. Category C taxi companies generally needs to operate for around five to six years in the industry before they can be upgraded into “tier 2” or category B.

The company that falls under category B, generally will receive higher number of additional operational fleets allocation during the tender (40% of what “tier 1” receives). The company under category B will need to operate for another five or six years in the business.
Meanwhile, the highest class is the “tier 1” or category A; the company falls under the category A will have a priviledge in terms of additional of operating licenses in the tender. This is crucial as we believe that the business needs economies of scale in order to generate sustainable and substantial returns. In the category A classification, only two big Indonesian taxi operators that are fall into this group; Blue Bird and Express Group, both taxi operators have been in the industry for more than 20 years.

Unfair competition from online application companies. Is Uber crushing the taxi industry?

Heating up competition from Uber
Competition in the taxi industry has been heating up since Uber arrived in Indonesia in FY14. The taxi industry has been dominated by Blue Bird (BIRD IJ, BUY, TP:IDR8,300), and the competition is getting fierce in Indonesia taxi industry. In order to grab market share in Indonesia, Uber applies an illegal move by giving a lower tariff rates compared to the conventional taxis in Indonesia. As we understand that Indonesia taxi industry have been heavily regulated by the Ministry of Transportation and Land Transportation Enterpreneurs’ Organisation (ORGANDA).

Is Uber poised a threat to conventional taxis in Indonesia?
In the current condition, we believe that Uber is giving a threat to the taxi industry in Indonesia. The promotional that Uber gives to the customers could potentially give a positive impact to the Uber itself. In the short term, we believe Uber will have a bigger opportunity to grab market shares in the Indonesia taxis industry. However, in our opinion, Uber will take the market shares of the other small taxi operators; and we do not see Uber could take the market shares of Blue Bird and Express due to their strong branding and also good quality services.

Who is Uber?
Uber Technologies is an American International Transportation network company that is headquartered in San Fransisco, California. The company allows the users or drivers to use their application to rent premium grade cars at an affordable rate. The application, which is also available in 100 cities around the world; and it was launched in Jakarta, Indonesia since 2014.

No easy ride for Uber on Indonesia’s roads
Controvercy over Uber operations in Jakarta, Indonesia. Since, the launched of Uber in Indonesia, there is always a controvercy whether Uber is an official public transportation in Indonesia. According to Chief of the DKI Jakarta Transportation Agency, Uber is categorised as a taxi company; because there is a passenger and there is a payment transaction. Thus, the service must be licensed as public transportation with a yellow license plate.

Meanwhile, according to Deputy Governor Basuki Tjahaja Purnama on Jakarta Globe, He said that he will not hesitate to take Uber cars off streets. According to him, Uber does not have the required taxi permits to operate in Jakarta and if Uber does not want to comply with the regulations; Uber taxi operations in Indonesia must be stopped.

In our opinion, we see that Uber does not bring a fair competition to the table and do not follow several regulations, such as: Uber do not fulfill the Indonesia’s regulation on tariff structure, Uber do not fulfill the Presidential regulation no 36 of 2010 on the negative investment list – We note that the government prohibits direct foreign investment in the taxi business in Indonesia, Uber do not build the facility to set up a taxi business in Indonesia – such as taxi pools, and etc.

Supply of number of vehicles for Uber will be an issue
Based on our meeting with one of the biggest rental companies in Indonesia, we found that some of the big rental companies in Indonesia does not want to be a partner with Uber due to unfavourable pricing from Uber. According to them, Uber will take 20% of the revenue and does not want to share the cost with the rental companies (c. fuel, parking, driviers expenses, depreciation, and etc). Based on our calculation (figure 19), of how much rental companies will earn if they become the partner with Uber monthly. We found that Uber does not want to take a risk together with the rental companies, they only take 20% from the revenue and leave the burden of expenses to the rental companies.

In our assumption, we assume that in one day Uber drivers will receive an order from their application 15x; but they can only take 7x in a day. This was due to Indonesia’s traffic jam and also they are not exempted for 3in1 (3 persons in 1 car) in the business district (Sudirman road, and Thamrin road) for a certain period of time. At the moment, Uber is still give a subsidy of 50% from the revenue/day. Based on our calculation, we estimate that rental companies will only earn IDR412k/day/car. In our opinion, it is not a good deal for the rental companies and we think it will be a huge loss for Uber; since they will not be able to expand their business as quick as they think.

Due to their inability to have an agreement with the rental companies in Indonesia, we think that Uber will face a huge challenge to expand their business in Indonesia. Currently, Uber take the drivers from:
1. Small rental companies
2. Private car owners

Safety is the issue for Uber
Uber takes most of the vehicles from the small rental companies in Indonesia and also a private car owners. In our view, we believe that the small rental companies do not have the strict regulation and safety. For example, in India where there was a safety issues regarding their drivers.

Low credit card penetration in Indonesia could be an issue for Uber
Uber fare use dynamic pricing system; means that the UBER x fare is not fixed at IDR3,000 (flag fare). In the rush hour time, Uber fare could be more expensive than conventional taxis; since the fare could be double or triple from the normal prices. We believe that Uber will lose some passengers in this time and in rush hour normally; where more passengers will look for taxis. Furthermore, in our opinion, payments could be the problem as well for Uber.

Uber’s customers have to pay the rides with credit cards and in Indonesia, credit cards penetration is still low compared to US. Uber has a succesfull business in US, where they took some of the yellow cab’s market share. We found that the credit card penetration in US is higher than in Indonesia. We believe that the payments method that Uber introduced will be one of the setback for the Uber business in Indonesia.

Seasonal risk from motorbike online application
Indonesia’s taxi industry were hit from the Gojek popularity. Gojek is an Indonesian start up that has won widespread praise, as well as triggering aggresive competition from other businesses already fighting for stake in the transportation industry. Like application based taxi services, Uber, which made its debut in Indonesia in August; Gojek was found by Mr Nadiem Makarim. Gojek is smartphone based service, but instead of allowing users to hail a car, it lets them book a personal motorcycle drivers. According to the Gojek’s owner, the number of drivers of Gojek reached 10,000 drivers and the applications have been downloaded almost 400,000 times.

Gojek is popular to avoid traffic in Indonesia
Gojek has been proving their business existence in Indonesia. It is proving popular as means of getting Jakarta’s people to avoid traffic jams. The on bike services that are newer and more reliable than conventional ojek, which are often shabby and neglected.

Gojek’s promotion to grab market share
In order to grab the market share in the industry, Gojek has used the fixed rate of IDR10,000 (USD0.7). The tariff is very cheap compared to other public transportation. These strategy has brought the company’s to be very popular in Indonesia transportation services. However, based on the news from CNN Indonesia, the company will change the fixed rate of IDR10,000 to a per kilometer fare like a taxi business start in September 2015.

In the new tariff scheme, Gojek will still use the fixed rate at IDR15,000 (USD1.1) or 50% increased from the old tariff in the non rush hour time. While, in rush hour time (Monday to Friday at 4-7PM), Gojek will use per km tariff. For the first 6km, the customers will be charged IDR15,000 (USD1.1) and per next km, the customers will be charged additional IDR2,250 (USD0.16).

Seasonal business for Gojek
We understand that the under developed public transportation in Indonesia and obviously very low fare in the promotion time have given Gojek a huge amount of popularity. The services is better compared to the conventional ojek. Normally, customers opt to use Gojek, in the case of heavy traffic due to manuverability and affordability.

However, we still believe Gojek are less comfortable for longer distances and business transport. Moreover, Indonesia has two climates every year, which are hot and rain seasons. Indonesia’s rainy seasons will start from November to March, and we believe at this time, Gojek will lose the number of customers. In the rainy seasons, normally the customers will prefer to use taxis.

Our experience using both Uber and Conventional taxis in Indonesia
Ground checking of conventional taxis and UBER. On Wednesday, 7 October 2015, we did a ground checking of Bluebird taxi and Uber taxi. We went to South Jakarta (Blok M area) by Bluebird Taxi and back to our office in Gatot Subroto road by Uber taxi. We estimate that one journey took around 6 km. In our ground checking, we also analyse their online application to order the taxis. We found that Blue Bird online application system is not as good as Uber systems. In our opinion, its understandable since Blue Bird is a real taxi companies and Uber is focussing more on their online appication.

First trip (Office – Blok M) by conventional taxis (Blue Bird)
Bluebird reservation application is available on Apple Store for Apple user or Play Store for Android user. We can download the application for free. We actually open the application for the first time so we were asked to create an account. Its need four step to create an account which is choose city -> Register the phone number -> Verification -> last, input the name, date of birth, and email address.

After the account was created, we open the application and make an order, to make an order we were asked to input the pickup address or choosing the pickup point. We make an order at 12:05PM and less than one minute; we received the confirmation from the driver by phone. The taxi arrived at 12:08PM. Bluebird is using Toyota Limo as a regular taxi. In my opinion, the bluebird reservation application is user friendly; the driver is quite responsive, the taxi looks well maintained and clean.

In our journey to our destination, we made some conversation with the driver. Below is the conversation summary:
Every order through the application will be offered by system to the nearest driver from the pick up point. Each Bluebird taxi equipped with a devices that can be used to receive orders and to contact passengers.
Bluebird offer many benefits and bonus to the driver such as;
30% commission from daily income
Bonus based on the number of working days per month
18 – 19 days: IDR100,000
20 – 22 days: IDR250,000
23 – 24 days: IDR350,000
Monthly bonus based on total revenue in one month
IDR15,000,000 revenue/month to get IDR1,500,000
IDR14,000,000 revenue/month to get IDR1,250,000
IDR13,000,000 revenue/month to get IDR1,150,000
Our journey was around 6km and took us around 25 minutes to reached our destinations. The Jakarta traffic condition at that time was quite pleasant will less traffic. The taxi fares was around IDR35,000.

Second trip (Blok M – Office) by UBER
In order to make an order with Uber, we must have the Uber application. Uber’s rregistrations client is more simple than Bluebird. We have two option either we connect using facebook ID or use another email address. If we choose not to use Facebook ID, Uber asked us to input our email address, mobile number, and password.

In order to booked the Uber’s taxi – first, we need to set the pickup location. Second, fare confirmation and last trip confirmation.
Figure 30: UBER’s step to make an order

We made an order at 01:48PM and received a confirmation from the driver a few second later. The messages were written that the driver arrived in 8 minutes, and the drivers arrived on time. Uber used the application like google maps to enable us to look the drivers location. At that time, the driver of Uber used Chevrolet Spin. Inside the car, we found that the car was not as clean as conventional taxis. Our driver does not know the road very well. We found that Uber does not give a sufficient training to the drivers compared to Blue Bird drivers. In our journey back to the office, we had a chance to spoke withe the Uber’s driver about their experience in Uber. Below is the summary of our

conversation:

The driver has just joined to be Uber’s driver for one week. He was using rental car and commited to share the revenue with rental owners. The rental companies that he used is a small companies that only have 5 cars.
Uber pay the driver once a week, and 100% revenue goes to the drivers. Every weekend there is additional money of IDR30,000 for every trip from Uber as incentive to the driver.

Currently, every person who interest to be Uber’s driver can use their own cars without having to register it to the rental company.
Our journey ends at 02:39PM and Uber’s charged us IDR24,000. The cost was cheaper compared to the conventional taxis. It was expected, since Uber used the lower price compared to the conventional taxis. We believe the switch to Uber from conventional taxis will happen momentarily. Moreover, their payment methods using credit card will limit their ability to attract more customers.

Our experience using Gojek in Indonesia
Ground checking of Gojek. On Tuesday, 13 October 2015, we did a ground checking of Gojek. We went to Wisma Mulia from Plaza Semanggi. We estimate that one journey took around 4 km. In order to order the Gojek, we need to download the application that is avaliable from Apple store or Play store.

After download the application, I opened the application and asked to create an account by input email, name, phone number, and password (see figure below) and then sign up. After account was created, I can directly make an order. It is quite simple to place an order from Go-Jek application, I only asked to choose pick up and destination point using maps which available in the application and then the cost showed up, click order to confirm the order. During promotion period, customer just pay IDR15,000 for every destination (non rush hour). We ordered the Gojek at 1:54PM and a minute later the driver called and asked the detail location for pick up. The driver pick us up at 2:05PM.

In our journey to our destination, we made some conversation with the driver. Below is the conversation summary:
There are eight services provided by Go-Jek such as Go-Send, Go-Ride, Go-Food, Go-Mart,Go-Box, Go-Clean-Go-Glam, Go-Massage. With a number of additional services which offered by Go-Jek.
Go-Jek cut 20% of each driver income. The fare for 0km – 5km trip is IDR25,000. If more than 5km, the fare is IDR25,000 plus IDR2,500/km. Let say the trip is 13km away, the cost for first five kilometer is IDR25,000 and the cost for eight kilometer remaining is IDR20,000, the total is IDR45,000. Go-Jek cut 20%, so the driver will get IDR36,000. If using Blue Bird taxi, it will cost up to IDR66,000.

Taxi industry is still alluring in the long term

Indonesia Taxi Industry is Still Under Penetrated
We are positive on the taxi industry in the longer term, due to following: Indonesia has a low taxi penetration ratio at 1.45x (Greater Jakarta) as compared to Singapore (5.24x), Hong Kong (2.5x), and Thailand (17.65x), Indonesia have a large number of populations that has become increasingly urbanised, Indonesia’s middle class is expanding and GDP per capita rises accordingly, A lack of investments in public transportation makes taxis an attractive choices, Taxi tariffs in Indonesia are among the lowest in the world, implying that taxi operators have room to raise these tariffs in the future; could boost the companies’ financial performance, UBER will face a big headwinds from Indonesia Government that has not approved UBER to operate in Indonesia. Moreover, the payment methods using credit cards will limit their expansion. Lastly, supply of rental cars will be limited due to some of the big rental companies do not want to be UBER’s partner

Low penetration of Indonesia taxi industry
Indonesia taxi penetration stood at 1.45x (taxis per 1,000 people) in 2014, much lower compared to Singapore at 5.24x, Hongkong at 2.5x, and Thailand at 17.65x – where these countries have a better mass transportation. One of the reasons of the low penetration of taxi industry in Indonesia is the taxi operations in Indonesia is highly concentrated in the Greater Jakarta area which contributed 60% of the total number of fleets of taxis in Indonesia according to the data of Directorate General of Land Transportation.

With the low penetration rate of taxis in Indonesia – potential riderships growth in Indonesia is still ample. According to Euromonitor, consumer expenditure on public transportation (include taxis) grow at 11% CAGR between FY09-FY14. We believe there is potential for continious growth, due to Indonesia’s poor public transportation system. Additionally, we believe that the growing middle class could spur riderships growth in the long run.

Rising urbanisation and growing middle class
In our opinion, Indonesia economic is still remain in Jakarta area, and we see the urbanisation to Java island to continue, as well as the trend towards a more affluent middle class further to support the taxi industry’s demand. According to Boston Consulting Group, the middle class and affluent consumers of monthly household expenditure of IDR2mn-IDR3mn in Jakarta will increase to 68% in 2020 from 42% in 2012.

Indonesia taxi fares is considered as the cheapest among other countries
In the absence of convenient and reliable public transportation modes, Indonesia taxi fares is still considered as the cheapest at IDR7,500 (USD0.53) at the start compare to Singapore at USD2.40, Malaysia at USD0.70, Hong Kong at USD2.84, and Thailand at USD 0.97.

Lack of investment in Indonesia’s public transportation
Under developed alternative forms of public transport in Indonesia. The under-developed public transport options such as buses and trains also drive taxi ridership demand. Passengers have to cope with over-crowding, unpredictable arrivals, social safety issues, and poorly maintained buses and trains. Customers can opt to use ojek (unlicensed motorcycle taxis), especially in cases of heavy traffic due to their maneuverability and affordability. However, ojek are less comfortable for longer distances and business transport.

The development of improved public transportation in Indonesia (especially in Jakarta) remains a challenge for the government. For those with medium to high incomes; taxis are the most convenient transportation alternatives.

The convenient public transportations in Indonesia are: Transjakarta, MRT/LRT (on progress), Taxis. In Indonesia, there are still many of public transportations which are not convenient and reliable, such as: Trains, Bajaj, Ojek, Traditional bus (Metro Mini), Mikrolet (or Angkot).

Improvement in public transportation is visible but far from sufficient

Public transportation transformation is getting visible
Improvement in the Transjakarta and KRL commuter services. Transjakarta and KRL commuter (both are main mass transportations in Greater Jakarta) besides taxis. The improvement in Transjakarta is visible according to some friends who are a frequent users of Transjakarta. According to them, Transjakarta’s improvement can be seen from more frequent bus, less crowded trip, and more clean station.

While, the other main mass transportation in Greater Jakarta is KRL commuter; the ridership of KRL commuter increased by 31% YoY to 17mn passengers in FY14. The improvement in the riderships was due to the cheaper fares that was introduced in FY13. The Indonesian Government utilised the fuel subsidy removal to give a subsidy to the KRL commuter in order to reduce the traffic in Greater Jakarta. In FY13, the Government introduced E-ticketing with a fares of IDR3,000 for the first 5 stations and another IDR1,000 for every 3 stations. In Apr15, the Ministry of Transportation changed the fares based on KM; for the first 25km, the fares at IDR2,000 and another IDR1,000 every 10km.

Inner city transportation is becoming very urgent
According to World population review, Jakarta has an estimated 10.2mn in FY14 and Greater Jakarta of 30mn in FY14. The Government has improved the transportation from outside Jakarta that can be seen in KRL Commuter’s riderships. While, we do not have any other reliable and convenient inner city transportation besides taxi, and transjakarta. Both Jakarta MRT and Monorail that will be the other solution for inner city transportation in Jakarta will be ready in FY18.

Taxi operators will be benefited for this trend
In the absence of reliable and convenient public transportation modes, and Indonesia taxi penetration is still low at 1.45x compared to other regions like Hong Kong (2.5x), Singapore (5.2x), and Thailand (17.6x) at the end of 2014. Taxi penetration measures taxi ridership per 1,000 populations. Without any reliable and convenient public transportation in inner Jakarta; taxi will be the choice for most of the people. Furthermore, in our view, the infrastructure improvement in the public transport will be beneficial for taxi industry (more open and close door) and in other countries like Singapore, Malaysia, and Hongkong; the improvement in the infrastructure were not a threat for them.

Indonesia MRT is not a threat; changes of Taxi Industry games

No more door to door operations; it will be point to point
More efficient revenue stream for taxi industry. In the past, taxi operators were served the customers from home to the workplace or we called it door to door services. In our view, with the improvement in the Indonesia public transportation; it will change the game for the taxi industry. The taxi operators will be served the customers from point to point; means that the taxi operators will take the customers from stations to the workplace.

We believe, these conidtion will help the revenue stream of taxi industry; with the less congestion of Indonesia traffic condition (after all the Indonesia public transportation is ready), we think that taxi operators can achieve more than 15x open and close doors (now is 11x open and close doors).

MRT development will provide a benefit to the taxi industry
The further development in infratructure and business districts growing in the Jakarta area will increase the demand for taxi. The development of new shopping malls and central business district (CBD) will increase the number of trips taxi make in the inner city. Furthermore, the development of Mass Rapid Transportation (MRT) trains in Jakarta will also be favorable; which could make taxi as a complement or a feeder for the MRT.

In our opinion, the passengers who travel on the MRT will use taxi services from the MRT station to their local destinations (point to point basis). According to our ground checks, the taxi drivers prefer a short trips rather than long trips, due to bad traffic jam in Greater Jakarta that could increase their fuel expenses. More frequent short trips could potentially give them more revenues as the taxi drivers will benefit from the flag fall charges.

Opportunities from government’s help to reduce private car ownership

Government is seriously consider to discourage private car ownership
Increase the parking tariff. In 2014, DKI Jakarta Governor introduced the new parking tariff under Governor Regulation no 179/2013. The parking tariff was increased by 50%-150% on off street parking tariff. The Governor also raised the on street parking tariff in 2014. On street parking means parking area that are located outside buildings and partly occupied public roads.

Implementation of Electronic Road Payment (ERP)
In 2014, the Indonesia Government was planning to introduce Electronic Road Payment (ERP) in the Central Business District area (Sudirman road, and Thamrin road). The plan was to reduced the traffic in the CBD area and also discouraged people to drive a private car. The tariff will depend on the traffic condition at that time; where the tariff may go from IDR6,000 (USD0.46) to IDR21,000 (USD1.61). These ERP implementation will not be applied to the taxi; hence, we see a positive impact to the taxi companies.

Fuel subsidy removal. Indonesia’s government has slowly reduced the subsidy for fuel and plan to eliminate the fuel subsdiy in the future in order to use the money for other purposes like government spending. The removal of fuel subsidy also to discouraged people to drive their own private cars and switch into public transportation – to reduce the traffic in big cities. Currently, the cheapest fuel (premium) is sold at IDR7,400/litre (8% increase from Mar15). Furthermore, the Government also introduce Petralite (Ron 90); which in the future will replace premium fuel; the market price is at IDR8,300/litre.

Off putting private car ownerships
The unfavourable initiatives from the Indonesian Government were aimed to discourage the use of personal cars; hence, it gives the advantages for the public transportation include taxi operators. Based on our back envelope calculation on monthly expenses differences after new initiatives, car owners in Jakarta may see an increase in the monthly cost by range of 31%-50% (please see below table). Some of the new initiatives have been implemented since last year and this year, the Government has introduced the Petralite. We may see some challenge for the Government to implement the ERP.

Furthermore, based on our calculation, we see that taxi can be a solutions for the people to switch from private cars to public transportation. With the current economy situation, the big jump in the monthly cost of private own car could make the people to switch. We see a 14%-70% lower cost to use taxi rather than private car in the short and medium journey (5km-20km). Lastly, we believe that taxi operators will be the major beneficiary from the new initiatives; since the others public transport are not as convenient and reliable as taxi.

Indonesia’s taxi industry business model
TAXI business model – Drivers as partners. PT Express Transindo (TAXI IJ) operates the regular taxi business under the partnership agreement. The company used the partnership agreement in order to attract high quality drivers, as well as to retain its driver by creating sense of ownership. The business model was developed since 2002, the partnership plan had become the key success factors behind higher growth of TAXI in the past few years. The business model is the company will buy the vehicles (for regular taxi is Toyota Grand Limo) and the drivers will operate them for 5-6 years with an option of one year extension. At the end of the partnership agreement, the drivers will have the opportunity to purchase the assigned vehicles.

How does the partnership arrangement model work?
To participate in the plan, the main driver must provide an upfront security deposit of Rp7.5mn. TAXI also provides installment plan (12 times) for the security deposit to attract more new drivers.

After entering the agreement, the drivers are responsible for a daily fixed tariff to TAXI in order to operate vehicle. The company’s internal policy states that each regular taxi can be operated up to 18 hours a day. Daily tariff for the Greater Jakarta area is Rp240,000/day (US$17.2/day – USD/IDR assumption at IDR14,000). The fixed tariff, bound during the agreement period, will be paid daily throughout the agreement period (whether or not the vehicle is actually operated).

a. TAXI provides monthly incentives (two free days of daily tariff payment) to drivers who fulfill their daily tariff payment in full from the beginning of the month until the last three days of the month.
b. If the driver chooses to have the additional one-year extension period for the agreement, TAXI may give them incentives in the form of 50% discount to the daily fixed tariff during the extended year.

Drivers who end their contract before the expiration date will lose their upfront security deposit as well as the rights to purchase the assigned vehicles. On fuel and maintenance cost, the drivers bear all the fuel and maintenance costs, as well as their meal expenses; therefore, take the burden off from the company. For the repair and maintenance costs, TAXI requires all the drivers to pay additional IDR40,000 (US$2.8) of daily deposit for their future needs, which can be reclaimed if not used.

At the end of the partnership agreement, the main drivers will have the opportunity to purchase the assigned vehicle typically at a price equals to the driver’s upfront deposit (Rp7.5mn) if certain metrics are met. Therefore, the partnership plan acts as an incentive for the drivers to make the most of the business days making as many trips as possible, as their take-home pay will depend on the remaining proceeds they make every day.

Blue Bird’s business model – commision based compensation
Blue Bird business model is differ from their close competitors (PT Express Transindo). Blue Bird used the commision based compensation; where it consists of commision, bonus, and incentives. The company implements payment scheme to driver based as a commision which is calculated from the total revenues obtained in one day. The company’s believe this business model is a win-win solution for the company and its drivers, as drivers generate higher revenue as they work for high commisions.

Net compensations to drivers are after fuel costs. A driver’s compensation has a minimum amount, which provides the drivers with income security. This is in addition to other benefits such as monthly bonus based on achievement, healthcare, dormitory facilies, housing loans, and etc.

Which business model is more resilient in soften economy condition?
Fixed daily payment help to survive in the soften economy condition. We analyse the Blue Bird and Express business model in Indonesia. In the base case scenario, we assume that the BIRD and TAXI have the same number of fleet of 1,000 units and utilisation rates of 75%. In the bad economy condition, we assume that the taxi operators will not expand their number of fleets; while, the taxi operators will increase the utilisation rates in order to offset the additional number of fleets.

Furthermore, we also assumed that BIRD average revenue per day per car will drop from IDR690k to IDR600k. In conclusion, we found that the TAXI business will have a better position in the bad economy condition. In the bad economy condition, for the drivers of the taxi operators, BIRD business model will give them more saftey compared to TAXI business model. Since, the TAXI business model has a fixed daily payment of IDR240k, while BIRD does not have a fixed daily payment.

Meanwhile, in the better economic environment, Blue Bird business model will give an efficient revenue to the company. In the good economy condition, we assume that BIRD’s average revenue per day per car will increase from IDR690k to IDR720k; 4% increase in the average revenue per day per car give an additional 122.6% in the revenue (based on our assumption). While, TAXI business model which are based on the fixed daily payment of IDR240k, will have a smaller improvement in the revenue. But, for the drivers, the good economy condition will give an advantage to the TAXI’s drivers, since the drivers will earn more income per day.