Grab may face tougher fight in Indonesia if Gojek and Tokopedia merge

GRAB'S battle to dominate Indonesia, a market widely seen as the crown jewel of South-east Asia, could grow tougher, now that rival Gojek is reportedly exploring a US$18 billion merger with e-commerce giant Tokopedia.

However, this does not imply a straightforward path to success for a merged Gojek-Tokopedia entity. Key obstacles include the fierce rivalry from Sea, as well as difficulties both companies have faced in expanding beyond their domestic markets, industry watchers say.

Bloomberg reported on Tuesday that Gojek and Tokopedia have signed a detailed term sheet to conduct due diligence for a merger, while eyeing an initial public offering (IPO) of the combined entity in the US and Indonesia.

Gojek is reportedly valued at US$10.5 billion. Tokopedia, backed by SoftBank's Vision Fund and Alibaba, is said to be worth US$7.5 billion.

The development could signal growing pressure from SoftBank's Masayoshi Son on Grab. Bloomberg reported that Mr Son had lost patience with Grab chief Anthony Tan for being reluctant to give up some control to Gojek, stalling the merger effort.

Had Grab been able to join forces with Gojek, that could have wiped out competition in Indonesia's ride-hailing sector, marking the end of both firms' heavy cash bleed in fighting for market share.

Will a Gojek-Tokopedia union now leave Grab out in the cold? Industry sentiment is mixed.

Zennon Kapron, director of fintech and research consulting firm Kapronasia, reckons that Grab could be in a tough spot if Gojek and Tokopedia's plans go through.

"(It could) put Gojek in a better competitive position, where it can afford to sustain the subsidies that it's had to do in its customer acquisition strategy across the region, whereas Grab would still be relying on external funding heavily," he said.

In the current climate especially, "investor appetite to keep throwing money into companies at higher and higher valuations is waning", Mr Kapron added. This could mean that Grab would face even more pressure to demonstrate profitability.

Back in September, Bloomberg reported that Alibaba was in talks to invest US$3 billion into Grab. But this deal could now also be up in the air, given that Alibaba is reportedly facing pressure from Chinese regulators over its equity investments.

The natural synergies between Gojek and Tokopedia could pose a threat to Grab. For instance, Tokopedia's e-commerce business could work with Gojek's last-mile delivery fleet.

And then Tokopedia's "pay later" schemes could be integrated with the services of GoPay and Bank Jago, a digital bank backed by Gojek.

Justin Tang, United First Partners' head of Asian Research, added: "The merger would see the new entity become an all-in-one platform to consumers - there will be very (little), if any, leakage of revenue. Additionally, the two could begin to cross-sell into the different pool of customers and increase user stickiness."

However, it may still be too early to tell the extent Gojek and Tokopedia can rival Grab, especially beyond Indonesia.

Joel Shen, a lawyer at Withersworldwide, said that, given their differing businesses, "Gojek and Tokopedia may run the risk of spreading themselves too thin across too many battle fronts. In order for the merger to succeed, they would have to develop and implement a cohesive post-merger strategy, which will need to be funded".

Furthermore, both companies are "dyed-in-the-wool Indonesian companies", with either no ambition to expand beyond Indonesia, as is the case with Tokopedia, or an inconsistent overseas track record, as is the case with Gojek, he added.

Some have also speculated that a bigger threat to Grab comes in the form of New York-listed consumer Internet firm, Sea. It would take a lot for Gojek and Tokopedia to rival a regional player like Sea, Mr Shen said.

Jianggan Li, founder and chief executive of Momentum Works, is more bearish on the prowess of a Gojek-Tokopedia merger against Grab or Singapore-based Sea. He believes that it may not change anything in the competitive landscape: Gojek is still defending its turf against Grab and Sea's e-commerce arm Shopee is moving ahead of Tokopedia.

"Grab has a regional leadership and Sea has a profitable gaming business, which neither Tokopedia nor Gojek has," he said.

Despite the differing outlooks, what industry observers are unanimous about is that the regulatory hurdles for a Gojek-Tokopedia merger will probably be less onerous than for one between Grab and Gojek.

Previous reports on Grab-Gojek talks had sparked threats from Indonesian motorbike drivers, who feared for their jobs if the two businesses combine. Regulators in both Indonesia and Singapore had also said they were looking into the talks.

On the other hand, a merger between Gojek and Tokopedia is likely to face less resistance, given their distinct businesses, said Mr Shen.

"Importantly, Tokopedia does not have an e-money licence issued by the Indonesian central bank (BI), which means that a Gojek and Tokopedia merger would be able to proceed without prior approval from BI," he added.

Mr Tang of United First Partners said: "It also is smart from an integration point of view. With both companies being Indonesian, post-merger integration will be significantly less complex than a deal with Grab."

Still, there is no certainty that any Grab-Gojek deal is dead in the water. After all, there are still many compelling reasons for a "Grabjek" merger "so it is not inconceivable that the principals would revisit the deal", said Mr Shen.

As he puts it: "This is Indonesia, so never say never!"