Deal focus: Go aims to bring Japan’s taxis up to speed

When Nihon Kotsu, one of Japan’s largest taxi fleet operators, and DeNA, the country’s preeminent mobile gaming and e-commerce services platform, merged their taxi-hailing services in 2020 it was widely regarded as a shotgun marriage. Yet Yu Itoki, a vice president at Goldman Sachs Asset Management (GSAM) believes it has yielded significant strategic dividends.

“We’ve seen a lot of M&A in Japan, but this is one case where the merger created so much value. Nihon Kotsu provided the quality and know-how of taxi operations; DeNA provided the technology and digitalisation. They got the best of both worlds, and it has worked out really well,” he said.

The honeymoon period for the combined business – known as Go Inc – was disrupted by the onset of COVID-19 and a downturn in demand so sharp that 30% of Japan’s taxi drivers were no longer able to sustain a living and left the industry. Plans to list Go were also thrown awry, but this presented GSAM with an opportunity to invest that otherwise might not have been available.

GSAM is the sole participant in a Series D of JPY 10bn (USD 75m) that values Go at approximately USD 1bn. MUFG Bank and Sumitomo Mitsui Trust Bank also contributed JPY 4bn in debt funding.

The only other post-merger investors are both strategic players, Toyota Motor Corporation and NTT Docomo. Toyota backed Nihon Kotsu’s platform, JapanTaxi, before the merger as well. Sparx Group was among the other early investors, according to AVCJ Research.

Go is now the dominant taxi-hailing app in Japan with 14m downloads and a 70% market share. It serves as a matching service, pairing passengers with vacant cars, and receiving fees from both sides. Users include members of the Nihon Kotsu fleet and independent taxi fleet operators.

Even with this market position, the company captures only about 88,000 of the approximately 840,000 taxi rides completed in Japan every year. This is because 85% of rides are initiated by passengers flagging down cars in the street.

“Our assumption is the industry will continue to undergo digital transformation,” said Itoki. “More people will use smart phones to hail taxis, so the app share will rise from 15% to 30%-40%.”

Japan trails its global peers on digitalisation for two reasons. First, taxis represent a small niche in a mobility sector underpinned by robust public transportation infrastructure. Second, the industry is highly regulated. Uncomfortable with the global ride-hailing phenomenon – disruption brought democratisation but also service quality issues and taxi driver job losses – the government banned it.

The likes of Uber and the Didi cannot follow their global playbooks in Japan. They are required to offer formal taxi services, which means taxis must be part of fleets not operate solo, and drivers must be full-time employees rather than members of the gig economy. Drivers undergo specific training programmes to obtain special licenses and are subject to different rules and regulations from normal car owners.

Itoki notes that Go would be cashflow-positive if it weren’t spending heavily on advertising to raise awareness of taxi-hailing services. The company also faces challenges on the driver side because demand levels have rebounded to 80%-90% of pre-pandemic levels but there is insufficient supply. Many of the drivers that left the industry during COVID-19 were relatively old and are unlikely to come back.

Go already claims to have boosted taxi driver salaries through the accuracy of its matching algorithm. Part of the Series D proceeds will go towards recruitment and training of more drivers and putting fleets to more efficient use, for example through the rollout of taxis that only handle orders made by app.

“There are plans to offer customised mobility services that cater to customers with specific needs – such as children, pregnant women, and people who want more of a private driver or car rental service,” said Itoki. “But the more imminent issue that must be addressed is having too few drivers to accommodate rising demand.”

In addition to the main taxi-hailing app, Go offers a B2B platform that handles taxi fee payments and tracks employee taxi usage and an artificial intelligence-enabled service capable of detecting scenarios that might lead to traffic accidents. While the company recently announced plans to terminate its food delivery platform, initiatives like the Go Premium service are moving ahead.

The other strategic priority is energy transition. Go is already promoting the use of electric vehicles (EVs) among drivers, and it has provided an in-car emissions tracking app function aimed at passengers. The company is also looking at ways to apply its technology to charging stations.

“Charging is a bottleneck in the EV taxi transformation,” said Itoki. “No one wants to charge at peak electricity hours, yet if every taxi came into charge at the same time, there wouldn’t be enough stations. We want to help develop a smart energy management system that helps taxi operators decide which vehicles come back and when they are charged.”

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• Topics
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