It’s always the same story in capitalism: worker exploitation = profit. Everywhere.
Arif Novianto is a Junior Researcher at the Institute of Governance and Public Affairs (IGPA) at the Universitas Gadjah Mada, Indonesia. He tweets at @arifnovianto_id.
Cross posted from Developing Economics
Photo by Rowan Freeman.
The race to pay drivers as little as possible is underway in Indonesia. In this competition, the participants are platform companies in online transportation services, such as Gojek, Grab, Shopee Food, Maxim, InDriver. Some researchers argue that competition between platform companies will create equilibrium prices, also called a race to the middle, which is considered positive.
This positive assessment of the platform’s inter-corporation competition is rooted in the neoclassical economic notion of perfect competition. In this theoretical framework, it is assumed that competition equalizes supply and demand to create a balance of goods prices, wages, and profits; the results of which will create mutual benefits. Therefore, the preconditions for such competition are emphasized as important from a policy perspective. These preconditions include strong legal systems to support the operation of the ‘free’ market and the minimization of state intervention, which is thought to distort market price signals.
However, the story of perfect competition is far removed from how competition actually plays out. Indeed, capitalism is not as harmonious as the neoclassical framework suggests. This has led to the recognition of imperfect competition within the neoclassical framework. Stiglitz, for example, sees that markets may not work perfectly because of information asymmetries. The Marxist economist Anwar Shaikh has proposed an entirely different view of competition. For him, what takes place in capitalism is not perfect competition, but real competition. In a real competition framework, there is competition between companies to cut production costs so as to enable them to lower commodity prices below those of their competitors. With lower prices compared to their competitors, their commodities tend to be chosen by consumers. This means that competition is a fight to beat rival companies, which often leads to a process of centralization: the strong get stronger and the weak get competed out of the market.
Competition in food delivery markets
Platform companies engaged in food delivery services began to thrive in Indonesia in 2015. The two big players in this food delivery service sector are Gojek and Grab. Both are developing so-called Super-apps, namely services that are connected in one application, such as food delivery, passenger delivery, goods delivery, digital wallets, digital payments, and more. The number of drivers classified as independent contractors and with a gig working mechanism at Gojek reached 2 million people in 2022. Grab is thought to be operating with a similar number of drivers.
In food-delivery services in Indonesia, currently, the determination of fares for drivers is left to the market. This was welcomed positively by platform companies such as Gojek, for example, who appreciated that this allowed the cut of labor costs, thus providing room for them to innovate. Meanwhile, for the Indonesian government, the policy of leaving the determination of food delivery rates to the market is appropriate, because it is considered that an equilibrium price will be created that is beneficial for both gig workers and platform companies, and which keeps employment rates high.
Competition in food delivery services in Indonesia is getting tougher now that three new platform companies have entered: Maxim, Shopee Food, and Traveloka Eat. According to recent reports, Air Aisia—a giant company that was previously engaged in the aviation business—is also planning to expand into the Indonesian food delivery service market with its Air Asia Food.
Indeed, there are many platform companies that are eyeing the food delivery service market in Indonesia, because of the huge profit potential there. Revenue in the Online Food Delivery segment in Indonesia is projected to reach US$1,136m in 2022. Revenue is expected to show an annual growth rate (2022-2026) of 9.33%, resulting in a projected market volume of US$1,623m by 2026, with 35.8 million users. Since the COVID-19 pandemic, there has even been an 183% increase in the use of food delivery services in Southeast Asia, including Indonesia. Gojek itself experienced a monthly rate of 50 million transactions on their GoFood service in mid-2021.
Though Gojek and Grab may have had a near-monopoly in Indonesian food delivery services, they now have new competitors. Start-up companies such as Shopee Food and Traveloka Eat are currently carrying out a “burning money” strategy. In general, this business strategy consists of giving a lot of discounts to consumers and fairly high wages to the drivers (base fare + incentives). This is a business strategy that was also carried out by Gojek and Grab in 2015-2019, with the aim of expanding market shares and acquiring more drivers, to ultimately increase the company’s valuation. Or in simple language, it means carrying out a loss-making business strategy to make a profit in the future.
Race to the bottom
Businesses in food delivery services have great profit potential compared to goods delivery or passenger services. That’s because the platform company, whose real role is only as a “middle-man”—to liaise between consumers and drivers—earns revenue from reduced delivery fees received by drivers (20%), reduced costs for food ordered to restaurants (20- 25%), from “order/platform fees” (Rp2,000 – Rp8,000), and from data capitalization on their platform.
As an illustration, when a consumer orders food for Rp60,000 with a delivery fee of Rp20,000 and a platform fee of Rp4,000, the consumer has to pay Rp84,000. Of the total of Rp84,000, in normal calculations, platform companies get 20% of Rp60,000, which is Rp12,000 (restaurants receive Rp48,000), 20% of Rp20,000, which is Rp4,000 (drivers receive Rp14,000), and all platform fees go to the company, which is Rp4,000. Thus, platform companies take Rp20,000 total of the 84,000, restaurants get Rp48,000, and delivery drivers only get Rp14,000.
In a competitive situation, platform companies do not necessarily cut the percentage of their income as illustrated above, but rather the amount of food delivery rates, of which 80% goes to the driver. In other words, the party who is sacrificed in the fight for cost cutting is the driver or gig worker. Companies take advantage of the absence of regulations protecting gig workers by lowering pay to the lowest possible level. That’s how competition works in a free market.
The competition to cut driver income, started when Gojek and Grab competed with each other to reduce incentives for drivers to almost no incentives at all in 2020. This incentive, not included in the fare amount, is given to drivers when they reach the target number of order delivery completions. For example, if the driver is able to deliver 12 orders in 12 hours, they will get an incentive of Rp80,000. After the incentives are reduced to almost non-existent, they then target the fares for drivers to be cut.
Gojek started reducing net fares for drivers in October 2021, for example in the city of Jakarta, from Rp9,600 (0-4 km) to Rp8,000 (0-4 km). In February 2022, their competitor, Grab, also lowered the net fare for drivers in, from Rp9,600 (0-4 km) to Rp8,000 (0-4 km). In Indonesia, the income received by online drivers is only from the basic fare calculated per km, there are no waiting time fees or cancellation fees. The two platform companies reasoned that the reduction in fares to drivers was an effort to attract consumers to use their services. The message Grab to their drivers was: “This GrabFood fare adjustment is so that more and more people use GrabFood so you can add more orders”.
Both Gojek and Grab are currently battling Shopee Food and Traveloka Eat, which are currently carrying out their money-burning strategy. Meanwhile, Maxim does not follow the money-burning strategy, so they set a low fare for drivers from the start, at Rp3,000 for 0-2 km. The competition between these platform companies constitutes a “race to the bottom”, where each platform company lowers their costs for drivers to compete with other companies.
Figure 1: Online Driver’s Revenue per Day in 2018 – 2020 (in Rupiah) in Gojek, Grab, and Maxim platform
Note. What is meant by “motorcycle” is a driver who uses two-wheeled motorbikes, and works in ride-hailing, goods delivery, and food delivery services. Meanwhile, what is meant by “car” is a driver who uses a car and works in a ride-hailing service. The survey was conducted in June – October 2020 in three provinces in Indonesia: DI Yogyakarta, DKI Jakarta, and Bali (Source: Keban et al., 2020).
Based on research I did with the Institute of Governance and Public Affairs (IGPA) at Universitas Gadjah Mada in 2020, I found that before the lowering of fares for drivers, there was a downward trend in income of online drivers (see Figure 1). This occurred because incentives for drivers began to be removed, since the money-burning strategy at Grab and Gojek ended. This decline in income has created vulnerability for drivers, as they have to work even harder and longer hours to earn enough income to meet the needs of daily living. Such working conditions increase the potential for accidents on the road due to fatigue and puts the drivers in a vulnerable position.
Why are drivers sacrificed?
Drivers in Indonesia are in a weak bargaining position for two reasons.
First, there are structural conditions that weaken the online drivers’ bargaining position, such as the large reserve army of labor in Indonesia – or the number of either unemployed or underemployed in the economy. Data from the Indonesian Central Statistics Agency shows that the number of informal workers in Indonesia was 78,14 million in February 2021 or 59,62% of the total productive work force. These informal workers are often referred to as vulnerable workers, because of the long working hours, low and erratic wages, and the absence of social protection. Meanwhile, Indonesia’s fragile formal sector (wages that do not match living wages) and the existence of a flexible labor market has led to both informal and formal workers being on the search for better jobs.
In the midst of the abundance of reserve army of labor, it is possible for platform companies to lower the income for drivers and depoliticize the organizing power of drivers. This is possible because of the large number of people queuing up to enter the food delivery service industry, especially in the midst of mass layoffs due to the COVID-19 pandemic. For formal workers, they use the food delivery service sector for side jobs, to provide additional income to compensate for low wages in the formal sector. This long queue of workers and few jobs makes the workers finally accept to work for cheap wages.
Second, the absence of a strong online driver or gig worker organization means the workers’ bargaining position vis-à-vis platform companies is weak. The absence of a strong online driver’s organization has also made them unable to win various demands, and the movements carried out are mostly using the wildcat strike strategy. Wildcat strike is a method of action that is carried out spontaneously, has no leader, and is not connected to established traditional trade unions, these actions tend to be unable to change the policies of platform companies.
The real competition that takes place in platform company in Indonesia, instead of creating a “race to the middle or top”, what happens is a “race to the bottom”. The practice of competing to pay gig workers as cheaply as possible in the food delivery industry has worsened the working conditions of online drivers. Unfortunately, this race is not over yet, and it will continue. This “race to the bottom” will end when the gig worker’s strength is well consolidated, so that they can win various demands for their welfare and job security.
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