$7.25 billion.
That’s how much Uber’s self-driving car business was valued at back in April 2019 when Uber investors Softbank, Toyota, and Japenese car maker Denso invested $1 billion into the company’s autonomous car division.
And they’re spending that money QUICKLY.
During the first 6 months of 2019 Uber spent more than $860 million in cash (not stock) on research and development primarily on autonomous cars.
And they’re not the only ones investing in autonomous vehicles.
Lyft also spent more than $220 million on research and development, presumably on autonomous vehicles.
Elon Musk has even proclaimed that his company, Tesla, would create an entire fleet of robo taxis by the end of 2020.
So with billions being spent on autonomous already, should we rideshare drivers just just accept that we’re going to be out of the job in 18 months?
That’s because when you really look at the economics of the rideshare industry, autonomous vehicles just don’t solve the biggest near term problem that transportation network companies (TNCs) are facing, profitability.
And the reason starts with the simple fact that Uber has almost commoditized the rideshare industry.
Uber has Nearly Commoditized the Rideshare Industry
For most passengers, there is no real difference between Uber, Lyft, and most other TNCs.
When I’m hailing a ride, the first and often the only thing that I look at is who has the cheapest ride, meaning that rideshare companies are always going to be trying to have the lowest price. In fact, the only other consideration that I’m likely to have is how fast my driver can get to me.
If my Uber can get to me in 3 minutes and a Lyft will get to me in 9 minutes, I’m always going to go with Uber if the price is the same, and sometimes I’ll even pay a premium.
THIS is where Uber has it’s one and only real advantage.
Supply.
The only thing that sets Uber apart from other TNCs is the fact that they have the largest fleet of independent rideshare drivers in the United States, which means that in many markets, they’ll be best positioned to find a passenger a driver fastest. So all they have to do is match the lowest price on the market, and they are likely to win.
But… What if GM, Toyota, Lyft, Ford, or Tesla could just build 1,000,000 autonomous vehicles and match the supply that Uber has in a year instead of spending years and billions of dollars building a fleet of real drivers? Then this gigantic advantage that Uber has spent the past decade building will be gone, and the only thing any TNC could compete on would be price.
Therefore the rideshare industry would be completely commoditized.
Commoditization means tiny profit margins
Commoditized products almost always sell for just slightly above cost.
Most airlines have a profit margin of just 9% and the steel industry has an average profit margin of just 6.95%.
So if the rideshare industry became fully commoditized by eliminating Uber’s supply advantage, you can almost guarantee that price for a ride would drop to the floor, meaning that TNCs would need to rely on cost-cutting methods to squeak out any sort of profitability.
Ok… that’s fine because autonomous vehicles are going to be so much cheaper than paying rideshare drivers right?
Wrong.
According to research from Ashley Nunes and Kristen D. Hernandez of MIT’s Center for Transportation and Logistics, autonomous vehicles with the same level of utilization as current ride-hailing vehicles (52%) would cost between $1.58 and $6.01 per mile to operate. Currently, including paying drivers for both mileage and time, rideshare companies pay drivers a median of between $.59 and $1.12 per mile depending on your market.
That’s right, autonomous cars are actually going to be significantly MORE expensive than humans unless these TNCs also figure out ways to increase utilization, meaning, these cars need to be doing something that makes a profit nearly all of the time.
TNCs can increase utilization by cramming more people into one vehicle, kind of like Uber Pool, but considering how much riders dislike Uber Pool, this seems like an uphill battle.
Companies can also look to do off-peak hour deliveries (think Amazon Prime with robots) to drive up vehicle utilization, but something tells me that the FedEx’s and UPS’s of the world may have something to say about passenger transportation companies encroaching on their territory so you can expect this market to be fiercely competitive.
So while the idea of autonomous taxis is nice and they would be hugely advantageous for consumers, in reality, transportation network companies need to prove they can be profitable over the next few years, and autonomous vehicles just aren’t the answer.
So while Uber, Lyft, Tesla, and Google are spending immense amounts of money on autonomous cars, don’t expect them to come to the rideshare industry and save the day.
So, drivers, we’re not going anywhere, anytime soon.
Agree? Disagree? Let me know your thoughts on the rideshare industry and its business model in the comments below!
