Uber - Who is happy and Who is Worried

Uber - Who is happy and Who is worried?

During my business trips to other cities in India, I rely on UBER and it hasn’t let me down. For starters, I average 10 UBER rides a week minimum (no pooling). I have traveled in the best maintained cars to the ones where shock absorbers do a role reversal of giving you back, cars with AC vents that can leave you infected. Being a Business Consultant, I often engage the drivers / owner cum driver, curious to understand the economics and their satisfaction of partnering with UBER for their earning. This conversation with a random set of drivers may not make sense statistically, but my understanding is gathered over talking to at least 300 drivers over the last 1 year.

All of them concurred gingerly and unanimously, that their trips per day have reduced owing to the large fleet of UBER and OLA on road. Couldn’t find a better example of the investment guru WARREN BUFFETT’s prophetic statement, “When everyone gets greedy - you get cautious and when everyone is cautious, you get greedy”.

Taking a flashback to their formative days of UBER, drivers were lured with earnings and incentives which led to massive recruitment of drivers and expansion of its fleet, which is quintessential for UBER’s success. Several drivers turned entrepreneurs, pledged their savings or wealth to buy a vehicle and chased their dream of earning a decent living and dignity, partnering with UBER. From the Business Life Cycle perspective for UBER, I would call it the “Introduction / Launch stage”. The early bird always catches the worm. The first lot of entrepreneurs (driver investors) reaped gains through earnings and incentives, foreclosed their vehicle loans and expanded their fleet with second and third vehicle.

UBER / OLA’s relentless advertising and adoption of ride hailing services by consumers in India, encouraged this business and it gathered momentum. The business grew for UBER and more vehicles were added to their fleet. UBER also ran a massive reference incentive program to their existing fleet owners to refer their friends or relatives to join UBER, which made their recruitment model easier. The business reached a Tipping Point where many abandoned their jobs / professions and bought a vehicle to partner with UBER / OLA. Some of the working executives got into the fray to augment their incomes, by adding a vehicle and partnering with UBER hiring a driver. Many youth, who drive cabs in GCC countries, saw the opportunity and decided to stay back in India and make a similar earning. The number of TAXI’s expanded exponentially and both UBER and OLA were crossing their business hurdles of creating massive fleet, comfortably. I would call this the “Growth Stage” in a Business Life Cycle. While some may differ, I would call that UBER is at the growth stage in India now.

At this stage, the drivers are charged approximately 26% of their gross revenue billing for partnering with UBER and are rewarded once a week for completing targeted trips (roughly 40-50 trips within 3 days).  The rewards could range from Rs 2000 to 3000 depending on the city they operate. This has led to UBER drivers accepting short distances trips at low fares that an Auto would otherwise refuse. The plethora of vehicles in many cities has ensured that the user pays a fare cheaper than an Auto and has access to a UBER under 10 minutes, depending on the time of the day he avails the service. The Customer is definitely happy as his transportation needs are met with utmost convenience.

The vehicle demand in the TAXI industry has contributed handsomely to the business growth in the passenger car industry over the last 15 months. This growth had a ripple effect on the Automobile Finance and Insurance Industry. Demonetization coupled with growth in ride hailing services, contributed to a faster adoption of Paytm and other digital payment options. This industry too logged in good growth. So, several industries have benefited from this transportation transformation.

How does it pan out for those who have invested in their vehicles? Against an average of 13-17 trips a day that they used to clock, trips have reduced to less than 10 per day. Average fare per trip has also taken a 20% to 30% dip owing to the plethora of UBER and OLA available on roads.  With declining revenues every day, the driver investors are unable to pay the monthly interest on their pledged jewelry (for the initial down payment for buying the vehicle), unable to generate funds to meet their monthly EMI for their new vehicle, unable to meet their daily needs and at times even unable to fill diesel (as many trips are thru PayTM and it takes a week to receive payment from UBER). Some of you may have noticed that some UBERS cancel your trips if they are booked thru Digital Payments, as they don’t have Diesel/Cash and cannot complete your trip otherwise. Some of them have pleaded with me to somehow change the digital payment mode and pay by cash for this purpose. Have come across several drivers who hadn’t eaten their lunch till 4PM as they don’t have sufficient cash generated in the business for the day. It has led to a complex web of inflow less than outflow, which is the raison d’etre of several money lenders. Some of the drivers have started borrowing at higher interest rates to meet their outflow with no outlook of how to repay and this is bound to constrict their finances further. In my last trip a driver broke down at 10.30PM on 14^th March 2018, not knowing if his vehicle would be seized when his EMI is unpaid. UBER needs to quickly address this imbalance to keep their chain taut.

On 6^th March 2018, Bloomberg Technology published an article that UBER has spent 10.7Billion USD in 9 years and fares poorly for its size, relative to successful business of similar size, burning cash every day. While their business grew at 90% compared to 2016, its valuation has grown to 7.3 times annual revenue. Groups of similar valuation are at a ratio of 4.2 and acumen says the lower the ratio, the better deal for an investor.

Under these circumstances it is difficult to say, Who is Happy and Who is worried.  

K. Subramanian.

16/03/2018

(The author is the founder of Drawing Board Advisory and Consulting Services and is based at Bengaluru. Views expressed are personal. He can be reached at subbu@drawing-board.in)