Uber: The Self-Driven Road To Success

Grasping Uber’s financing needs before a full launch into driverless vehicles is critical for upcoming years
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Grasping Uber’s financing needs before a full launch into driverless vehicles is critical for upcoming years.

A Driverless World

Imagine a world where you wake up in the morning to get ready for work and your car does the same. You walk into your driveway and a self-driving car takes you to your office while you catch up on emails or daily news. Once you have arrived at your destination, your car takes to the street, driving locals around town the same way a regular Uber driver would. This is the reality that Uber is working towards. In fact, experts predict that such a world could take shape in as little as five year

While Uber’s business model has proven attractive enough to raise more money than any other pre-IPO technology start-up in recent memory, it faces a serious problem executing the next phase of its plan. Uber recently began testing driverless vehicles by giving rides to its customers in Pittsburgh; however, expansion of this model across the world will ultimately require millions of driverless cars. Most importantly, Uber currently has no plans on who holds ownership of these driverless vehicles, a vital point to iron out to launch the driverless fleet. Having attained mass adoption through a decentralized business model in which Uber does not directly own vehicles, Uber’s only infrastructure investment has been in the 100 recently launched driverless vehicles. To facilitate its driverless efforts, Uber would require billions in capital investment to build a self-owned fleet and compete directly with the resources of other players in this space, including Alphabet and Tesla. This investment is a big ask, given that Uber is currently not profitable and lost at least $1.2 billion in the first half of 2016. To remain relevant in the ride-sharing industry, Uber must find a less capital intensive way to rapidly enter the industry before competitors gain significant market share.

The most apparent reason for Uber to move driverless  is that it will no longer have to pay its drivers. Driver  commissions, on average, make maintenance  and taxes, leaving Uber with the other 25 up around 75 per  cent of the fare after accounting for gas, per cent. In  a driverless world, Uber would no longer be paying  wages and would therefore be able to significantly  reduce fares. This reduction would allow Uber to  squeeze out existing ride-sharing competitors such  as Lyft before they are able to develop their own driverless technology, allowing Uber to immediately win market share. On the flip side, if Uber is not the first to scale in the driverless ride-sharing market, competitors will outprice Uber and likely force it out of business.

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New Roads, New Cars

While currently only facing direct competition from ride-hailing companies such as Lyft, Uber will face a significantly stronger wave of competition when entering the driverless space. Not only are its competitors in ride-hailing developing driverless technology, but also several car manufacturers and technology companies, namely Alphabet and Tesla, are positioning themselves as competitors in the driverless market of the near future.

Alphabet, Google’s parent company, has been actively testing driverless vehicles since 2009. As a result, there is speculation that Alphabet will begin positioning its self-driving vehicle technology as a ride-hailing service. Alphabet has no plans to manufacture its own vehicles, but instead will partner with existing automakers and license their autonomous vehicle software and hardware sensors. As this strategy is similar to what Uber will likely pursue, and given that Alphabet’s driverless technology has been developing since 2009, Uber will have to differentiate itself to potential partners in order to be competitive against Alphabet.

Tesla’s proposed entry into the market is through dual-use vehicles. Under this model, Tesla owners could, using the Tesla app, have their vehicle drive for Tesla’s ride-sharing network when not in use by owners. By opting in to the network, owners could reduce the monthly costs of owning a Tesla car. Elon Musk, Tesla’s CEO, has been optimistic with his belief that many Tesla owners will be incentivized to share their cars with the fleet, but specific details surrounding how the ride-sharing will operate along with how potential passengers would be vetted remain unclear.

Perhaps anticipating Uber’s impending entry into the driverless ride-sharing industry, Tesla’s most recent leasing contracts state that vehicle owners must agree not to use a ride-sharing service such as Uber if the car is driving autonomously. Though Tesla’s strategy focuses on manufacturing electric cars and not creating an efficient ride-sharing network, a Tesla network would make it cheaper to own a Tesla vehicle and would likely enable Tesla to gain market share in the driverless ride-sharing industry.

Steering Driverless

Looking to other competitive transportation industries such as planes or taxis, it is possible that the driverless ride-sharing industry will become commoditized with a couple of years given the low differentiation of the service. Commoditization means that there would be little to no differentiation between using Uber or one of its competitors; consumers would expect comparable prices, speed, and service throughout the industry. What will be important is surviving the initial launch phase, where quickly achieving a cheap and dense network of driverless cars before Tesla or Alphabet means life or death. Should one of Uber’s competitors achieve optimal density first,

Uber will struggle to win back market share.

In a market with major competitors making clear moves towards market entry, Uber must acquire a driverless fleet as soon as possible. Given that Alphabet has significantly more resources than Uber and that Tesla will have the capacity to output 500,000 cars per year by 2018, speed to scale will be a critical determinant of success in this space. In order to execute on this, Uber should focus on its current model of external car ownership. By keeping cars off its balance sheet, Uber will be able to maintain the flexibility of its current model and drive higher returns for its investors as less capital will be required to finance millions of vehicles. Moreover, buying vehicles would not be the only investment that will be required; should Uber purchase its own network of vehicles, it will also have to hire significant amounts of new personnel to support the maintenance and fuelling of this new fleet, capping its ability to grow. Uber’s focus should thus be on growth with as little investment as possible.

In order to execute on an externally owned driverless network, Uber should instigate a partnership with large car manufacturers to use Uber’s driverless technology. In exchange, Uber will hold exclusive rights to that car’s ride-sharing network, thereby ensuring that the vehicle will be not be used with an alternative ride-sharing platform. Using Tesla’s licensing agreement as a precedent, this binding clause will ensure that the car sold will be programmed for use on Uber’s fleet and the car owner can leverage it for ride sharing when they are not using the car.

Unlike Tesla, which will have a network confined to Tesla vehicles, Uber has the ability to drive substantial scale by partnering with multiple car manufacturers giving it a larger annual output of potential vehicles. While Tesla plans to output 500,000 cars per year after 2018, a partnership with Ford – which is already taking part in Uber’s Philadelphia driverless launch – has the capacity to contribute a large fleet to Uber as they can produce 2.6 millions cars per year.

To remain competitive against Alphabet, who will likely attempt to engage the same partnerships, Uber should leverage the fact that it already has a data set from existing riders to plan the most efficient use of the cars. While Uber uses Google Maps and thus Alphabet will have access to some of this data, Uber may have a much more cohesive picture of the fleet logistics, matching cars to customers and dealing with surge pricing. Conversely, While Alphabet has access to location data, they may be unable to differentiate between Uber travellers and regular travellers. Having this data will uniquely enable Uber to optimize driving patterns using historical rider behaviour to plan the most efficient routes, measured as fares earned per unit of gas used. Car manufacturers will want to partner with the ride sharing network that offers their customers the most efficient way to earn money and, until a fleet is already out and running, Alphabet will not have the data to compete on this front. Once Alphabet collects and develops this data in the future, Uber’s exclusive partnership should give it an edge to out-manufacture Alphabet’s partners.

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Riding Into The Sunset

The rollout strategy for this driverless network should be phased in using a hybrid model. Uber should create an option on the app to either have a driver or go driverless. To encourage adoption, Uber should show the expected fares for each option in an attempt to incentivize use of the less expensive driverless option.

This initial period will also act as a beta test so that Uber will be able to understand common challenges for driverless riding and create fixes through software updates before it has millions of cars on the road. Eventually, drivers will find that they are no longer getting competitive fares, resulting in less drivers working with Uber as they are replaced by the cheaper driverless fleet.

While Uber is currently only open to drivers and riders, in a driverless world, Uber could have partnerships with investors seeking returns. A pension plan, for example, could buy thousands of driverless cars through the Uber network acting as a true investment vehicle. These types of large-scale investments will not only help Uber grow its fleet, it will also require less human resources managing car owners.

With the establishment of strategic partnerships across a number of leading automotive firms, Uber has the potential to gain exclusive access to a vast driverless network. Moreover, Uber will have the support it requires to rapidly scale into a market that major competitors with substantial resources are currently pursuing. Ultimately, Uber’s evolution into a driverless market leader will usher in a fundamental shift in the ride-sharing industry: Uber’s best hope for long-term survival and profitability is to spearhead this change, maximizing the returns that the first mover in this market can achieve.

The external ownership model proposed will require quality control in order to work effectively. In order to be an attractive opportunity for driverless car owners, Uber should punish riders that abuse the car and also set controls in place to quickly fix damages caused. An issue that current drivers face is riders causing damage to the vehicle. In this situation, the driver has to stop giving rides for the night and have the car cleaned, cleaning fees are reimbursed by Uber and charged to the rider that caused the damages. Without a driver, Uber would have to have sensors within the car to know if damage is caused and cameras should be installed. There are currently cleaning services for Uber cars, such as Spotless First, that can have the car back on the road within 60 minutes of calling for service and charge Uber directly so that the owner would never have money out of pocket. These same services could be automatically called should the driverless car sense that there has been an incident in the vehicle that requires cleaning. Should damage be done, the rider would automatically lose rating points, much like they would under the current system, while also being charged for the cleaning fees, punishing the act. The difference in the driverless model is the fact that riders will be incentivised by their rankings, such that the highest rated 20 per cent of riders pay lower fees and the lowest rated 20 per cent of riders pay higher fees. This tiered pricing system could also incentivise riders who are most prone to damaging vehicles to ride on a competitor’s network. By maintaining this ratings system, Uber will be able to weed out the abusers of the driverless model and hold its riders to a high standard of respect.

Uber has a long road ahead for it to be the first to mass market with a driverless fleet. By adopting a model of outside vehicle ownership, Uber will be able to take down competitors such as Lyft while also gaining footing in an industry that technology giants will likely attempt to enter in the near future. The key for Uber now is not to think about how much money it can make on driverless cars in the short term but on capturing as much market share as possible in an industry that will shape future generations.

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