Monday, February 3, 2020

OMG: "Do the economics of self-driving taxis actually make sense?" (UBER)

The answer is no.
The quoted headline was from an FT Alphaville post Izabella Kaminska wrote in 2015.
Here's another one from 2019: "Uber's conflicting self-driving fleet vision". There were probably a dozen on the topic in-between those two bookends.
And why this traipse down Memory Lane?
From today's Financial Times:

Uber looks to radical financing to fund driverless cars
Car fleet investment trusts would establish autonomous vehicles as new asset class
Taking an Uber has entered the lexicon as surely as doing the hoovering or making a Xerox. Along with US rival Lyft, and China’s Didi Chuxing, Uber and other tech-enabled taxi services — or ride-sharing operators, as they like to be known — are transforming urban transport. One thing they have failed to do — so far at least — is to make a profit. Hopes are pinned on the economics of autonomous cars. Eliminating the overhead of paying people to drive vehicles could boost profitability significantly.

But there is a snag. Without car-owning drivers, the transition to autonomous vehicles could also blow up the companies’ balance sheets by lumbering them with the cost of owning millions of vehicles — unless financial innovation intervenes. And that is just what Dara Khosrowshahi, Uber’s chief executive, is dreaming of. For early-stage tech companies to make money is, of course, deeply unfashionable. Faithful investors cling to the theory that revolutionising an industry is a costly business that will pay off in the long run.

 Scaling up should normally help. But when it comes to ride-sharing, the numbers often do not add up. Disclosures last year by Didi Chuxing showed it was losing $2 on every $100 taxi fare. The bigger it gets, the more money it loses. Uber’s profit trend is more encouraging. The group lost $1.2bn in the quarter to September, up 18 per cent, but that was owing to non-taxi activities, such as food delivery. Ride-sharing made an “underlying” operating profit of more than $600m, up by more than a half on a year earlier. Investors seem unconvinced. Since its float last year, the stock is down 30 per cent. Mr Khosrowshahi, who replaced maverick co-founder Travis Kalanick in 2017, is continuing with a margin-boosting strategy, including a programme to trim some of its more extravagant punts. But more radical change may depend on driverless cars. Ride-sharing operators give their drivers 20-25 per cent of a fare. Without drivers, margins would jump. But how to solve the problem that no drivers means no cars? The last thing Uber would want is to see its relatively capital-light balance sheet — a mere $32bn at the last count — expand into one that owned all 4m of the vehicles in its network. Even with modest price forecasting, that would imply a sextupling of the balance sheet.

No wonder, then, that Uber executives are toying with radical new ideas. Under one model, autonomous vehicles could be established as a new asset class. Vehicles would be owned via what some are nicknaming “Fleits” — or car fleet investment trusts — a new twist on the concept of Reits, the real estate investment trusts that own $3tn of property assets in the US alone. Investors in a Fleit would get a share of a fast-growing sector, perhaps tax-incentivised as with a Reit, and a return of, say, 6 per cent, funded from the cash flow generated by rides. So far, so neat. But just like Uber’s current shareholder base, investors in a Fleit would have to take a big leap of faith....

Izabella nailed it. The economics don't make sense but as Travis Kalanick said, getting rid of the driver is critical, he actually said 'existential' to Uber's very survival.
What to do?

Offload the required financing onto someone else, preferably retail yield-reachers, maybe use the midstream oil & gas MLP model of continually selling shares to pay for maintenance and expansion while paying 95% of cash flow as a dividend.
It would work for long enough that Mr. Khosrowshahi could retire.

Thinking Kinder Morgan, or better yet the Equity Funding scandal which taught us that if an insurance company underprices coverage to get growth in premiums and policies outstanding and/or simply makes them up, the plan can work until the claims start to come in a few years down the road and/or a young analyst like Ray Dirks comes along and says "There's something wrong here".

If interested here's another post on Dirks.