WHO WILL BE THE WINNER IN RIDE-SHARING NETWORK?
I find the autonomous car industry very exciting. If you look back at the automotive industry over the last hundred years, not all that much has changed. Now, however, we are undergoing two crucial changes.
One is the transition to being EV (electric vehicle) and FSD (fully self-driving vehicle), second is the ride-sharing network.
My favourite childhood animation was ‘The Jetsons’. I wanted to commute to school like George Jetson in a family-size flying car that magically turns into a briefcase at the end of the journey. I think that I will have to modify my dreams from flying cars to fully self-driving (FSD) cars as FSDs seem not far from reality.
Uber, Didi and Lyft run the three biggest ridesharing services globally. Their FSD car ambition is the real key to owning the future of mobility. This is a space that is now seeing serious competition from tech companies and automakers alike such as Tesla, Waymo and G.M (Acquired Cruise in 2016)
I think that while the end goal is to have an autonomous ridesharing network, for both car companies and ride-sharing networks, they will need more data, infrastructure planning, policies, and new regulations to transition to being fully self-driving (FSD). Developing a self-driving vehicle involves and integrates two components: the software (the driver) and the hardware (the car to be driven). The grand plan is to build a self-driving ride-sharing network that’s better, cheaper and safer than the other available transportation options.
The existing ridesharing sector is struggling to find a way to remain both profitable and sustainable in terms of its business model. On top of that, ride-sharing services have been involved in a legal battle regarding whether their drivers are employees or independent contractors. California is suing both Uber and Lyft for committing wage theft by misclassifying drivers as independent contractors instead of employees.
Uber and Lyft have been losing money for two important reasons. First, paying drivers is a massive expense that cannot be eliminated without FSD. Both ride-sharing networks pay back to drivers about 80% of all the money it generates. Second, the utilisation rate is low. According to TLC, the utilisation rate is defined by the time that a driver spends with passengers in their car compared to the time spent shiftless, parked or waiting for a fare. It seems to me that the only solution to these two problems is FSD.
However, Uber and Lyft aren’t alone in their quest for profitability. Almost every major ride-sharing network in the world is experiencing significant losses after seven or more years of operation, including Grab (Southeast Asia), Didi Chuxing (China) and Ola (India).
Lyft has partnered with General Motors to launch a FSD network while Toyota Motor has invested in and partnered with Uber. This indicates that car manufacturers won’t create an autonomous ride-share network in isolation, but instead, they will sell or license their cars to Lyft and Uber.
However, Tesla has created a unique place for itself, and there are plans to launch a ride-sharing network ahead of reaching full autonomy which would involve human drivers. I think this could be a massive opportunity for Tesla and one that is worth talking about just a little bit more for two big reasons.
- Economics: It costs a lot less to power an electric motor than a gas engine. Therefore, driving a Tesla vehicle is cheaper than a traditional car based on the operating cost. The cost will be much lower; a half or a third of what driving an Uber or Lyft vehicle would be. This means that you’ll be taking home more money as a driver in the Tesla network. It will be much more appealing to use a Tesla vehicle in this type of ride-sharing network than a vehicle facilitated by Uber or Lyft. I think that this will incentivise people to lease from Tesla or to get a loan followed by driving to generate an income. Let’s dig into the maths. An electric car gets an average of 3 miles per kWh on average at around 14.37p per kWh. This means that driving a mile in an electric car would cost around 5p per mile. The efficiency of car fuel and gas prices are harder to estimate as the range is wide depending on location and the car manufacturer. The most conservative scenario for a gas car is an assumed £1.50/gallon with high fuel efficiency. Let’s assume that the gas car gets 50 MPG. In that case, a mile in a gas car costs around 33p per mile. This makes the gas car 28p more expensive per mile than the electric car.
- Data: Tesla is the only auto company today that is using customer cars to collect data. Everyone else currently testing autonomous vehicles is using fleets of test cars. Tesla has over 367,000 cars on the road. Every time you turn the wheel or drive on autopilot, you’re training Tesla’s AI and getting the company one step closer to the end goal of FSD cars. The current autopilot software gives Tesla a chance to fix any bugs detected ahead of time as well as letting the owners of the Tesla vehicles make money from their cars. This can become a substantial financial benefit not just for the drivers but for Tesla itself. This is because Tesla’s current market cap is $464.3 billion, and Uber’s market cap is $60 billion as of September 2020. If Tesla captures a small part of the market that Uber has, this could result in significant future revenue for Tesla.
Over the next ten years, 27% of new car sales are expected to be electric, and most of the electric cars will be FSD. If you are a gas-powered car maker, your core business is shrinking. I believe that there will be some consolidations and M&A in the auto industry as a whole as it will keep losing a significant market share to Tesla as the leader in the electric car domain.
Traditional car companies have mastered the art of making a few small upgrades each year, so the models of the upcoming year will be only a little better than the previous models. They are struggling both with technology and R&D. I am not sure if the established automakers can innovate before they become the future Blackberry or Kodak. EV is not their core business; hence they will have to follow Tesla.
Traditional car companies will have to be much more aggressive and innovative to transition to using the new technology and the associated business models successfully.
According to ARK Invest’s thesis, Tesla could charge the $2.50 per mile that Uber and Lyft charges today before dropping it to $1 per mile in 2023. Tesla could take a 50% cut of the gross revenue from the autonomous taxi network, which is significantly higher than the 20–25% cut that Uber and Lyft take today. Therefore I think that pushing out an update of its App to add a ride-share network will benefit both Tesla vehicles and their owners as it is an easy way to secure revenue and to fix bugs along the way until Tesla gets to the point of having Robotaxis in the future.
This is a winning combination that only Tesla can offer.
Special thanks to my friend Frederick for his feedback.