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 20 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 75-80 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.
A “Fleit”, though similar conceptually to a Reit in comprising a portfolio of assets, would be different in some crucial ways. Most obviously, a car — even a fancy driverless one — is likely to decline in value as it ages, rather than appreciate in value as property, and the land it is built on, tends to. Tesla founder Elon Musk insists an autonomous car would be “an appreciating asset”. That sounds implausible. But whatever the truth, it would be challenging to value the assets and create investable funds.
Another complication would come with the liability stemming from accidents — again a key difference between a “Fleit” and a Reit. Buildings, as a rule, do not knock people over and kill them.
Broader operating risks are quite different, too. A 25-year lease on a property is a lot more secure than an hour-by-hour flow of money from taxi rides.
Some finance experts believe that if Uber and its like do indeed shift their taxi model to fully autonomous vehicles at some point over the next decade or two, a more likely financing model would be for car manufacturers to keep fleets on their own books and lease them to operators.
Then again, the longer our ultra-loose monetary policy persists — and investors’ hunger for returns intensifies — the more likely it may become that financial wizards, with some encouragement from Uber et al, overcome the challenges and build those Fleits after all.
This article has been amended to show that drivers receive 75-80 per cent of a fare.
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