Amid all the furor over the upcoming Uber initial public offering, many analysts and spectators have begun questioning the company’s next steps. In its IPO filing , Uber said its long-term goal is to become a leader in autonomous driving technology and to develop a fleet of self-driving cars that would phase out human drivers. The concept certainly sounds modern and exciting, but does it actually make financial sense?
The answer is no. Increased liability, compressed margins The first problem for Uber in this plan would be the increased costs the company would bear as a result of operating its own fleet of cars, as opposed to using the vehicles of its contracted workers. Automobiles are assets that depreciate significantly – just think about how much cheaper it is to buy a used car with minimal mileage than it is to buy one brand new. Currently, Uber drivers bear all the costs associated with keeping their cars in workable condition: cleaning, refuelling, maintenance and so on. Under the driverless fleet model, Uber would take on all of these costs.
Moreover, they would face far greater liabilities than they currently do – by assuming responsibility for passengers’ wellbeing, Uber’s insurance costs would greatly increase. All of this will compress margins by a significant amount. Given that Uber already operates a very low-margin business, does everything in its power to circumvent regulatory burdens in the different jurisdictions in which it operates and still fails to make money, falling margins will spell nothing but trouble.
Price surges are likely to get worse
As has already been noted, cars are expensive to maintain. This means any time a driverless vehicle is sitting idle, it is causing a net value loss to its operator. Therefore, Uber will not want to operate more cars in an area than there is demand. Demand, however, is not always static. During periods of high demand, for example after concerts or large sporting events, more cars will be required. Uber’s proposed fix for this is to rely on a reserve of human drivers that would pick up the slack on these occassions.
The problem with this is driverless cars are presumably supposed to replace human drivers. Therefore, the pool of people willing to wait in the wings for periods of high demand to arise is likely to be small and, as a result, customers will experience even more severe price surges than they already do. Pricing surging is currently one of the biggest gripes Uber’s user base has. If it becomes worse under this new model, they are probably going to look for alternative modes of transportation. If Uber becomes a strictly off-peak service, that will also hurt its profitability and will undermine its expansion strategy.
The bottom line is it doesn’t make financial sense for Uber to operate its own fleet of cars, even driverless ones. The notion that autonomous vehicles will operate as perpetual cash flow engines does not hold up under any serious examination. For this reason, investors would be well-served by staying away from the IPO.