By Steve LeVine,
Special to The Post
In its first seven years of existence, Uber has irked cities, flouted regulators, and petrified whole industries. It has yet to make money but is worth a fifth more than BMW and almost a third more than General Motors, both the owners of tons of futuristic technology, tens of billions of dollars in capital equipment, and big profits. In recent deals resembling famous speculative bubbles, rich investors eager for a piece of this juggernaut have poured hundreds of millions of dollars into custom funds that provide exposure to Uber but no equity or financial disclosure.
Which is to say that investors have made a one-way, uber-bullish bet on Uber, forecasting that the company will be at the center of an utter transformation of our collective lifestyle. If not everyone is betting on it, they’re at least not betting against it. We can state that with some certainty because even if you want to short Uber—which you might wish to if only to hedge or to take on a bit of high-end risk—it is generally thought impossible to do.
But what if the consensus has miscalculated? What if the coming trends expected to propel Uber—primarily a decline in private vehicle ownership and the rise of self-driving, clean-powered cars—do generally unfold, but not quite transformationally? What if they take much longer to materialize than anyone is expecting?
And what if Uber’s dramatic decision to surrender the pivotal Chinese market to local rival Didi Chuxing, announced on Aug. 1, halts the momentum that has heretofore been a crucial piece of the American startup’s story?
Until now, auto and tech giants, investment banks, think tanks, and expert consultants have generally agreed that, just as Google appeared out of the blue to own search, Apple to revolutionize smartphones, and Amazon to capture online commerce, Uber was likely to be the singular name in shared transportation. But in light of its retreat in China, it seems more likely that the company will be, at best, part of a shared triumph.
Indeed, the company is grappling with local competitors in markets around the world—among them Lyft in the US, Ola in India, and Fasten in Russia. They also are raising tons of capital and nurturing global ambitions of their own. Among the tens of billions of dollars anted up for a share of the action, GM has taken a $500 million stake in Lyft, and Apple has invested $1 billion in Didi Chuxing, which itself is about to invest a reported $100 million in Malaysia’s Grab.
Uber would argue that its potential goes well beyond ride-hailing, that it has uniquely large-scale ambitions to be a logistics firm, using its fleet and its technology to deliver food and packages in cities around the globe—like FedEx, only with robot cars.
But what if Uber accomplishes this and is still not worth its current $62.5 billion valuation, or even the $16.2 billion in cash that investors currently have at stake?
In his best-seller The Big Short, Michael Lewis featured the inventive investors who figured out how to bet against the housing bubble that preceded the 2008 financial crisis. If an investor could similarly build a case against Uber, and was right, there might be few contrarian bets in Silicon Valley that would deliver as rich a payday.
Should savvy opportunists now be figuring out how to make a tidy profit betting against ride-hailing? The answer, I determined, is yes. The conundrum was how.
Part I: Self-driving technology is indisputably on its way
Every major automaker on the planet, in addition to tech giants like Google and Apple, is developing self-driving technology as fast as it can. Already, cars produced by BMW, Tesla, and Toyota can guide themselves along major thoroughfares, and slide perfectly into a parallel parking space.
Experts dispute how fast such capabilities will become standard equipment in mainstream-priced, fully autonomous vehicles. Tesla CEO Elon Musk predicts it will be in just a couple of years; Kia and Mercedes say it is more probable in the 2030s. Other forecasts are in the decades after. But the conviction of all is that self-driving cars are the future.
The bet on Uber is that this trend will converge with an increased shift to the “sharing economy.” In this broader vision, personal transportation will come to be dominated by autonomously driven cars. Starting as soon as a decade and a half from now, large numbers of people around the world will get around by hailing driverless taxis that operate like robots, so ubiquitous that they will arrive an average of a minute after being summoned by an app. Or we will own a contract conferring privileges in a robotic vehicle shared by numerous others. Whichever the case, households will own at most a single car, or stop buying them entirely, and sales may plunge almost in half.
There is logic to this view. Analysts making the case usually start with the nonsensical way we own cars: Autos are our second-largest investment after a house, yet we barely use them. Presented with a more rational alternative, adults around the world will naturally discard their old ways. The residents of cities in the industrialized world will be first to rush into this lifestyle choice, mostly out of frustration with obsolete infrastructure, and those in the developing world will be next. “Gridlock will be so horrible that people won’t consider buying a car,” said Alejandro Zamorano of Bloomberg New Energy Finance, which analyzes trends in energy technology.
In a recent note to clients, Barclays analyst Brian Johnson wrote:
The average vehicle is only driven 56 minutes per day–that is, 4% of the time. Even at peak hours, only about 11% of vehicles in a highway-intensive city like Seattle are in use. Accordingly, a significant opportunity exists for asset utilization to increase via sharing of self-driving vehicles.
It’s the shift implied by Johnson—shedding the drivers—that most of all accounts for the big bet on Uber.
In the remote chance that you have only vaguely heard of Uber, it is an alternative to Hertz and taxis. You open an app on your smartphone, and within a few moments, a private driver, one who has signed on as a contractor with Uber, shows up precisely where you are standing and takes you to your destination. No cash changes hands (unless perhapsyou’re in Africa or India) because your credit card is on file.
According to confidential documents obtained by The Information(paywall), Uber took in $1.2 billion in revenue in the first three quarters of last year, but still lost almost $1.7 billion. Much of Uber’s spending goes to compensate its drivers. According to a May 2015 report by Barclays, the omission of drivers will reduce the total fixed operating cost of a new ride-hailing vehicle to 34 cents a mile, down from 81 cents today, meaning that Uber will save about 47 cents a mile from the advent of robot cars. So if it can cement its hold around the world, and be rid of those people behind the wheel—if all or most of its cars are propelled by robots, and it will simply be paying to insure and maintain them—its profit should be astronomical.
Hence the automation/ride-hailing thesis: If the market embraces the two advances more or less equally, Uber investors should score a financial bonanza. But to the degree automation develops more slowly than ride-hailing, the windfall would be much less.
When analysts and the carmakers themselves get to talking about this subject, they are prone to forecast the fast robotization first, and from there become fairly excited. Such bulls say that transportation network companies, as they call firms like Uber, are central to an inevitable shift that places ride hailing, vehicle sharing, and autonomous driving technology, rather than cars themselves, at the center of the automobile business. For the major carmakers, that could mean catastrophe, while for Apple, Google, and other tech giants with ambitions in the same field, the revolution could mean a significant new stream of income.
The believers are not shy about forecasting large returns. According to Morgan Stanley’s Adam Jonas, we are talking a $10 trillion-a-year industry. And according to Rolls Royce (paywall), in a quarter century, “everyone will be chauffeured by robots.”
The widely accepted narrative is that Uber will have a significant share in all of this.
Part II: Forecasting and being right are different things
In a June 17 note to clients, analyst Bob Brackett of Sanford Bernstein argued that the world may not be making a massive shift to ride-sharing. Brackett, who has a record of dry contrarianism that he calls realism, suggested that, in invoking a cognitive connection between autonomy and ride-sharing, fellow analysts are committing a “conjunction fallacy,” invalidly linking one trend to another.
US Census data, Brackett said, shows carpooling in the US plunging over the last three and a half decades, from 19.7% of all commuters in 1980 to 9.4% in 2013. If Americans are so prepared to share cars with other human beings, why are fewer of them doing so now than a generation ago? He went on:
Yes, cars are “inefficient”—used only 5% of the time for example. But so is art. And so is jewelry, and I’ve yet to convince my wife to rent it. So are golf clubs but we still buy them. Toothbrushes are used less than 1% of the day, and a perfect app I’ll develop called Gumbuddycould find neighbors willing to share for a modest fee. I’d argue that automobiles in the American tradition fall closer to a personal and emotional item.
A 2015 study by JD Power tends to back up Brackett. One of its primary conclusions is that American millennials, the generation said to be most eager to renounce car ownership and share, are still buying vehicles, and a lot of them. This age cohort in fact accounted for 27% of all US car sales in 2014, compared with 18% in 2010, the firm said.
A May survey by University of Michigan researchers Brandon Schoettle and Michael Sivak found that, at least for now, American motorists aren’t in fact keen to be driven around by a robot, either. Just over 15% of respondents embraced the idea of a fully self-driving car. Those aged 18 to 29 showed only slightly more enthusiasm, with fewer than 19% wanting a completely autonomous vehicle, and a solid 41% preferring no self-driving features at all.
Autonomous driving and car-sharing have been combined into a single narrative, but they may not belong together. That autonomous functionality is coming to our cars is manifest—we can watch the car companies moving to install and offer these features (although a fatal May 7 crash in Florida involving a self-driving Tesla S suggests that fully autonomous, robotic cars will not be ubiquitous as soon as the consensus thinks). But not so much car sharing: People are using apps to hail cars, but that may reflect a snubbing of taxis and rental companies, and in the case of Saudi Arabia, simply a desire by women to move around freely.
It is not evident that most or even a large plurality of us wish a life entirely liberated from the wheel, at least not yet.
Part III: But if ride-sharing does take off, will Uber win?
The settled view remains that car-sharing will take hold more or less alongside autonomy. So out of respect for its advocates, let’s conduct a thought exercise: Will Uber then conquer the global market, as has been suggested by analysts, and more specifically by its valuation?
Here, too, there is logical dissonance. The assumption implies that the disruptees—the carmakers who must lose if Uber is to win—will sit more or less idle while their future is diminished or even foreclosed; that, like other once-dominant incumbents in other technology-driven industries (Kodak and Nokia come to mind), the carmakers will flail heedlessly, or at least impotently, while a potent new technology captures their business.
For the automakers, the nightmare visage is an Amazon-like gargantuan to which they become beholden, an all-but impassable global gatekeeper for the sale of their vehicles. Within just a few years of its launch in 1994, Amazon was already starting to dominate book sales, weigh heavily on publishers, and put bookstores out of business, all the while keeping about half the list price of hardcovers it sold. Today, Amazon effectively calls the shots.
In the carmakers’ scenario of Hell, they, just like the booksellers, would become mere cogs or, worse, redundant, because who really cares what car picks them up—a Corolla, a Fusion, a Tucson—as long as it is clean and comfortable, and the driver reasonably courteous? Uber would be the branded platform, and the cars so many faceless nothings. Some say the seeds of this future are here. “Uber is already the winner in many countries in a winner-take-all industry,” said Jay Ritter, a prominent expert on IPOs and asset pricing at the University of Florida.
Only, the major automakers are visibly mobilized in focused counter-revolution, intent on preventing their dystopian fate.
Consider GM. Four years ago, this US giant was ahead in early electrics, having launched the path-breaking plug-in hybrid Volt, which gave it the type of estimable street cred it had lacked since perhaps the stylish Camaro in the late 1960s. Yet it was a tenuous lead, and one that GM itself seemed not to know what to do with. When presented with the opportunity to run with its advantage by, say, acquiring advanced battery companies, GM refused. In interviews at the time, GM executives said the company made cars, not batteries; it needed to husband its scarce resources.
In 2016, GM has had a re-contemplation. Uber’s sweep across the planet, along with the success of Tesla Motors, spurred a $500 million GM investment in Lyft and a decision to pony up another $1 billion to acquire Cruise, a San Francisco-based self-driving technology startup. (GM is also preparing to release its new, 200-mile-range, pure electric Bolt by the end of this year.)
May was a big month for similar tie-ups. BMW, Toyota, and Volkswagenall bought stakes in ride-hailing companies (respectively, in a California startup called Scoop, in Uber, and in Israel’s Gett). In July, Daimlermerged its MyTaxi subsidiary with a rival called Hailo, and then led a fresh investment round in an app-based limousine service called Blacklane. Taken together, the automakers appear to be muscling up, attempting either to emerge with a clear lead themselves, or at least to mold a friendly future in which they are one of several car-sharing winners.
Amnon Shashua, chairman of Mobileye, a leading autonomous technology provider, predicted in a July 26 earnings call that most of the carmakers will morph into “mobility companies,” and supplant today’s standalone ride-hailing firms. “There will be nothing special about Lyft and Uber and Gett in the longer term,” Shashua said.
The barriers to entry for ride-hailing companies can be quite low. In many places, all you need is a smartphone and a mobile credit-card reader, and you are on your way. The trick is to get enough people to download your app and drivers to satisfy the demand. Numerous firms have managed to do this. Lyft has thus achieved a $5.5 billion valuation, India’s Ola $5 billion, and Didi Chuxing $35 billion, including the Uber business it just absorbed.
The competition is cutthroat, though. To get and keep market share, the ride-hailing rivals are continually dropping their fares, even while awarding bonuses to cement driver loyalty. In December, Lyft and three Asian startups—Ola, Didi, and Grab—formed an alliance to beat Uber on scale and convenience, pledging to allow passengers to cross-use their apps in Asia and the US.
On June 21, Andrew Ross Sorkin at The New York Times wrote that Uber’s feverish pace of fundraising seems at least in part a calculated attempt to crush this savage competition by crowding out investment available to the others. The argument is that individual winners will eventually emerge in each market, and then command higher, profitable fares.
If so, the strategy does not seem to be working, at least not yet. That has been most plain in China, probably the most important market in the world. Over the last two years, Uber and Didi fought a ferocious battle, with Uber alone spending $2 billion to retain drivers and subsidize fares. Even so, Didi ended up controlling at least 80% of the market before forcing Uber to succumb. The American startup sold its Chinese business for an 18% stake in Didi, which in exchange obtained a $1 billion equity stake in Uber. While not a bloodletting, it was a far cry from the triumph many expected from Uber.
Just a few days later, Didi showed that it does not regard the deal as a truce, joining a $600 million funding round for Grab, a strong rival with a network around Southeast Asia. The move seemed to suggest that Didi has globe-conquest aspirations of its own.
To read the rest of this story, go to http://qz.com/707947/investors-have-placed-a-one-way-bet-on-uber-which-made-us-want-to-figure-out-a-way-to-short-it/
This piece was originally appeared in Quartz (qz.com).
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