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Car Companies Should Steer Clear of Uber’s Red Ocean

Car Companies Should Steer Clear of Uber’s Red Ocean
by Roger C. Lanctot on 11-30-2016 at 7:00 am

 It is no secret that Uber drivers struggle to make a living driving for Uber. The most popular guidance for Uber drivers is to use the service to supplement existing income, not as a full-time job. But Uber is transforming transportation with billions of dollars of investment, billions of dollars in fares and billions of dollars of self-driving car research. Car companies wanting to participate in this transformation should beware.

Most users of Uber have had the delightful experience of chatting with Uber drivers thereby discovering usually non-professional drivers who have turned to Uber as a result of mid-career pivots or unanticipated unemployment or underemployment. The average Uber driver I have encountered around the world has usually been on the job for well under a year.

For many of these drivers taking fares from place to place is still a somewhat new and novel experience and likely one that they don’t anticipate making a permanent career choice. Also, in chatting with these drivers, you almost invariably hear the same assessment of Uber as an oppressive master constantly manipulating driver compensation and fares to manage supply and demand.

Of course, Uber’s not-so-invisible hand is often perceived as unfair and driver compensation insufficient. That insufficiency may be less than obvious, though, to an Uber driver who has not figured in the costs associated with maintaining his or her vehicle. One of the most positive aspects of the Uber experience, as a passenger, is the generally nearly-new condition of most Uber cars.

It’s somewhat sad and not unusual to see a nearly-new Toyota or Audi or Tesla racking up mileage at the rate of 25K or more within a 3-4 month period. It’s true that maintenance intervals for new cars are getting longer and longer – stressing out new car dealers that depend on service revenue – but usage rates for ride hailing service providers – using their own cars – is a big red flag and usually the final straw that breaks the back of the business model.

This is just one of many reasons behind the high rate of churn of Uber drivers. It is also the reason behind Uber’s widening efforts to put drivers who don’t even own cars into leased or rented vehicles. Of course, this strategy simply substitutes the additional cost of the lease or rental for the burdensome cost of vehicle maintenance – all to overcome the diminishing pool of available or interested drivers.

Of course, in some markets, where the demand is high, there are too many drivers. This, too, contributes to the churn challenge and the inability to make a living.

But my real motivation for writing this brief note is the fact that Uber is using its drivers to help build the infrastructure that will put these drivers out of work entirely. Uber is putting a sizable chunk of its investor capital into developing driverless cars – and the data gathered from its test mules and existing vehicles will be used as part of that development effort.

In effect, Uber is using the independent weavers to build the looms that will put them out of business – to make a slightly tortured analogy to the 19th century Luddite movement in Northern England.

A car maker I was chatting with yesterday described the Uber and Lyft ride-hailing sector as a Red Ocean – as part of describing why his company was not planning to subsidize Uber or Lyft leases, or invest in either of these companies. A red ocean is a market where everyone is talking a different version of the same thing versus a blue ocean which is an uncontested market sector.

I had to chuckle, because, unfamiliar with the expression “red ocean” I simply envisioned a sea of “red ink,” which is in fact what Uber has been producing in its run up to ad hoc transportation domination. The whole concept of Uber seems intended to undermine both the taxi and rental car industries using financially oppressed drivers offering untenably low fares.

We know how this ends. Existing services are disrupted. Professional people and organizations may be forced out of work or out of business. The insurgent takes over and new forms of discrimination and pricing emerge.

Uber’s reason for being is predicated upon a variety of shortcomings all or some of which may exist in a particular market including: poor taxi availability, high fares, poorly trained or rude drivers, and dirty, old or poorly maintained vehicles. Given the wide disparity in the quality and availability of taxi services around the world, I understand the convenience, economy and efficiency offered by Uber.

At the same time, I depend upon those taxis lined up at airport taxi ranks to be there when I need them. Uber threatens the availability of those taxis at the expense of drivers who have a limited professional stake in delivering me to my destination.

Under these circumstances it is probably best for car companies to steer clear of the Uber’s of the world. The auto industry is in transition from a B2B to a B2C business where direct interaction with consumers will increasingly be the rule.

Car companies are naturally allied with the taxi and rental car industries. Collaboration with these incumbents to create more customer friendly offerings makes much more sense to me.

But don’t take it from me. Hail yourself a taxi instead of an Uber today. You may have to download a different app to do it. But chances are you will get a professional driver in a well maintained car who will know your destination without the need of a map and most likely speaks your language.

I truly enjoy chatting with Uber drivers – but I feel the most sympathetic thing I can do for them is to not encourage them. It’s a lousy living and the employer is actively seeking to put them out to pasture.

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