The Road to Profitability: Uber’s Play for a Driverless Future

By Guest Editor

May 22, 2017 at 5:19 PM

Uber.jpgIt’s arguably the most important legal fight of the year: Waymo, Google’s since-spun-off driverless car division, is battling Uber over allegedly pilfered trade secrets and information.

The two companies are fighting in a space increasingly crowded by traditional car manufacturers, ridesharing giants, and Silicon Valley upstarts alike, and for good reason: Human labor is extremely expensive and highly volatile.

At present, Uber generally pays out a whopping seventy five percent of its fares to drivers, less a small booking fee (generally around $1.65 in most major metropolitan areas). The math is plain enough: If Uber can keep gas, car maintenance, and all other pass-through fees currently borne by drivers below 65-75% of its gross fares, it stands to make money by going driverless, perhaps even while slashing its current rates.

More importantly, Uber can regulate its supply of cars on the road far more effectively without a human labor pool: Driverless cars don’t get tired. Driverless cars will drive at odd hours, late hours, and won’t cancel your trip because you’re going too far into the suburbs. It bears mentioning, too, that a driverless car is far less likely to discriminate against passengers (of any sort) than vehicles with a person behind the wheel.

The result is textbook microeconomics: Rather than having to incentivize drivers with surge pricing (while fueling marketing campaigns for no-surge competitors like Gett and local cab outfits) to control its supply, Uber will be able to far more accurately and easily regulate its supply of various types of vehicles on the road in every city, 24/7/365.

Of course, these savings on labor depend entirely on Uber to keep those additional expenses in check. Even more so than any tweaking of hardware or software, this transition from “middleman” to direct service provider is the key challenge that rideshare companies like Uber will face in the coming years.

Particularly as this transition begins, Uber’s performance will be tied directly to the strength of its procurement function. For the first time in its history, Uber will be responsible not only for the gas, maintenance, and repair expenses for its fleet of cars, but also for either purchasing or leasing the cars themselves.

Entirely new cost-benefit analyses will thus become immediately relevant sources of direct spend in the millions (or perhaps, even billions) of dollars: Will Uber purchase or build its own parking garages in high-traffic areas for off-peak hours, or will it choose to rent space from an existing player? The same goes for maintenance: Will Uber contract with existing repair shop and part networks, or will it attempt to provide these services in-house?

For better or worse, these new vendor selection processes will fall largely on the shoulders of Uber’s procurement team, and will come to define the company’s profitability equation and feasible price ranges. As the rideshare market begins this necessary shift away from human drivers, Uber’s ability to negotiate volume discounts and other savings with vendors will make or break its capacity to compete. Simply put, Uber’s biggest challenge going forward won’t be a future of cars that drive themselves, but rather the very present-day problem of buying cars, period.

 

Author Bio

everhard.pngOliver Everhard is an Associate with GEP. He focuses on delivering end-to-end procurement solutions within commercial and professional services and is part of the global consulting team based in Clark, NJ. He has worked with medium and large-cap clients across the insurance, pharmaceuticals, real estate, CPG, and industrials sectors. Oliver holds a Bachelor of Science in Business degree with concentrations in Finance and Economics, Magna Cum Laude, from New York University’s Stern School of Business.

 



Tags: uber driverless car procurement function
Category: News Article

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