How Sustainable are Third-Party Taxi Companies?

Uber, Lyft, Ola, Didi Kuaidi, Karhoo — these ride-sharing companies have grown exponentially over the past couple of years, enthralling users and investors alike. The rise of the ride-sharing app has no doubt redefined the taxi and car service business, but with investors eagerly throwing money at companies like Uber (which is in turn largely passed to users in the form of free or heavily discounted car rides), it is important to ask: just how sustainable is the existing ride-sharing model?

Shock, Horror, Uber Makes a Loss

Earlier this year, documents showing that Uber has sustained hundreds of millions in losses (despite tremendous revenue growth) were leaked to American online blog Gawker. This is perhaps unsurprising — after all many start-ups and tech companies aren’t profitable (think Amazon), especially in their early years. Indeed, Uber responded by calling it “a case of business 101: you raise money, you invest money, you grow (hopefully), you make a profit and that generates a return for investors.” This business model has made many of the world’s greatest companies possible. Today’s venture capitalists and investors are unfazed by Uber’s operating losses — they are now accustomed to a constant diet of jam tomorrow, and seem to be ever optimistic about the future growth of ride-sharing companies like Uber.

But where exactly is the money from their investments going? Uber has invested heavily in global expansion, and a lot of its operational costs come from technological research and development, as well as marketing and legal fees. However, the nature of the ride-sharing app industry (independent contractor drivers, multiple apps providing essentially the same services), has forced Uber to engage in cutthroat competition: firstly, to retain drivers by offering them incentives to accept their bookings instead of their competitors’; and secondly, to win customers, by offering the lowest prices. Uber has managed to stay afloat thus far by using investor capital to offer free and reduced price services, which help attract new customers. Nevertheless, there is virtually no customer loyalty in the business — drivers and customers alike flock to the company that offers them the best deal. Prices may be unsustainably low; how will companies like Uber survive when the flow of investment money dries up?

Hoo-ha over Karhoo

Judging by the emergence of a new third-party taxi application service just last year, Karhoo, the flow of investment money into the ride-sharing industry is still strong, for now. Despite common belief that the third-party taxi app market is already saturated, Karhoo raised $250 million in its latest round of funding, with plans to raise more than $1 billion in capital. Unlike Uber, Karhoo works with existing license taxi companies to let customers hitch a ride from a range of taxi services. Other ride-sharing apps like Singapore-based GrabTaxi are employing a similar business model by working with small taxi companies to match supply with demand.

As seen by the continuous emergence and disappearance of commute-sharing apps, the barriers of entry and exit to the ride-sharing industry are extremely low — unlike traditional taxi companies, there is no need for large sums of capital investment in physical taxi fleets. That doesn’t mean it’s easy to succeed in this industry, however. For every new app that pops up, another winds down its operations and fades into the background. When venture capitalists invest a large sum of money in a commute-sharing company, they are betting that the company can attract a large base of customers and continuously come up with innovative ways to trump their competitors. The big question is whether they are investing in some profitless Ponzi scheme — or if there is actually money to be made in this industry, sometime in the foreseeable future.

The Game Changer: The Autonomous Car

As Uber CEO Travis Kalanick notes, “The reason Uber could be expensive is because you’re not just paying for the car — you’re paying for the other dude in the car.” Uber aims to eventually replace all its drivers with a fleet of driverless vehicles — for Kalanick, developing autonomous cars is of utmost importance, in order for Uber to avoid ending up like the taxi industry it is currently disrupting. In its quest to get the autonomous car on the road, Uber has recruited over 50 autonomous-vehicle researchers from Carnegie Mellon University’s robotics program, announced a partnership with the University of Arizona in optics and mapping technology research required for autonomous vehicles, and hired Brian McClendon (Google’s former VP of engineering) to run its Advanced Technologies Center. However, Uber has well-financed rivals. This year, Google Inc. will make its self driving-car unit a stand-alone business under the Alphabet Inc. corporate umbrella, with the intention of offering rides for hire in the future.

If autonomous cars do indeed make it to the ride-sharing industry, it would change the entire way we look at transportation. Successfully establishing a fleet of self-driving vehicles would justify Uber’s investments thus far in autonomous-vehicle research. As of now, individual drivers take home about 75 percent of Uber’s revenues. With a fleet of self-driving vehicles, the company would eliminate the need for drivers and be able to dramatically lower fares and increase its revenues. By generating more supply and delivering a shorter pick-up time (a study by Columbia University indicates that a fleet of 9,000 shared, driverless vehicles would be able to replace every taxicab in New York City, whilst reducing passenger wait time to under one minute), Uber will be able to attract a larger base of customers and even encourage existing car owners to reconsider owning an automobile. Its ultimate aim is to make its driverless-car service so economical and pervasive so as to render car ownership obsolete.

Can Uber Survive the Wait?

Perhaps the best way to think about the sustainability of ride-sharing apps is to look at the efficiency of the market. Applications like Uber, Lyft, Didi Kuaidi, Ola and Karhoo are essentially intermediary services that match demand with supply. If the market has low allocative efficiency (remember waiting impatiently by the roadside for a taxi to drive by, in the days of app-less taxi hailing?), then there is a gap in the market for which ride-sharing apps to operate in. There is no doubt that this gap exists, and innovative features like surge pricing seek to further address this market inefficiency. The emergence of a new generation of driverless cars would certainly improve market efficiency dramatically, but that is still a relatively long-term goal for the industry — CEO Travis Kalanick has indicated that a driverless Uber fleet could be made possible around 2030. In the ever-changing landscape of the ride-sharing industry, fifteen years is a long time.

The real question, then, lies in how ride-sharing companies continue to improve market efficiency and sustain low fares in the interim. Uber has some ideas; it is currently testing a program in Chicago and Chengdu, China that turns everyday commuters into temporary drivers with its app. Any ordinary commuter could pick someone up on their way to work and make some money on each drive. The price of the ride would be even lower than UberPool, an Uber service currently available that allows strangers to share a ride. As Uber executive David Plouffe points out, “You have over a million cars coming into central London every day, almost all those cars have one person in them. If we can turn that into something that’s more efficient it’ll have a huge impact.” The number of rides available could increase significantly, improving efficiency and reducing pick-up times. If the program is implemented in the 68 countries Uber is currently operating in, it could help the company survive in the interim. However, the biggest issue Uber faces with the program right now is whether these “temporary drivers” can be classified as independent contractors. If Uber is forced to treat their drivers as employees, then the company would have to pay for health insurance, worker’s compensation, and assume any of the other liabilities employers are required to take on. They would also have to follow minimum wage laws and other costly regulations, posing a challenge to the company’s commitment to sustaining low prices. Uber’s survival therefore not only relies on the company’s ability to innovate, but also on it’s ability to navigate the complex legal landscape.

The market for ride-sharing apps clearly is still tremendously popular. Unfortunately for traditional city taxi fleets and skeptical regulators, that probably means the industry is here to stay. However, whether the global ride-sharing companies currently dominating the industry will remain on top remains a question to be answered. As ride-sharing companies hire young minds to help them come up with innovative strategies and easy-to-use interfaces, as well as embark on extensive campaigns to gain more market share, the reign of companies like Uber might be short-lived.

Not that I am complaining. In the last couple of months, I’ve taken more than a dozen taxi rides with Uber and Lyft combined, and not paid a single penny, thanks to numerous “first-time user” and “friend referral” discounts. In the ruthlessly competitive world of third-party taxi apps where a clear winner has yet to become apparent, one stakeholder emerges victorious: the triumphant consumer.

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Ruru Hoong, a freshman studying economics, is a staff writer at Stanford Political Journal.