This comes on the back of an article I, wrote last week. The theme was that Uber and Ola are not focused on creating a profitable business. This argument was proposed and commented on in-depth. The key argument was that in order to drive user adoption at prices 30% lower than the current market, these companies are stuck with driver subsidies that will leach away any efficiencies from scale. An attempt to reduce driver earnings would result in loss of service and attrition.
Ola and Uber’s drivers threaten indefinite strike from Sunday midnight
Not something you wish for? But the direction was predicted on March 5th, 2018 and will roll out March 19. 2018. Uber comment is classic funny,” Uber spokesperson termed the strike call as a speculative.”
This is how both Ola | Uber and their drivers can win
Ola and Uber are not able to realise economies of scale as they don’t own the key deliverable cars and drivers. Look at the challenges ahead of them. Cost of driving an Uber X or Mini (diesel self-owned and financed car with commercial license without driver wages for an average of Rs 150 km a day). Let call this
Direct production cost
- 12.6 km without a driver
- 15 per km with driver
- 18 per km to profit with driver
Billing per km average
- Rs 15 (includes free movement for pickup)
Uber | Ola earning per km – 25%
- Rs 3.75 per km
Uber | Ola driver incentive subsidy
- Rs 3 -5 per km
Which cost can Uber | Ola crunch and maintain billings at current rates of Rs 15/- per km.
Cost break up pertains to Mumbai market and is a back of an envelope calculation
The only cost it can crunch is the cost of ownership. Rs 4.2 per km. They should buy out all the cars and temp-hire at Rs 4 per km. Currently, all their subsidies are going to pay EMI with no asset creation for the company. Also with their scale, they can drive the cost of car ownership to Rs 2/- or 3/- per km and create an asset. In any case, both companies are well funded and do not need an asset-light model.
This will create a win-win.
It will take the burden of the drivers who cannot pay their EMI. The divers will also retain their jobs and get salaries and incentives. All costs go to the company. Companies will retain the cars on the road at a depreciated cost and reduce P&L losses
This article first appeared on Linked in