With western world interest rates now tantamount to free money, unsurprisingly common sense has gone out the window. The Uber float raising US$8 billion, epitomised this.
Described subsequently as a terrible flop because the issue price lost 8% on the first day, the reduced share price still valued the company at US$76 billion. For that reason I’d have called it an astonishing success.
Since establishing the company a decade back, so far it’s lost US$10 billion. That’s explicable given the promoters global scale instigation approach. Additionally, there’s no doubt Uber’s established an enormously popular customer base and presumably that fact has given the investment Funds, currently desperate for investment outlets, a rationale to buy.
The fact is its analogous to creating a global company offering to exchange a dollar for two dollars. Such a company would also quickly establish a huge happy customer base and also like Uber, chew up billions of dollars of losses.
To me it’s economic structure simply doesn’t add up at the most basic level. We read the same Uber drivers story everywhere, including here in New Zealand, namely that their returns are abysmal. There’s a New Zealand National Uber Drivers Association and last year it’s president pulled stumps, telling the news media it was simply a mediocre deal once the cost of the car and it’s maintenance was taken into account. So they keep tossing it in and being replaced by fresh sucker drivers but sooner or later that process must grind to a halt.
I appreciate Uber has a number of efficiency advantages for consumers but it’s principal one is cost over traditional taxis and that’s certainly never been a high paid activity. Accordingly, to sustain the exercise the driver rewards will have to rise, ergo, the loss of it’s main advantage.
Another weakness is it’s lack of a monopoly factor and already competitors are popping up, particularly in America and Asia.
After drinks with our staff got out of hand in our Glasgow office a few weeks ago, about 9pm our manager booked pre-paid Uber drivers to take everyone home. To my home cost £4. Our driver, a young married Indian fellow, told me he worked from 6pm to 11pm each night after his day job was over as he was saving for a house deposit. I gave him a tenner tip and he stared at it disbelievingly, then said, that’s more than he’d earned so far that night, this after 3 hours. I’m told tipping is not customary with Uber anywhere.
This is simply not a sustainable exercise and all the new services they might think up, such as Uber Eats, will not overcome the sheer inadequacy of the driver returns. In Europe many governments are looking at this, concerned at the unintended cheap labour factor. Some have already declared the drivers to be employees, thus bringing into play minimum pay laws, holiday pay, paid sickness leave and other conventional employer costs.
The US$8 billion raised in the initial public offer should sustain a few years further losses whereupon it’s odds-on there’ll be a rights issue to raise more sustaining capital. But unless drivers are adequately rewarded the current model simply can’t last. Still, it may well be that customers will pay more given it’s efficiencies. We shall see.