Why the Uber Solution will not Work in India


(Bick Bhangoo) #1

Any business is only as good as its business model, and business models are designed for profitability. Uber's model is based on a non-capex and high fee per fare system, where expenditure is on customer service and app maintenance. App maintenance being the ability of the Uber app to communicate freely and smoothly at any given moment in time. The costs generated by the company to maintain such a market presence requires funds from income to provide the cash flow to support operational and marketing expenditure.

Transportation is a capex and high-cost industry. Cars are one of the metrics used to define the wealth of a society. For instance, one metric is how much more do new cars cost than building or buying a home? In some countries cars are less than an apartment, in others, such as India, Sri Lanka, The Philippines, and many Asian and African states the cost of a car is sometimes equal to and, in many cases, even more expensive (can reach 10 times as much) as the cost of an apartment or small house. In the case of these countries, the cost of maintaining transport is higher than the cost of maintaining a house.

This is why Uber is facing operational challenges in India, and why drivers of rideshare company's Uber and Ola are on strike. Drivers were offered a dream of becoming a middle-class society, but in reality, were forced into poverty from investing in an industry that cannot survive in a country where driving is costlier than living.

The statistics coming in from India show a very poor chance of survival for anyone wishing to peruse a career as an Uber driver. India is a country where every rupee is important. (not that every US$ is less important, the ratio of a single rupee to livelihood is higher in India than in the US.)

According to the many drivers on strike, they earn on average around 700 rupees a day, and after they repay loans and pay expenses, they are left with around 200 rupees. This is actually in sync with the percentage of return that every Uber driver has when looking at gross income versus net cash in hand.

What made the original driving experience a false experience was how Uber and Ola, who both started out with loads of spare cash, subsidizing drivers and falsely introducing them to a life that would eventually spiral down into debt. No one prepared these people to the facts of life, where being given incentives and subsidized income was not a permanent solution, and no one bothered to do the math. It is also apparent that no-one bothered to ask if the companies are losing billions, how do their drivers make a profit? Drivers, now faced with poverty and debt decided to strike, the losses of operating a driving business are too high, and the current business model does not work.

It is obvious that it would not work in India, as it won't work in many other countries where the costs of driving are similar if not identical across borders, but the costs of living are exponentially different. Car costs, gas and maintenance costs, insurance too, are all identical, no matter where you live.

The organized strike is making some unreasonable demands, such as demanding that blacklisted drivers be reinstated. There is no connection to the cost of living and the profitability of driving to the fact that drivers were blacklisted due to bad driving, criminal activities or bad customer relations. On the other hand, the demand for minimum wage, or a minimum guaranteed income is not so fantastical.

Uber's main problem was how it entered the market back in 20143, which was Kalanick's crazy blitzkrieg for world dominance without considering the actions and end results. There was no financial oversight or study into long-term effectivity of the operational models, all that mattered was getting as many drivers on the roads as fast as possible.

So, Uber offered a high earning and low commission of under 10% to start off with. The high earnings would be appropriate if the saturation of drivers remained low, but once there is a saturation critical mass, then earnings would be spread across many drivers and by default not be as high as when there was a low saturation. The low percentage of the commission was bound to go up since it was only an introductory offer to help subsidize the driver's initial introduction to the market. No one prepared the drivers (neither did they foresee) how a rise of 150% (commissions jumping to 25% of income) would impact their earnings.

During the past few years, over 1.5 million Indian drivers applied to drive for both Uber and Ola. Some even quit their jobs to start a new one as a driver, investing in a car that met the requirements. The standard sales pitch was, buy a car earn around RS 1lakh per month. This made many decide to sell off their agricultural investments (small plots of land) to buy a car instead. While agriculture is also a problem in India, it did not put the landowners into debt; it just made for a very bad source of income in comparison to the promises of riches for driving with Uber.

As the two companies started to succeed in saturation of the market, so did their desire for profitability start to overtake their desire for saturation, and prices started to drop, commissions started to rise, and drivers started to feel the truth of being a rideshare driver.

Today, an average driver only makes a fifth of the promised income, that's around Rs20,000 a month, and pay over 25% of that for commissions. Add to that, that most of the Indians did not own a car suitable for driving for Uber and Ola, they went out and bought a car through leasing or loans. Their situation is made worse since they don't have any more land as collateral, and their loans are being defaulted, and the cars will be seized, leaving many drivers with debt, no land and no source of income.

The issue of a successful strike is that everyone strikes, however, add insult to injury, many drivers are scared of losing even the small income they make as a driver, so they supplement this with other jobs. Many now work in more than three jobs daily. They eat less, work longer hours and won't strike since the small income they make is too small to give up.

Another issue facing rideshare drivers are state-owned buses and other forms of riding such as rickshaw, motorized trikes and app-based taxis fighting back the rideshare apps. The surge pricing issue doesn't work well in India; it causes customers to seek more conventional methods, such as taxis.

The strike organizers as well as research groups all agree, that if Uber and Ola had not brought in all the changes in such an abrupt manner but had eased into the business changes, allowing them time to adapt and find other sources of income to supplement their driving earnings, India might have survived the rideshare earthquake.

The bottom line is this; While Khosrowshahi and his peers all travel around in business class jets, his drivers are trying to find a way to buy enough rice to feed their families. It is not about how beautiful Uber looks on a web page; it is how satisfying a driver feels driving for Uber. In this case, Uber has failed miserably in India, and this might not be the only place to fall. Business models have to adapt to the country they are in, and not use a global model for every country.


(Andrew Martin) #2

I think that there is a major problem with rideshare models, in that the weighted value of customer care while factoring in the cost of maintaining an app outweigh the income that the gig can provide. After all, drivers do need to make an income. The current models that work include when a person either “rents” a car from a fleet and pays the fleet a flat rate or a percentage of income. The other option is when a driver owns a car and pays for the service, a service fee. This is the model that Uber uses, but its fee is 25% of the drivers income, which leaves the driver with only 75% that has to have the expenses deducted from it. In countries where transportation is cheap, in ratio to the cost of living, such as the US and Germany, the ratio’ match and provide success. However, in countries where the cost of transportation is high in comparison to the cost of living, such as India, the Philippines and other “poor” countries, the model is flawed, and as such, drivers cannot survive on the same ratio as their peers in the US.


(Ian) #3

I agree with Andrew, I don’t think that Uber can make the same model work in every country. Ech countries economies are totally different.