Stock markets around the world have been taking a beating since the severity of COVID-19 global pandemic became clear. One sector in particular -- ridesharing as represented by Uber and Lyft -- has fallen even harder than the general markets.
This pessimism is generally well-founded. No one is going out. If you are, it’s to exercise, take a walk, and go to the grocery store, likely in your own car or walking. While none of the other major ridesharing services in other parts of the world are public companies (Grab and Gojek in Southeast Asia, Didi Chuxing in China and Brazil, BlaBlaCar in Europe), the dynamics are the same.
However, I believe these ridesharing platforms will thrive soon after the coronavirus is under control, provide a strong employment “stimulus”, and even replace public transportation.
Sounds crazy? Please hear me out.
Ridesharing Will Suffer, It Will Not Die
Despite the market pessimism, many of these large ridesharing platforms have the cash to survive or the ability to attract additional capital. Uber’s CEO, Dara Khosrowshahi, said on a recent call with reporters and analysts that in a worst case scenario, where rides decline 80% for the rest of 2020, Uber will still have $4 billion USD of unrestricted cash. (After the call, Uber’s stock rose more than 20% from its trough.) Gojek, one of the two dominant ridesharing services in Southeast Asia and the most valuable tech company in Indonesia, raised $1.2 billion USD of venture funding, which closed during the first half of March, right when the global impact of COVID-19 became evident. Didi Chuxing appears to be close to raising $300 million USD from Softbank to fund its autonomous driving unit, though the funding is not for Didi’s ridesharing business directly.
During his media and analysts conference call, a core part of Mr. Khosrowshahi’s argument is that many of the costs associated with operating a ridesharing business are variable costs, meaning if the number of rides go down, so do the costs. Less revenue, less cost.
I do buy this argument.
The ridesharing business is famously asset-light; the platforms don’t own the mode of transportation. That’s why I’m intentionally excluding the scooter and smart-bike sharing companies in this post (e.g. Lime, Bird, HelloBike, etc.), because they do manufacture and own their modes of transportation, which makes the economics of the business materially different. I’m also excluding delivery services, like Uber Eats, or payment gateway products that are run by the same companies just to focus specifically on the impact on transportation itself.
When no one is taking rides due to a mandatory societal behavior change, there is no point in spending money on marketing and ads acquiring customers, which is usually costly. With no rides to share, the computation, data analytics, and overall technical infrastructure cost that go into calculating optimal routes, surge pricing, distance from driver to rider, etc., all go down drastically as well.
One area of heavy cost that is not only going down during COVID-19, but may even stay down after the pandemic is over, is driver subsidies. In a two-sided marketplace business like ridesharing, the supply side tends to be more costly to cobble together than the demand side. In order to give the users that magical, convenient feeling of being able to get a ride from point A to point B whenever they need it (“demand”), you need 3 or 4 drivers available in the vicinity to pick people up (“supply”). Thus, the ridesharing companies are still capital intensive despite not building or owning much physical assets, because they need to spend more than a pretty penny to recruit drivers with ads and referral bonuses, and then push them daily to give as many rides for as many hours as possible. (All these platforms have programs that peg a number of rides given per day to some form of extra payout or gas cost relief.)
This is certainly not to say that the drivers have the more powerful position in this relationship. But whatever leverage, individually or collectively, drivers may have before will likely vanish due to a massive rise in unemployment caused by COVID-19.
Ridesharing Becomes the Employment “Stimulus”
It’s impossible to predict how bad the unemployment situation will be when the dust settles on COVID-19. IHS Markit, an economic analysis and forecasting agency, projects that the unemployment rate in the U.S. will reach 9% by December 2020 (the most recent rate for February 2020 is at 3.5%). That projection sounds too optimistic to me, considering that during the 2008 financial crisis, or the Great Recession, peak unemployment was 10.2% reached in October 2009.
The COVID-19 crisis is most certainly more severe than the Great Recession in all dimensions, and more difficult to both model forward and draw insights from past events. Another thing that’s certain is that mass unemployment typically hit the most vulnerable. During this current crisis, the impact is disproportionately severe on people who are employed in the service sectors, like travel, hospitality, transportation, and events, as well as small and medium-sized businesses.
This will not be only a U.S. phenomenon, but a global phenomenon.
And when these folks who’ve been laid off indefinitely are allowed to go out and resume a modified version of normal activities, where will they turn to to try to make some money? Ridesharing. And this time with no extra subsidies or incentives needed. It may end up becoming a more direct and longer-lasting employment stimulus than any of the options that policymakers have at their disposal.
This increase in supply of drivers will be met with at least some recovery on the demand side. Based on reporting by The Information, Didi Chuxing has seen its service recover from the low of 20% of normal ride volume during the height of the lockdown in China to about 50% in the last few weeks, as the virus appears to be under control in many Chinese cities. And the cheaper driver acquisition cost could lower the cost for riders, which brings us to public transportation.
Replacing Public Transportation
If the ridesharing companies recover and thrive in a new post-COVID-19 era, its services may replace a meaningful chunk of public transportation ridership. And not just in cities like San Francisco, which is already happening because the existing system is poorly designed and falling apart, but also in places where the system is objectively decent and efficient. Because the rides may be cheaper than what they were pre-COVID-19, this replacement will be widespread and last many years.
Why? Two reasons: public health concerns and pace of autonomous driving development.
Public health concerns. Regardless of how you feel about public transportation’s various utilities, we can all agree that it’s a public health weak spot, magnified now by COVID-19. I personally love taking public transportation wherever I can -- for the cost, efficiency, environmental-friendliness, and people-watching -- but never because it’s clean.
It’s a problem in many Asian countries, despite the systems being newer, because the cities are denser. That’s one of the reasons why in most East Asian cities, frequent riders of public transportation have a habit of wearing masks. (Worth noting some other reasons too: air pollution, especially in China, and memories of dealing with SARS.) In the U.S. and Western Europe, the population may be more spread out, but the systems are also older and less well-maintained. These are all regions where I’ve personally used local public transportation. The conditions in less economically advanced regions are likely worse.
Even if public transportation agencies dramatically increase their maintenance input and hose down every seat with disinfectants daily, people’s mental paranoia about public places with lots of other humans will lead to behavior changes and attitude shifts toward public transportation that may be permanent.
But people still need to get to places. So they can either drive themselves or use ridesharing, where the most crowded Uber Pool ride max out at five people including the driver. Of course, the cleanliness of the cars will have to improve too. I can see new features being built into these apps to surface “cleanliness” as a first-class rating with a bigger weight on the driver’s overall rating. Riders may be looking for a “cleanliness badge” before taking a ride, and the drivers will be incentivized to keep things both clean and safe to attract riders. This positive competitive dynamic simply does not exist in public transportation.
Pace of autonomous driving development. The development of autonomous driving technology and “robotaxi” still have ways to go. I don’t want to say “slow”, because that’s a relative judgment. Most of the engineers I know who are working on this problem day in and day out never thought it was going to be fast or easy. The people who thought so are mostly investors, who are generally not good at making these sorts of judgement to begin with.
Autonomous driving and robotaxi services likely will need another decade to mature and be properly regulated in developed economies, and many more decades to reach global scale. In the meantime, human-powered ridesharing will expand as both an engine of employment and a more public-health-friendly version of the existing public transportation services.
This replacement of public transportation will of course not be 100%. There will be people too poor to afford ridesharing. There will be people who don’t have smartphones to get these rides. But the replacement will be a significant proportion, and for the better.
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