Why Uber & Ola drivers cancel trips: Economic analysis
Updated: Aug 10
Apparently, everyone's very upset about Uber & Ola's trip cancellations and terrible service People are urging the companies to "please focus on user experience" in tweets, LinkedIn posts and their silent prayers.
But what exactly is the problem? And can Uber and Ola fix it? The answer to the second question is 'Not really'. You can't fix a terrible business model. Now let's come to the first question.
You see, these companies began with a flush of infinite VC money. For years, they were subsidising the customers and providing bonuses to drivers (from their pockets), all in the name of "growth" and "capturing market share". These artificial discounts and bonuses were the bedrock(s) upon which these companies were built. But now the situation has changed (or rather normalised) a bit. 12 years after Ola's founding (and its cumulative losses of over INR 17,000 Crores until FY 2021), these discounts and bonuses have stopped coming. The drivers aren't happy, which is in turn making customers really sad.
Just think about it. Who would have boarded these taxis if they were priced fairly? And how many drivers would have registered with them, if not for the unbelievably exorbitant (and fraudulent) incentives? Not many.
India is unfortunately a 'gareeb desh'. When compared to US' $70k & China's $12k, India's GDP per capita is around $2200 (around INR 1.8 Lakh/annum). How many cabs rides do you think can a guy making 1.8L in a year take? Maybe once a month? And that's when he's really feeling rich. But thanks to Uber & Ola's generous discounts, even our average Aakash took a cab every week, because it was free (or cheaper than an auto-rickshaw). This was the destruction of the market which these companies excelled in, while easily burning over 30,000 crores collectively. But not anymore. The average Aakash is back to taking a bus, making the market much smaller, as it always should have been.
On the supply side, the fake incentives were making drivers actually rich. Those guys were making over a Lakh every month. Maybe even more! That was their expectation setting. Fast forward to real times, they're now making around 20k, minus a few expenses. Many of them are hoping for Reliance to launch its own Cab service and bring back the 'Acche din'. It's a tragicomedy.
Ola has around 3,000 employees. And the only way to feed those employees (handsomely) is by taking a heavy margin on the cab. Ola takes 20%. That's a terrible margin. But even that seems too steep to the driver who's slogging all day. Also, since the fake incentives are gone, the driver's dependent on cab fare (minus commission) for bread and butter. So he can't be taking the shitty Rs. 150 trips which leave nothing on the table. He needs big trips with good money. And preferably without commission. He can only make 7-10 in a day, so...
In short, the service is not failing because the companies are going lax, it's because this business model wasn't designed to be this big. It works as a niche business for the rich (or upper middle class, occasionally) who can pay the fair price for an AC cab without flinching.
This service was never "for everyone", as it was projected due to infinite VC money.
Annexure 1: The VC perspective & Economics 101
If at all you get a chance to discuss this with VCs, you'll hear that these investments are made with "future" in mind. According to them, these "habit forming" products will become reasonably profitable in the "future" when India's discretionary spending ability becomes nice. What's that point of comfortable spending ability where the average Aakash is happy to pay a premium for these luxuries? Per capita income of $6,000 (INR 4,80,000/year).
Okay. Now a good question is: When will that happen?
Well, GDP Per Capita is basically a nation's GDP divided by its population. So in order to reach the GDP per capita of $6k, India's GDP will have to reach almost $10 Trillion, while population remains constant. According to Modiji, we could become a $5 Trillion economy by 2024-25 or by 2028-29. But even he can't guarantee that the population stays the same (though he must think about it a lot). What's the "target" for $10 Trillion? 2047.
The level 2 which comes from VCs is that the nation's GDP per capita is too "macro", and that we should instead consider the GDP per capita of Delhi, Mumbai, Pune, Bangalore, Chennai, Hyderabad, Kolkata, and a few other cities only. Well, okay. But Delhi's GDP Per Capita is over $5k. How many cities like Delhi exist in India? Five. With total population under radar being less than 10 Crores. How would that justify the investment thesis of "capturing the market of 1.3 Billion people"? How would that justify the cumulative losses of over $4 Billion which have happened by Ola and Uber already? Also, if that was the thesis, why is Ola in 160 cities already?
When I got a chance to meet Bhavish Aggarwal back in 2017, I asked for his thoughts on the above macroeconomics (the per capital income and all that jazz). I asked, considering all that info, shouldn't Ola Autos work better for India? He said Ola Autos are great and work really well, but the focus is on cars. I understood that it was because of the funding atmosphere. Cars (at that scale) made no sense (and still don't). Five years hence, I see Uber and Ola pushing Autos more than ever. Understandable.
Annexure 2: The drivers' perspective (some calculations)
Let's say a driver makes 8 trips a day, worth Rs. 350 each. This is an uphill task and requires atleast 14 hours of on-duty work. But let's say he still does it, so the total revenue/day is Rs. 2,800.
After 20% commission to Ola, it's Rs. 2,240
Assuming a Rs. 350 trip is 15 Kms away, this translates to roughly 120 Kms of running around for the entire day. CNG costs Rs. 3.5/Km, so it'll be roughly Rs. 52/trip, and Rs. 420/day.
Subtracting Rs. 420 from Rs. 2,240, it'd be Rs. 1,820
Roughly1.5/Kms is spent on maintenance (and insurance) of the vehicle. Private owners spend much more, but cab drivers are frugal. Taking 120 Kms a day, this amounts to Rs. 180.
Rs. 180 off Rs. 1820, we're left with roughly Rs. 1,640
Getting 8 trips in a day, averaging 15 Kms/trip takes a lot of time. The guy's got to eat. Two meals on the road, Rs. 100/day.
Taking food away, what's left? Rs. 1,540
One interesting trip thing people often miss is the distance between two consecutive trips. Customers don't fall on drivers' laps. It takes about 2 Kms to reach the location. That's 16 Kms/day of wasteful drive. CNG & maintenance makes that Rs. 80/day.
CNG & Maintenance charges for the wasteful drive off, we're left with Rs. 1,460
Lastly, drivers' cars are mostly financed. So there's an EMI of minimum Rs. 7.5K/month. Divide that by 25 working days, it comes out to be Rs. 300/day.
Hence, the net take home becomes Rs. 1,160
So basically a driver pulling 14 hour workdays on the road for 25 days in a month "on his own car", will make around 25-30k. Doing this consistently isn't humanly possible, of course. But they try. Can't blame them for cancelling inconvenient rides, asking for cash, etc. Especially when they were made to believe that they'll make a Lakh a month.
Annexure 3: Future of the industry
Cab hailing in India is seeing an interesting shift towards BluSmart. What's BluSmart? It's basically Meru with electric cars and an app. Drivers are employees, not gig workers; and since electric cars are supposedly cheaper than even CNG, the economics is slightly better. But there are scalability issues, obviously.
Globally, they're trying to remove drivers from the equation altogether with "self driving cabs". That's probably way into the future for India. It's frankly unimaginable.
So basically, after 7 years of exuberance and many billions of dollars burnt, are we coming back to the Meru model? In some ways, yes. It didn't have to be this way, though. This madness only happened because of bizarre decisions by VCs and one business practice which should be BANNED altogether. What is that? Selling on negative gross margins.
Companies selling on negative gross margins may be a good news for consumers as it works like a government subsidy. I like to call it Mahatma Gandhi Ameer Kalyan Yojna. But it DESTROYS the market and everyone playing fair in it. And when the barrel breaks, a lot of people get hurt, lose their shirts and what not. The Competition Council of India should have never allowed all this, but corruption in India isn't exactly news.
Anyway, the future is bright. Though not for Ola and Uber. Good thing is that Bhavish Aggarwal diversified into making scooters, cars, ships and god knows what else. That's a story for another time.
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