Last fortnight, finance minister Ms. Nirmala Sitharaman claimed that millenials using Uber and Ola are the reason for the slowdown of the auto economy, resulting in many supporters and many memes. 

Shuttl and Bounce, Baby

“Bhaiya, diesel ka bhaada dene jitna nahi kama raha din mein” said a cab driver to me last week. (“I don’t earn enough from the cab to even pay for the diesel”)

As he elaborated over 20 minutes the various issues he is facing, while running his daily bread and butter, it was almost a microcosm of how curiously divided we are about ride sharing’s impact. 

On one hand, it has provided gainful employment to thousands of Indians, helped us move around predictably and unlocked new ways of easy to access travel. On the other hand, it has had strikes from troubled driver-partners, security issues and surge pricing.

Ridesharing, or shared mobility, extends not only to cars, but also scooters, buses and bikes. More specifically, it is defined as transportation services and resources that are shared among users, either concurrently or one after another. 

What started with Ola, now also has Uber, Vogo, Shuttl, Bounce and Drivezy trying to solve how Indians get from point A to point B efficiently. 

But why is Uber asking you to Shuttl and Bounce in the first place?

Sharing Is Caring

Travel demand in India has grown almost 10x in 20 years, making it one of the most travel-hungry countries 

But that is not all. 

Mobility demand in India is growing with increasing GDP, rapid urbanization, and urban sprawl. India is expected to have another 14x growth in passenger-kilometres travelled (PKT) from 1400 billion passenger kilometres (BPKM) to 18,750 BPKM between now and 2030.

Just drawing out this graph another 14 years makes you feel like every city will be Bangalore-d.  

With India being a diverse economic market with differing road networks, vehicle density and population, a one-size-fits-all mobility model will not work. 

Private vehicle use has a direct impact on the land use for parking. In Delhi, parking accounts for 8-10% of the available land pool. The congestion cost is estimated to be $21b in Delhi, Mumbai, Bangalore and Kolkata. 14 out of the world’s 20 most polluted cities are in India.

This is at an urbanization level of just 35%, with urban rural migration only making things worse. 

Despite your traffic woes, you’ll still be shocked to know that all big Indian metros make the top 4 cities in urban peak hour congestion in Asia (ex-China)

While economic principles argue for the establishment of private rights over assets or resources to prevent overuse, the world is shifting towards shared or ‘common’ ownership of all kinds of assets.

We now look at startups leveraging technology to flip another age-old economics problem on its head – ‘the tragedy of commons’. 

Surging Market

The landscape is changing rapidly driven by technological innovation, digital penetration, mindset shift, pollution, congestion, health and safety concerns. 

The change is already happening slowly and gradually with India being at a pole position. India is expected to be a shared mobility leader by 2030. 

With a medium price/high Convenience value proposition, commute players target users with HH income> Rs. 8 LPA. We take the working population from affluent households in urban cities of India comprising of ~27MM people.

With the travel options being Ola/ Uber, personal car (with/ without driver), two wheelers and bus, we presume a 15-35-20-30 split respectively in steady state.

Our estimates of the overall market for urban commute peg it at ~$19B, with 10% of the miles being shared :

It is a massive, growing market for the taking, but it all started with sharing a cars. 

"I Have Arrived"

For every 1000 people in India, just 32 people own cars as compared to 797 in the United States. 

The majority already use shared services like buses or metros while some revert to even older methods of mobility like bicycles (and walking!). Product market fit has already been established

While the global market for ridesharing will continue to increase, the case for India’s adoption being even higher is a strong one. 

The use case for car-sharing is clear - why not hail an Uber if it means that you can get from Point A to Point B without having to worry about road rules, parking, and the overwhelming mental and physical energy it takes to avoid the confluence of people, cars and cows on the streets of India? 

For the ‘millennials’ whose reluctance to own cars FM Sitharaman attributed the auto decline to, Uber and Ola (in their various price and comfort categories) have become the go-to for late-night shenanigans and early morning rides to work. 

But does it make sense for people to replace owning a car completely in favor of ridesharing? 

Most analyses will give you the same answer - it depends. It depends on how much you will ride in a car everyday, whether you would have a driver for your car, whether your trips are usually shorter or longer, and the area you live in. 

There will be parts of India where modern shared mobility solutions of any sort will be infeasible but those aren’t the areas that the companies at the forefront of innovation aim to disrupt.

Taking a deeper dive into the economics of ride-sharing in India, there are some key differences compared to the ‘traditional’ model that made Uber a household name in the US. 

For example, while Uber was an asset-light company which employed part-time workers in the States, the paradigm in India was completely different. Drivers tend to treat driving for Uber / Ola as their full-time job, and often don’t have the capital to buy the cars they drive (this was one of the main reasons that Uber tied up with financial institutions to provide car loans to these drivers). 

Other changes were necessary too - Uber needed to offer a cash option in India since 95% of payments in 2017 were made in cash. 

Operating in a market where the price will always be the biggest consideration for the end consumer, it is interesting to see whether Uber and Ola will ever end up competing on anything other than discounts and promotions. 

And as Uber and Ola began to see more opportunities in shared urban mobility, they saw buses. 

Space Shuttl

Buses are an entirely different ball game, primarily because the coordination needed to onboard 20 people is far more than 2.

Close to 10 players in the space shut down due to inability to raise funds, including the shut down of Ola Shuttle.

Building an expensive network requires long-term commitment. Competition exists through improving public transport and the launch of Metro services in major cities in India. Stickiness is low as multiple options for commute as well as lack of door to door offering.

But how do the economics work?

Buses cost roughly 3MM INR, have a 10 year life, a mileage of 3 KM/L and run for 70KM on a daily basis for two trips. The cost is driven thus by 24K of monthly bus labour cost, 35K of monthly fuel expenses and 30K of depreciation and maintenance - totalling to 89K. The per trip per seat cost for a 35 seater bus is INR 63. 

On the revenue side, with an average occupancy of 60% and a per ride fee of 115, the revenue per seat is 69 INR. This means that each bus is just making 6 INR per seat-trip, or for a 35Km ride, 0.16 INR/km

The loss might be higher for a players such as Shuttl which has a subscription model to charge INR 1,800-2,000 for 20/30/40 rides per month effectively charging only INR 50 per seat.

Bus profitability will thus be driven by two key drivers- occupancy rate and pricing. The ability to operate at full or near full level occupancy will be crucial coupled with innovating on alternate ways to monetize the consumer base.

Food delivery and selling grocery are being explored by players such as Shuttl. Other monetization options include partnership with OOH advertising on buses or B2B tie-ups with better utilization and pricing.

While Shuttl and Co explored buses, technology was coming to one of India’s most used mode of transport. 

Bouncing In VOGO-e

Through the strategies of the car sharing companies, it is clear that they will not stop at cars. 

The price point for Uber and Ola excludes the bulk of the Indian market, leaving them with the top 10% of the consumers (~110MM). They could have flourished as high-value low-volume products had it not been for the ever-increasing driver costs, and more importantly, customer acquisition costs.

As we had elaborated in our piece on 2 wheelers earlier, the solution may not be far away.

Two-wheelers account for a massive 80% of the vehicle ownership in India and penetrate almost all income classes. Their compact design makes them highly convenient and time-efficient to drive on Indian roads.  . 

Major players in this segment are ‘pickup anywhere, drop anywhere’ dockless Bounce scooters, station-based Vogo scooters and low-speed Yulu e-scooters. 

While daily cab rides stand 3.65 MM, representing a 4-5% growth from last year, Bounce claims that its daily rides have shot up by 140X, from 500 in September 2018 to 70,000 as of July 2019. The Ola-backed Vogo is doing 40 times the rides Ola was doing at its stage.

The exponential growth for scooter-sharing models is partly explained by the fact that they solve for ‘micro-mobility’ needs, in addition to regular transport needs. Micro-mobility, or simply short trips of less than 10 km, constitute two-thirds of all trips in India. 

It is no surprise that Bounce and Vogo with their fares of INR 4-6 per km, are picking up bulk of this market. Bounce even claims that sharing a ride with another customer brings down the cost to that of a bus!

However, as we discussed previously, the economics for the companies in this space has some room for improvement. For instance, Bounce needs to increase its demand by 3 times to cover its customer acquisition cost. 

Aware of these challenges, all players have looked to electric scooters as the means to drive profitability. Though the operating cost with e-scooters is claimed to be significantly lower, at around 40 paise per km, given the supply constraints in the space, it is some time before they can fully transition into an electric mode. 

As all these shared mobility players continue to create a viable business model, is it beginning to hurt the auto sector?

Uber Cool Millenials

There are strong opinions on the subject - research points to the fact that over 50% of millennials in India are questioning car ownership. 

The number of cars sold has fallen in every month in 2019, in comparison to last year. Overall, vehicle manufacturers reported their worst August sales in 18 years, and the passenger vehicle segment declined by nearly 31% in July from a year earlier, to 200,790 units, the steepest fall in sales numbers since the year 2000.

While politicians and dinner table philosophers are quicker to criticize ride-sharing for the decrease in India auto sales, it is important to peel the onion. 

The slump in auto sales can be traced to the distress in rural areas, which are home to 70% of the population. Stagnant incomes there are depressing demand for cars, as well as small-ticket items such as shampoo and biscuits. 

Ridesharing is largely an urban phenomenon and has limited influence on rural demand. 

In cities, some buyers are deferring purchases until stricter car emission standards are introduced next year. The lack of visibility on whether your car may be useless due to pollution norms is a huge buying consideration.

The lines between car manufacturers and mobility startups, infact, are starting to blur. 

In India this year, the second-largest player, Hyundai Motor Corp, has invested $300 million in Ola and started offering a subscription service through the self-drive company Revv. 

Whereas third-ranked Mahindra and Mahindra are launching an electric ride sharing service called Glyd, and has invested between $300 and $400MM into Zoomcar, following the same sort of strategic tie-ups taking place in the global arena, where the biggest car markets of Europe, the U.S., China are also being disrupted.

So, how does the cookie crumble and where do stand on the issue? 

Public Display Of Attention

The tone we like to take is cautious optimism. 

The challenges down the road (punny?) are plenty - limited infrastructure, a population embedded in the public transport system, and price elasticity are just a few of the challenges that keep shared mobility disruptors up at night. 

Asia, and specifically India, is one of the few markets where private players have stepped in to plug the gap in public transport infrastructure. 

Over 60% of people in these 20 cities use public transport, and almost 70% of public transport users rely on cabs, autos and non-motorised means to access buses, metros and other modes of public transit. Around 60% of non-users are willing to shift to public transport if coverage, first- and last-mile connectivity, frequency, and comfort improve.

The bigger question then really will boil down to whether transportation can be solved by private companies, profitably. 

For most companies, the unit economics only starts to make sense at a certain scale - and to get to that scale they need to provide an incentive to get people using their service, leading to an interesting chicken and egg problem. 

While cabs and scooters appear to be at least unit economics positive, buses still struggle with driving profitability on a unit basis. The likely answer is that buses should be run by the government, while cabs and scooters are better off with private players.

Nevertheless, with burgeoning demand for commute and a creaking public infrastructure - private players can draw inspiration from another disrupting force. 

Fintech players, of course. 

A lack of public financial infrastructure allowed fintech players to leapfrog India into better financial access. Leveraging the benefits of widespread technology adoption, ridesharing companies can help do the same for commute. 

Ridesharing is likely the panacea to India’s transport woes, and the millenials are right.