Uber pampers with low rates and fancy cars but here's why you need to be careful

Uber has an impact on a crucial part of life and will impact public transportation going forward.

K Yatish Rajawat November 24, 2014 11:50:06 IST
Uber pampers with low rates and fancy cars but here's why you need to be careful

In our fascination with everything foreign and the internet, we sometimes tend to forget the real issues. Uber a US company, with a taxi app that promises a quick and reliable taxi service has been in India for some time now and ispampering the elites with very low rates and amazing cars. Several journalists, especially the new breed of 'internet journalists', have been endorsing it publicly. A few see it as the biggest thing happening on the FDI front and some rose in Uber's defence when the company had a run in with the central bank on its payment system.

Uber has an impact on a crucial part of life and will impact public transportation going forward, considering the $1.2 billion in funding that it has raised. It is important to understand the economic impact of Uber. India has the most disorganized public transportation and it is not changing any time soon. Taxis and autos are very important components of public transportation, especially in crowded cities, where parking is a challenge and driving an ordeal. The ownership structure in the taxi and auto business allows both a small entrepreneur and large business to co-exist.

The ecosystem or taxi-economics of a city sees large fleet owners who rent out their vehicles to drivers at a fixed price on a daily basis. Single vehicle owners of rickshaws drive them during the day and rent them out at night. The ecosystem allows both small and large fleet owners to co-exist as the consumer can't differentiate between them at the street level.

However, this has started changing with companies owning and branding their fleets. Every city now, has one or many taxi companies with clearly branded cabs that you can call and they will pick you up. So the street has been replaced by the phone as a buying location. As a result, distribution hubs like metro stations and shopping malls have become highly competitive for standard cabs and rickshaws. There are more providers than consumers at these locations.

The entry of corporates into taxi services has helped consumers get better service and one that reliable in terms of pricing. Several private equity companies have pumped money into these companies, hoping for scale and listing. There is fierce competition among these companies too, and there is cartelization as well with prices being the same on most of them. The quality of service, however, varies and even the business models of the services are different.

There are three models here: One is where the corporate taxi service provider owns the fleet, employs the drivers and maintains a high service quality. The second in which the corporate taxi service provider owns the fleet, rents out the cabs to drivers and provides business to the drivers. The third is where the taxi service is a internet/telecom platform, the taxis are owned by the drivers and they pay the company for each booking and an annual or a monthly fee for being part of the network. The third model has evolved as the number of cabs multiplied on the street and single vehicle owners founded it difficult to survive and needed a network.

In the first model, capital expenditure is the highest and it is not easily scalable or attractive for private equity funding. The second model also has capital expenditure but lesser risk and better cash flow as the drivers are not hired. The cost of the maintenance of the taxis is also passed on to drivers through a long term lease agreement. In this model, the company is both a finance company and a taxi operator. The third model is the least capital intensive as it is focused on just the consumer interface. There is little capital expenditure, the brand is important, consumer experience is paramount, it is highly scalable and is the most attractive.

In the third model, the taxi company has to focus only on attracting consumers, it does not have to spend on owning a fleet, hiring drivers and maintaining vehicles. Therefore, it can be quickly expand within a city or enter a new city. This is where Uber comes in and it is disrupting the other models, not just the small owner or driver, but also the corporates.

Though, Uber may not be very popular among journalists with its scare tactics, it is time to ask some tough questions.

Does Uber help in improving the public transportation?

Uber is reliable but it is difficult to classify it as public transportation because as the name suggests it is for an elite section of the society. In India it has launched a low priced service too. It is popular as it is the only company that is offering a minimum fare as low as Rs 49 for first time users.

What impact does Uber have on consumers ?

Uber does collect information about the consumers and has been criticized strongly for its privacy policies. There have been reports of Uber executives threatening to use this information for intimidation. So much so that the Daily Beast has an article of ten worst stories of customers. Indian consumers have almost zero protection for their information. What the Uber experience tells us is that if we don't work on a privacy law soon enough we are waiting for a bigger problem in the long run.

Is it an innovative company ? Is it a technology company ?

A platform or an app does not make a technology company. Uber will derive its revenues from fares paid by commuters so it is a taxi company and nothing less or more than that. Does it have to be treated differently by the regulators or the central bank is not even a question that should be asked. It was a bone of contention for some columnists.

What is the impact Uber has on the competition in the short and mid term ?

This is something that has not been explored, but the cut throat pricing offered by Uber for its first time users is clearly a predatory pricing. It will affect companies already working in this space. These companies will respond by improving their services and with better pricing in the mid-term and will surely survive Uber. The bigger issue is how single vehicle owners of taxis and autos will fare. It is important that they be considered as businessman and entrepreneurs too and the Competition Commission of India looks at ensuring their survival too.

Yatish Rajawat is a senior journalist based in Delhi, he tweets @yatishrajawat

Updated Date:

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