by Deepak Shenoy, Capital Mind

In my last post on Uber, I spoke of economics and we’ve had some extremely good arguments countering some of the economics. I’m always malleable, so if there’s a solid argument stating a case against me, I’m always open to change.

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1. What About The Cost of Owning A Car?

I spoke of the price per kilomoter for taking an Uber versus taking your own car, and Uber’s costs came to 13Km + per kilometer. Using your own car costs about Rs. 6 per kilometer – and if you added the rest up (About Rs. 0.5 per km as insurance, Rs. 1 per km as maintenance), you’d still pay less than an Uber.

But there’s a larger cost: the cost of the car itself, which according to many people will be Rs. 10 per kilometer, if you assume a cost of Rs. 5 lakh over 50,000 kilometers over 5 years. I don’t agree with this for many reasons.

I’m not selling my car, because:

a) You can’t depend on a Uber or Ola: They take time, they can’t find your place, and if you need to move urgently, you’re not going to find one. When their incentives diminish, you will find they crib just like autos about not coming to some place or the others. (Editor: they’re also getting violent)

b) It’s terrible for short distances: The concept of waiting 10 minutes to travel for five minutes to take my kids to a swimming class, and then ferrying them back after another 10 minute wait, and paying Rs. 50 each way, is terribly uneconomical. If you do this enough – and people with kids will know how many times “enough” happens – you will find this skews the equation substantially.

c) Doing long distance trips: (From Bangalore) to Mysore, or the mountains in the ghats, or even to Goa (we drive up) is going to be hugely expensive with a non-owned car. A sedan costs Rs. 2000 per day, which for a week can drain your cash substantially.

d) It leaves you at the mercy of Uber: There’s a surge? Ouch. There’s no Uber? Ouch again. They suddenly raise prices? Double ouch, because you have no alternative. Having a car is great because it is an alternative – even now, when Uber is cheap, I’ve used my own car when the nearest car was too far away. But at least I had my car to use. Let’s not even consider the small joys of driving on a highway, and the privacy of your own vehicle.

I think the capital cost of owning a car should be considered only if you don’t plan to own a car and use Uber for everything. But for most people this may not be applicable.

Having said that, the economics aren’t that bad. I have two cars. One is 13 years old, and the other is six years old. I paid about Rs. 6 lakh for both of them. They will last me about 100,000 kilometers each, in fact even more is likely. The average diesel taxi goes for 100,000 to 150,000 km.

Economically speaking, you’d have to adjust for
– The outstation trips where you hire a car:
– The comfort of your car when you need short trips
– Where you didn’t pay a surge price.
– The interest cost of that Rs. 6 lakh paid upfront – say Rs. 50,000 per year.

Over 10 years, you may see a net cost of Rs. 500,000 or so, over 100,000 kilometers, so your economic cost is Rs. 5 per kilometer. Your metric may differ, and perhaps you’d go to Rs. 10 per kilometer. There’s an inflation metric to further confuse you but let’s not knicker-twist.

Add it in the calculation and you might hit about Rs. 13 per kilometer. This is just about the same as an Uber, you say? But obviously, Uber’s losing money at this fare, so they’re going to have to raise fares. And if they push it to Rs. 20 per kilometer, the economics just goes back in favour of you and your car.

But you know what kills the economics? It’s the fact that you’re not in control of your life. A bus fare is regulated. An Uber with random surge pricing is not. So you have no idea what you will end up paying, and that uncertainty can be insane. You only know the lowest you will pay, not the highest. There are mathematical models to get a value for “what that uncertainty costs you”; these are often used in stock markets to price derivatives like call options. Roughly speaking (sorry to all the black-scholes fans here) you would put at least a 20% higher cost on something where the outcome is uncertain, to account for that uncertainty, and when you add that in, the Uber cost just went up even more.

2. What About Parking Charges?

Many cities like Bangalore have very little in the area of parking charges. I visit a friend, I park near his house or in his complex and it costs me nothing. But Mumbai has a hefty parking cost, apparently, and driving your car does add that cost in your bill.

This is unavoidable, so I admit that this charge should be added to your cost. If you pay Rs. 2,000 per month to park your car, and travel 1,000 km, you will be paying Rs. 2 per km extra versus the Ubers and Olas. That might push your cost to Rs. 15 per kilometer, including the fixed cost of a purchase, or Rs. 10 per kilometer if you own the car outright.

This is still cheaper than an Uber in my opinion, which is at Rs. 20 per kilometer including the uncertainty costs.

3. Won’t People Pay More For Convenience?

People would never have believed they would pay Rs. 100 for a coffee. Yet, they do, in hundreds of air conditioned coffee shops in the country. Won’t they pay more for a ride? Like 2x what they would pay for an alternative? Or even higher?

I’m sure Uber hopes so. I don’t think they will, because a coffee shop is a great place to meet friends and get a quiet place to chat, so you think of it as rent. There are cheaper alternatives but not available in the unit size of say, four coffees.

It will be quite remarkable for Uber to go into that zone. Maybe it happens. Maybe our kids will go around telling their friends, “lets Uber together”. If that happens I’ll be as surprised as many of you, but I must admit that this is a definite non-zero probability.

4. How Can Uber Make A Profit Elsewhere But Not In India?

Uber is profitable in other places, apparently. But in many of those places people are happy to pay high costs for a taxi. (average fares in alternatives are higher) In those places the fuel and running costs are low compared to the costs of the taxi itself (like a medallion cost in New York). Plus, cars are cheaper – In India we pay a LOT of money for cars. In dollar terms we pay as much for our sedans as the US, but the fares are 1/20th.

Which is why making a profit is going to be substantially tougher for Uber here. Yes, they have alternatives like food delivery and shipment transportation and other avenues. But if they address some of the cost issues – lowering fuel costs through gas conversion, lowering interest costs, doing bulk deals for cars so they’re cheaper etc. they might be able to do better. But at this point they’ll have to keep burning money for a while, and let’s hope for the sake of over 300,000 drivers that have registered for Uber/Ola across the country, that they don’t run out of funds.

About Deepak Shenoy: Deepak Founded Capital Mind, which mines financial data and provides analytics. Deepak is part of the core team that helps build, grow and keep our data platform up to date. He lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

Read the original article here.