Sunday, September 28, 2014

Car-Share and Ride-Share Companies are Blending the Lines of Public and Private Transportation
by Joy Sun

Here’s something to think about: in early June, Uber—the venture-capital-funded, on-demand car ride service—set a record valuation of $17 billion, which makes this “start-up” worth more than half of the companies listed in the S&P 500. The month before, Uber was integrated into Google Maps. And now, in addition to mapping your travel based on whether you are walking, biking, driving, or taking the bus, Google Maps also offers the option of getting there via an Uber car.

Uber is a four-year-old start-up and success story that is scaling quickly (currently, Uber is up and running in 130 cities worldwide) and here to stay. So what does it mean for automotive OEMs when its founder and CEO envisions the company making “car ownership a thing of the past”, replaced by ubiquitous “car access,” but limited private ownership?

Uber is simply one manifestation of the rise of the shared economy, in which assets that used to be 100% owned and 99% idle (think of your empty guestroom or your commuter car between 9 a.m. and 5 p.m.) are becoming more productive as they are utilized by more people. The shared economy has been unleashed by the internet and smartphones, which have enabled peer-to-peer connections in real time. Whereas your guestroom used to sit idle, now it can be easily rented to vacationers on Airbnb and used to generate value.

Transportation is a sector disproportionally affected by the rise of the shared economy, because sharing transportation has historically been commonplace. Public transportation has always allowed people traveling in the same direction to use the same vehicle for a small fee. However, unless a city has invested in a comprehensive infrastructure, public transportation can rarely match the flexibility and convenience of private transportation.

In contrast to yesterday’s dichotomy between private and public transportation, today’s technology enables a slew of travel options varying on a spectrum of convenience and cost. On one side of the spectrum is your fixed-route traditional public transportation that is low cost and inflexible to your personal needs. On the other side of the spectrum, we are seeing higher cost transportation options that rival the convenience of private ownership. I’ll call these options “shared personal transportation,” and they include Uber, which offers to any urban dweller the convenience of being chauffeured, and Zipcar, which gives users access to a neighborhood car for extended hours.

Shared personal transportation makes the experience of private car ownership available on a pay-per-use basis, which allows for a greater level of price sensitivity and flexibility for consumers. According to Kelly Blue Book, a recognized consumer guide for new and used vehicle price estimation, the annual cost of ownership (including fuel, insurance, financing, maintenance, repairs, and depreciation) for a new 2014 subcompact vehicle amounts to ~$530/month; the equivalent of traveling 441 miles in a chauffeured Uber every month (after the base rate, the travel fare is $1.20/mile in Boston)! In the meantime, ride-share companies are continuing to push down the prices of their services. This is, in part, because they are engaged in pricing wars with each other. It’s also, in part, because they are launching even lower price alternatives, such as real-time carpooling that allows strangers traveling in the same route to share rides and split the fare.

Automotive brands don’t just compete against one another for vehicle sales, they also compete within a greater context of private vs. public transportation, and now those options are being supplemented by a slew of flexible shared transportation options. Shared personal transportation complements public transportation, and, if combining the two can mean lower costs than private car ownership, with the option of flexibility when you need it, then who will be the car owners of the future (at least in urban areas)?

What does the shared economy mean for automotive manufacturers? What does “no car ownership, but full car access” mean for automotive aftersales? How do companies like Uber, Lyft, and SideCar, which contract with large numbers of part-time drivers, influence their service and repair habits? These are questions that will be explored in part II of this blog, but in the meantime, I speculate that it might bear a resemblance to fleet operations (to be investigated in a future blog post).

Bottom Line:In the context of the shared economy, on-demand ride-sharing and car-sharing companies like Uber and ZipCar are enabling more people to have the convenience of automotive access on a pay-per-use basis, without the responsibilities and costs of automotive ownership. The ramifications of these new transportation entrants on car ownership and aftersales behavior are not yet clear and are worth investigating.

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