Friday, November 13, 2015

Hiring an Ola/Uber versus Buying a New Car

While Ola and Uber have indeed been disruptive in their business model and have changed the way people travel in cities; the need of personal transportation cannot be eliminated. While auto companies are worried on this trend and has made Mr. Anand Mahindra himself to express his concern last month – ‘There is going to be increasing number of people who would want access to transportation and not own object of transportation.’ The automakers surely seem concerned that these Taxi Aggregator companies would eat onto the new car sales and consumers will lose interest in owning cars.  The concern seems valid considering the mentioned statistics -
  • ·         Ola plans to diversify itself into leasing business and initially pump in Rs.5000 crore into its captive leasing subsidiary (initial investment to be Rs.500 crore)!
  • ·         Ola to purchase upto 1 Lakh cars by 2016 and offer on lease to drivers!
  • ·         Ola already has an existing network of 2,50,000 lakh cars attached to it.
  • ·         Ola is currently operating at 7,50,000 rides a day across 100 cities.
  • ·         Uber is close second and has 1,50,000 drivers on it network as of date.
  • ·         Uber also has aggressive expansion plans is targeting 10 Lakh rides/day within next 6-9 months
  • ·         Taxi Market in India set to grow at 20% annually to $28 billion in next 5 years!
The concern is also valid by the fact that a lot of Ola & Uber taxi’s were purchased in past 3 years – considering the aforementioned numbers, 4 Lakh cars are already attached to OLA+Uber. However, the sales of these cars have not added to the overall car sales and the overall scenario has still been worrisome – New Car Sales is struggling to project growth and had indeed been the toughest years in the industry. To support the argument, Economic Times shared a calculation on how Ola/Uber proves to be practical than purchasing a new car –
Source: ET
Descriptive Calculation:
New Car Ownership Cost for 3 year (New Car considered here is Maruti Swift Petrol LXI with ex-showroom cost of Rs.4,78,000): 

Cost of using Ola/Uber for 3 years (without taking inflation/price hike/peak time charges):
As per the above calculation; both Uber & Ola project to be cost-effective and lighter on pocket. However, one needs to consider the price hikes that the operator can substantially do in 3 years and also the additional peak time charges these aggregators levy needs to be counted as well. We have taken 20% hike YoY for the consideration:
This clearly highlights that Ola can prove costly as well! Let's consider the bigger picture on why the lighter charge by Taxi aggregator companies can vary - 
  • - Ola/Uber is heavily discounting the current rides to get people addicted to the platform
  • - All aggregators are incurring hefty losses* (focus now on increasing Market Share)
  • - Once people are used to the trend, price hikes will be imminent - which will prove to be a costly affair for the daily commuter. These companies already charge 2x-3x based on the cab demand!
*Ola already incurred over Rs.50 crore losses in previous 2 fiscals (2013-14 & 2012-13).
Source: Business Today
Also the Advantages & Disadvantages of hiring a Ola/Uber for daily commute is as mentioned:
ADVANTAGES:
  • a. No Investment: For students, fresh professionals, etc purchasing car can be a big commitment. Ola/Uber is indeed a pocket friendly alternative
  • b. Blessing in Traffic: For residents of Bangalore/Delhi/Mumbai - driving in traffic is the biggest concern. What better way than ride in a chauffeur driven car and also have scope to utilize the time while travelling!
  • c. Settle in new cities easily: Finding it difficult to explore routes in new cities. The neighboring Taxi guy can prove to be your best friend!
  • d. Luxury of being driven by a Chauffeur: Explore the second row seats! Also escape the fear of accidents, road rash, etc 
  • Easy Availability: With multiple players and even higher number of taxis on road, getting a cab is a 5-minute affair these days!
DISADVANTAGES: 
  • a. No Sense of Ownership: Car Purchase for majority of Indians is a matter of prestige and is linked to a sea of aspirations. Many customers buy a car to project a better lifestyle and car is much more then mere mode of transportation!
  • b. Emergency Hassles: There is no better alternative to a own car in emergency situations (hospitals, schools, interviews, etc). 
  • c. Dependency: There are multiple scenarios, where your cab booking is cancelled or the cabs are over-booked. Also owning a car always has a CONVENIENCE factor attached with it.
  • d. Missing Driving Pleasure: Many of us drive our cars for the intangible pleasure of driving. Can you get that in a cab?
  • e. The choice of Car itself: Majority of the cabs today are the base variants or mostly Tata Indica. What about your personal taste of cars and how can you decide in which brand you want to be driven around?
  • f. Safety: Incidents of irresponsible drivers causing nuisance can make you think twice as well.
Taxis these days are an international trend and their particular effect on New Car Sales is nowhere specifically seen. Take Uber as an example - It has not affected the biggest car market in the world (US) which is almost at a saturation stage (700 car penetration in a population of 1000!). We at Management Punditz very strongly believe that the uprising of Taxi usage in India will seldom have any effect on New Car Sales and in turn will add to the Overall Sales. India with a current car population penetration of 20 in 1000 people, has an immeasurable potential for New Car Sales and request OEMs to focus on understanding the consumer psyche much better rather than worrying on Taxi Aggregators as of now. (Note: Even these Taxi Aggregators are consumers by itself!).

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