Venture Bytes #53 – In the Hunt for the Holy Grail

Venture Bytes #53 – In the Hunt for the Holy Grail

on June 20, 2019

In the Hunt for the Holy Grail

Reaching profitability is the holy grail for the ride hailing companies. The narrative today is that autonomous vehicles (AV) will eliminate the biggest cost component (driver commissions), thereby increasing the take rates and moving the companies closer to profitability. As we noted in our earlier articles, the software for AV is not yet ready and will take some time. But once the software is completed, there are other recurring costs to AV technology, and these costs rely on the hardware that has to be fitted into regular vehicles. Current hardware is expensive and has to be replaced over time, and this replacement could prove to be the largest cost component by the time the autonomous fleet rolls out.

The required hardware has three main purposes: awareness of its surroundings, knowledge of its location, and computation of decisions made by AV software.

The eyes of the car are made up of a combination of lidar, radar, and cameras. Lidars are sensors that emit millions of pulsed lasers that reflect on objects and create a 3D map of the surrounding area, with the more lasers employed the better the car understands its surroundings. The industry tends to implement a 64-laser lidar, which costs around $70,000, and two 16-laser lidar for $7,000 each. However, lidars are computationally expensive and provide erroneous results in bad weather conditions, leading to the simultaneous use of radar.

Radars are less precise, but are necessary since they are less computationally expensive, reliable during bad weather and more importantly – cheaper. AVs typically have 6 radars, 4 short-distance and 2 long-distance, for a total price of $10,000. Lastly, AVs are also equipped with at least 12 HD cameras that can cost up to $6,000. Cameras are extremely detailed, but the long processing time of pixels makes it impossible to only depend on cameras with the current speed of computers.

After the eyes of the car are in place, the car still needs to know its location. In order for the car to know where it is, it needs a 3D GPS and an Inertial Measurement Unit (IMU). The 3D GPS has pre-built maps of its surroundings to navigate through the city, and the IMU constantly checks that the location provided by the GPS is reliable. Both components cost $1,000 and $4,000, respectively. The last hardware piece is the brain of the car (the computer), which requires fast chips to process all the data obtained by the rest of the hardware allowing the software to make a driving decision. An AV computer can cost up to $6,000. The total current price of the hardware sums up to $118,000.

It would take a big investment to transform a regular car to an AV, so how long will it take to recoup that investment? To come up with an estimate, we are going to need the assumption that trip prices are going to stay relatively the same. According to Lyft’s S-1, the average length of a trip is 4 miles and costs $13. Since paying a driver is not required anymore, we would only discount maintenance costs (we are ignoring ownership costs). According to AAA, the maintenance cost for a medium Sedan is 8.58 cents a mile, plus fuel costs. An AV uses about 40% more fuel than a regular car since it needs to provide electricity to the added hardware. An electric AV’s fuel consumption would be around 5.6 cents per mile. The total operating cost is 13.78 cents per mile or about 60 cents for the average trip, leaving $12.40 of operating profit per trip. At that rate, it will take a little over 9,500 trips to recoup the investment, which could be done in a year taking 26 trips a day. Switching to an AV fleet, therefore, requires a massive investment that will not turn any profits in the first year of operation.

After the AV breaks even, it would only provide profits for a year. The current state of the technology limits the ability to continue generating profits much longer since hardware replacement would be needed every two years. Lidars are the most expensive component ($84,000 in total) and they currently have a life span of about 2 years. At those rates, if an AV takes 26 trips a day for 2 years, it would yield a profit margin of 47% (not including ownership costs). The model would allow ride-sharing companies to be profitable, but it would also be a considerably capital-intensive affair.

Apart from the high development costs that ride hailing companies have to incur for developing AV technology, which is estimated to be a decade away, they also have to bear the elevated hardware cost to switch into the AV fleet. The hardware for a million AV fleet would cost $118 billion, but where is all that cash coming from?

As a result of these high costs, these firms are going to have to increase their fares in order to keep up with the development and hardware costs of the technology. Additionally, companies are also focusing on developing cheaper and longer-lasting lidars to reduce the upfront cost of switching to a profitable AV fleet.

AV technology offers attractive margins and would allow ride-sharing companies to be profitable, but requires a massive investment before a profitable path is viably set forth. Current hardware prices are expensive, and further development to lower production costs will allow companies to bear the expense of switching to an AV fleet. Though operating profits are considerably high and AVs will eventually pay for themselves; ride-hailing companies will struggle to obtain the cash needed to afford the development costs.

One thing to note is that the aforementioned calculations did not include ownership costs since the AV’s ownership is uncertain, but even if taken into account, the resulting profit margins of an AV fleet would still allow ride-hailing companies to be on a long-term profitable path.


Is Micromobility the Silver Bullet for Ride Hailing Business?

Is the micro mobility business a viable, long term business? That is a pivotal question in the face of new investments in this business.

The micro-mobility business is relatively new and innovative, with a huge untapped opportunity. It is affordable for almost every socioeconomic group reducing the wasteful use of resources for operating a large vehicle for only small distances. These new shared vehicles will continue to appear in cities across the world and will likely continue to do so for the foreseeable future.

According to the Federal Highway Administration, over 50% of trips in the US are less than 4 miles, and 20% under a mile. Micromobility has the potential to fulfill over half of the trips made in the US at a much lower cost than using a car. Micromobility’s biggest addressable market will be mostly located in dense urban areas where trips tend to be shorter, and car trips are time consuming due to traffic. A one-mile trip in the heart of the Big Apple averages from $8 – $10 and lasts 14 minutes during rush hour while a scooter trip, by contrast, would take about 8 minutes for a price of $2.20, riding an e-scooter is therefore 40% faster and 75% cheaper.

The price difference for a short trip is known as the last mile opportunity, and it provides compelling growth potential for the micro mobility industry. The compelling opportunity has attracted over 24 startups to emerge in just under 3 years since the inception of the industry. Most micromobility startups are based in China and the U.S. but new players are also emerging in densely populated countries in Europe. Startups Lime, Ofo, and Bird are leading an industry which tends to be populated with acquisitions from ride-hailing companies.

Among the various means of urban transportation, e-scooters are becoming an increasingly viable choice for customers. The industry started about 3 years ago with docked bikes, then added electric dockless bikes that could be left anywhere after the trip was completed. The industry expanded to electric scooters a year ago, and ever since then, most companies have mainly focused to improve their e-scooter designs as they present the stronger demand out of all means of transportation.

According to the National Association of City Transportation Officials, there were 38.5 million trips taken on e-scooter compared to a mere 3 million trips of dockless bikes in 2018. At present, e-scooters are not profitable but, according to our estimates, can achieve profitability in the near future.

As indicated in the chart below, an e-scooter generates a 70-cent profit per ride, which translates to a 19% take rate. The companies aren’t profitable because the life of an e-scooter is about two months, but it keeps gradually increasing due to innovations and more focus on its development.

That said, the e-scooter revenue model has a few challenges to reach profitability. The biggest one is the cost associated with battery charging. Since the e-scooters are dockless, by the end of the day the e-scooters are all over the city, and they need to be charged to be operational the next day. Companies hire third-party contractors to pick the e-scooters from all over the city, charge them overnight and deploy them on the streets the next day. This approach is expensive, absorbing 50% of the revenue. Companies are developing new approaches to reduce the charging costs. One example is a startup called Wheels, which has designed the most innovative approach so far with its swappable batteries.

The micro mobility industry is still evolving, and is on the right track to turn profitable. Most of the trips taken in the United States are within e-scooter range, and its affordable price provides a seamless solution to the last-mile problem. The increasing focus on e-scooter developments is bringing charging costs and e-scoter’s lifespan to profitable levels in an industry with strong demand. The industry is environmentally friendly, accessible to low-income groups, with a path to profitability.

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