Bumps In The Road: Don't Bet On Uber Crashing

Bumps In The Road: Don't Bet On Uber Crashing
Justin Fox

NEW YORK — For six months now, almost all the news about Uber has been bad. Even before then, the ride-hailing company's combative executive team displayed a remarkable facility for generating negative headlines, but since former Uber engineer Susan Fowler went public in February about seemingly systemic sexual-harassment problems at the company, it's just been one disaster after the other. Ugly lawsuit over allegedly stealing autonomous-car secrets from Google parent Alphabet? Check! Revelations of a concerted effort to evade regulators around the world? Check! Embarrassing video of co-founder and Chief Executive Officer Travis Kalanick rudely berating a diver? Check! Board member resigning after complaining during an all-hands employee meeting on combating sexism that women talk too much? Check!

Even the forced departure of Kalanick in June doesn't seem to have settled things down much, with the company's board struggling to agree on a replacement and Kalanick — who remains a major shareholder — reportedly haunting the search with chatter about "Steve Jobs-ing it" by eventually returning to power. In an attempt to dodge complaints of sexism, Uber tried to find a female CEO, but eventually narrowed the list down to three male executives.

If you think turmoil like this would be bad for the company's business, you're right. Uber's market share in its head-to-head U.S. battle with kinder, gentler rival Lyft fell to 75.3% in June from 78.8% in February and 90% two years ago, USA Today reported last month based on data from TXN Solutions, a consumer research firm.

This does not mean Uber's business is shrinking, though. The company reported that revenue rose 18% in the first quarter of this year, to $3.4 billion, and has told investors that bookings were up more than 10% in the second quarter. Lyft is growing even faster, but Uber's competition with Lyft is not a zero-sum game — at least not yet.

Once you've got a critical mass of customers and providers signed up, it can be pretty hard to unseat you.

For one thing, both companies are still taking market share from taxis. So summed up, Uber's market share is flat, not falling. Throw in rental cars, and Uber's share of all business-travel spending on ground transportation is still rising, to 55% in the second quarter from 53% in the first. That's just among business travelers, but it seems reasonable to extrapolate that a similar dynamic is playing out among non-travelers choosing to leave their cars at home (or dispense with them entirely) and taking an Uber or a Lyft instead.

In short, despite shooting itself in the foot again and again and again, Uber continues to hold a pretty commanding share of what is still a growing market. That's partly because of the kind of business it is: a platform that connects customers with providers. Once you've got a critical mass of both signed up, it can be pretty hard to unseat you. Such two-sided markets existed before the internet (credit card companies, for example), but in the online era, they seem to be the default business form. Online platforms such as Airbnb and Uber, Andrew McAfee and Erik Brynjolfsson of the Massachusetts Institute of Technology write in their new book Machine, Platform, Crowd, "represent the richest combination we've yet seen of the economics of bits and the economics of atoms. As they scale, these platforms handle huge volumes of information — about members and their choices and activities, the availability and pricing of goods and services, payments and problems, and so on. All of this information approaches the ideals of free, perfect, and instant. It's very cheap to store, process, and transmit, and it's getting cheaper. This means that all relevant and useful information can be everywhere on the platform, all the time. It also means that the demand-side economies of scale — the network effects, in other words — can eventually grow much faster than costs."

Taxi drivers protesting against Uber in Rio de Janeiro, Brazil Photo: Rodrigo Chad/ZUMA

That all sounds like good news for Uber. So why is it that the company lost $708 million in the first quarter?

One theory popular among the most skeptical observers is that the potential market for ride hailing actually isn't all that big, and Uber and Lyft have been continuing to grow only by offering unsustainably low fares. Eventually their venture capital riches will run out, they'll have to stop subsidizing fares, and their growth will shift into reverse. There's surely something to this worry — and to concerns that Uber and Lyft will eventually be forced to take on their independent-contractor drivers as employees or at least spend more on benefits for them. Focus on these issues too much, though, and you risk missing that Uber and Lyft really do provide a useful service that wasn't being provided nearly as well before they came along. As Ben Thompson put it in a somewhat different context in his Stratechery newsletter in April: "The most important reason why Uber (and Lyft) has overcome regulatory challenges most of the time is that the company has positive externalities: not only is the service "good" for passengers (who get a liquid transportation option) and drivers (who get a job), it benefits people who don't use the service. There are fewer drunk drivers, fewer parked cars, restaurants and bars get more business, underserved neighborhoods become accessible, travelers have better experiences, etc."

I don't think Uber is in a death spiral.

Another worry is that the switching costs between Uber and Lyft are quite low: Once customers have installed both apps on their phones, it's no hassle at all to toggle between them for the best service or the best deal. For drivers, it's more complicated, but there are now apps that can manage the process. If switching is easy, it follows that profit margins will always be under pressure. On the other hand, getting to the point where it can offer a plausible switching option to Uber across much of the U.S. has cost Lyft hundreds of millions of dollars. That's a pretty significant barrier to entry.

So Uber and Lyft provide a service that is worth something. Some company (or maybe more than one) should eventually be able to turn a profit by providing it. Despite all its recent troubles, Uber still seems to have the best shot at becoming that company. Of course, Kalanick talked investors into giving Uber a $69 billion valuation based on a wildly ambitious vision that included a presence in every major global market, brand extensions such as UberEats — a meal-delivery service — and Uber's very own self-driving cars. It has ratcheted back those global ambitions over the past year by getting out of China and Russia, and there's probably more retrenchment to come. I don't think Uber is in a death spiral. I do think some of its investors will be sorely disappointed.

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How China Flipped From Tech Copycat To Tech Leader

Long perceived as a country chasing Western tech, China's business and technological innovations are now influencing the rest of the world. Still lagging on some fronts, the future is now up for grabs.

At the World Semiconductor Conference in Nanjing, China, on June 9

Emmanuel Grasland

BEIJING — China's tech tycoons have fallen out of favor: Jack Ma (Alibaba), Colin Huang (Pinduoduo), Richard Liu (Tencent) and Zhang Yiming (ByteDance) have all been pressured by Beijing to leave their jobs or step back from a public role. Their time may be coming to an end, but the legacy remains exceptional. Under their reign, China has become a veritable window to the global future of technology.

TikTok is the perfect example. Launched in 2016, the video messaging app has been downloaded over two billion times worldwide. It has passed the 100-million active user mark in the United States. Thanks to TikTok's success, ByteDance, its parent company, has reached an exceptional level of influence on the internet.

For a long time, the West viewed China's digital ecosystem as a cheap imitation of Silicon Valley. The European and American media described the giants of the Asian superpower as the "Chinese Google" or "Chinese Amazon." But the tables have turned.

No Western equivalent to WeChat

The Asian superpower has forged cutting-edge business models that do not exist elsewhere. It is impossible to find a Western equivalent to the WeChat super-app (1.2 billion users), which is used for shopping as much as for making a medical appointment or obtaining credit.

The flow of innovation is now changing direction.

The roles have actually reversed: In a recent article, Les Echos describes the California-based social network IRL, as a "WeChat of the Western world."

Grégory Boutté, digital and customer relations director at the multinational luxury group Kering, explains, "The Chinese digital ecosystem is incredibly different, and its speed of evolution is impressive. Above all, the flow of innovation is now changing direction."

This is illustrated by the recent creation of "live shopping" events in France, which are hosted by celebrities and taken from a concept already popular in China.

10,000 new startups per day

There is an explosion of this phenomenon in the digital sphere. Rachel Daydou, Partner & China General Manager of the consulting firm Fabernovel in Shanghai, says, "With Libra, Facebook is trying to create a financial entity based on social media, just as WeChat did with WeChat Pay. Facebook Shop looks suspiciously like WeChat's mini-programs. Amazon Live is inspired by Taobao Live and YouTube Shopping by Douyin, the Chinese equivalent of TikTok."

In China, it is possible to go to fully robotized restaurants or to give a panhandler some change via mobile payment. Your wallet is destined to be obsolete because your phone can read restaurant menus and pay for your meal via a QR Code.

The country uses shared mobile chargers the way Europeans use bicycles, and is already testing electric car battery swap stations to avoid 30 minutes of recharging time.

Michael David, chief omnichannel director at LVMH, says, "The Chinese ecosystem is permanently bubbling with innovation. About 10,000 start-ups are created every day in the country."

China is also the most advanced country in the electric car market. With 370 models at the end of 2020, it had an offering that was almost twice as large as Europe's, according to the International Energy Agency.

Photo of a phone's screen displaying the logo of \u200bChina's super-app WeChat

China's super-app WeChat

Omar Marques/SOPA Images/ZUMA

The whole market runs on tech

Luca de Meo, CEO of French automaker Renault, said in June that China is "ahead of Europe in many areas, whether it's electric cars, connectivity or autonomous driving. You have to be there to know what's going on."

As a market, China is also a source of technological inspiration for Western companies, a world leader in e-commerce, solar, mobile payments, digital currency and facial recognition. It has the largest 5G network, with more than one million antennas up and running, compared to 400,000 in Europe.

Self-driving cars offer an interesting point of divergence between China and the West.

Just take the number of connected devices (1.1 billion), the time spent on mobile (six hours per day) and, above all, the magnitude of data collected to deploy and improve artificial intelligence algorithms faster than in Europe or the United States.

The groundbreaking field of self-driving cars offers an interesting point of divergence between China and the West. Artificial intelligence guru Kai-Fu Lee explains that China believes that we should teach the highway to speak to the car, imagining new services and rethinking cities to avoid cars crossing pedestrians, while the West does not intend to go that far.

Still lagging in some key sectors

There are areas where China is still struggling, such as semiconductors. Despite a production increase of nearly 50% per year, the country produces less than 40% of the chips it consumes, according to official data. This dependence threatens its ambitions in artificial intelligence, telecoms and autonomous vehicles. Chinese manufacturers work with an engraving fineness of 28 nm or more, far from those of Intel, Samsung or TSMC. They are unable to produce processors for high-performance PCs.

China's aerospace industry is also lagging behind the West. There are also no Chinese players among the top 20 life science companies on the stock market and there are doubts surrounding the efficacy of Sinovac and Sinopharm's COVID-19 vaccines. As of 2019, the country files more patents per year than the U.S., but far fewer are converted into marketable products.

Beijing knows its weaknesses and is working to eliminate them. Adopted in March, the nation's 14th five-year plan calls for a 7% annual increase in R&D spending between now and 2025, compared with 12% under the previous plan. Big data aside, that is basic math anyone can understand.
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