For Uber drivers, the economics of ride-sharing and grocery delivery have always been troublesome. Owning a car and driving it frequently is expensive, and working as an Uber driver doesn’t pay all that much considering the costs (median hourly earnings before expenses in the U.S. were $21 in the third quarter of 2022, per Gridwise estimates).
It’s a recipe for a high-churn business, albeit one that Uber executives have generally navigated well. Uber has made the side hustle just flexible and gainful enough for millions of independent contractors, mostly avoiding driver shortages that would cause trip prices to spike.
But wouldn’t it be a win-win for everyone if drivers could cut their costs while maintaining their modest income? Drivers could make a better living (provided Uber doesn’t slash ride prices or hike its commission). And Uber could keep more drivers on the road, trimming its recruitment- and incentive-related expenses.
That intriguing scenario sat top of mind Thursday for Uber CEO Dara Khosrowshahi while speaking at a Davos event hosted by the Wall Street Journal.
Khosrowshahi told a small crowd that his mobility company is working with an undisclosed number of automakers to develop lower-cost, small electric vehicles designed for traversing busy city streets. Khosrowshahi said automakers could accomplish this feat by eliminating features seen in higher-horsepower cars, building vehicles with two or three tires, and reimagining seating areas.
“I do think that top speeds, for example, that many cars have are not necessary for city driving that’s associated with ride-share,” Khosrowshahi said, according to the Journal. “That can reduce the specs and if you reduce the specs you can reduce the ultimate cost.”
Khosrowshahi provided few specifics about the company’s efforts, including which automakers are on board.
In theory, the proliferation of sleek, city-bound vehicles could become a boon for Uber and Lyft.
A huge chunk of Uber’s mobility and delivery business is done in big cities, where cost-of-living and gas prices are high. Uber doesn’t break out financial results by geographic area, but the company said in its 2021 annual report that nearly one-quarter of its $7 billion in ride-hailing revenue came from five metropolitan areas (New York City, Chicago, Miami, London, and São Paulo).
Uber has worked to make driving for the company more attractive, primarily through the addition of food delivery and efficiency-focused technological upgrades to its platform. Still, as the New York Times detailed last week, Uber drivers continue to struggle to make ends meet in the Big Apple. Notably, the Times featured two local drivers who bought expensive cars—a $42,000 Lexus and a $50,000-plus Toyota Highlander—that proved to be bad investments.
A cheap, city-centric vehicle might not cure Uber drivers’ poor decision-making (don’t buy a Lexus!), but it could make the arrangement more tenable. In turn, Uber could cut driver turnover expenses that likely cost the company tens of millions—if not hundreds of millions—of dollars each year. (Uber doesn’t release its driver churn rate. The best available data on turnover came in 2017 from The Information, which reported that only 3% of Uber drivers stayed on the road for more than a year, but that statistic is woefully outdated.)
Still, for Uber, the challenge of turning this proposition into a reality remains daunting.
For legacy automakers, the economics of mass-producing a low-cost—read: low margin—electric vehicle has proven unattractive to date. Sales of smaller sedans haven’t been particularly strong, likely owing to their still-high price tag (typically $30,000-plus).
Many automotive startups, meanwhile, are fighting to stay afloat while focused on higher-margin passenger and commercial trucks. The one company that has publicly disclosed a partnership with Uber on a lightweight car, U.K.-based Arrival, said in November that it might not have enough cash to survive past the end of 2023. Arrival’s U.S.-based shares have crashed to penny stock territory, well below their March 2021 IPO price of $22.40.
Uber’s aspirations also assume that drivers are willing to buy an electric vehicle designed specifically for ride-hailing and delivery. While those vehicles might have decent resale value if sold to other ride-sharing drivers, the lack of space, comforts, and flexibility will make them a tough sell to those who see Uber as a temporary gig.
Khosrowshahi has successfully expanded Uber’s business by rapidly ramping up food delivery, offering additional ride-sharing options, and starting to partner with taxicabs (though he's yet to turn an annual profit). He's moved Uber away from previous efforts under cofounder Travis Kalanick to develop flying cars and self-driving cars.
In that sense, Khosrowshahi's new EV effort is somewhat out of character for him—but even if his latest idea doesn’t pan out, it’s certainly worth kicking the tires.
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Jacob Carpenter
