Will Uber be a lifeline for Daimler, BMW

There has always been a paradox at the heart of Uber Technologies Inc’s business model.
The ride-hailing firm aimed to attract users with prices that undercut the traditional taxi industry, thereby squeezing out the competition. With a monopoly, it would be able to raise its fares and turn a profit. But higher fares then risk irritating the customers it wooed with affordability in the first place.
Those monopolies are yet to materialise. Instead the industry has seen vicious price wars that led Uber to lose $8.5 billion last year, its US rival Lyft Inc. to hemorrhage $1.5 billion and the parent company of Free Now, its main European competitor, to lose a further 1.8 billion euros ($2.1 billion). Uber now seems to be gambling that the resolve of Free Now’s owners, the luxury carmakers Daimler AG and BMW AG, is wavering. The San Francisco-based company is considering a bid for the joint venture, Bloomberg News reported. The interest should come as a relief to the storied German giants.
The two carmakers’ ride-hailing and car-sharing efforts, which include Free Now and were lumped into a joint venture dubbed Your Now last year, have proven an unwelcome distraction amid the tribulations of 2020. The meteoric rise of Tesla Inc’s share price has accentuated the need for investment in electric mobility, just as the Covid-19 pandemic has eviscerated traditional car sales. Net profit at both BMW and Daimler this year is expected to fall to its lowest level since 2009. They can’t as readily afford to fund an asymmetric conflict against Uber, a rival whose investors aren’t anticipating a profit on the same basis until 2023.
Five years ago, there seemed to be three threats to the classic automotive industry: ride-hailing, autonomous cars and electric drivetrains. Carmakers invested widely in all three. Since then, it has become clear that electric vehicles are the immediate priority: Neither ride-hailing nor autonomous cars are going to turn the industry on its head any time soon.
BMW Chief Executive Oliver Zipse and Daimler CEO Ola Kaellenius have to decide whether the long-term benefits of being in the ride-hailing game offset the near-term losses. Neither has expressed much enthusiasm about the industry publicly, which can’t have made it easy to find new investors.
Even as a platform to sell vehicles to ride-hailing drivers, it’s unappealing: Toyota Motor Corp, which dominates that market, sold just 169,500 of its Prius hybrid hatchbacks globally last year, or 1.9% of its total vehicle sales.
And the Uber paradox suggests that ride-hailing remains a high-risk gamble. It’s still unclear that the business model works. Besides, the most significant part of Free Now’s business is from regulated taxis, meaning it can’t unilaterally increase the price of fares.
An acquisition of Free Now would also significantly strengthen Uber’s position in Europe, pushing it towards a monopolistic position in some markets, which would give it far more pricing power. That’s particularly the case in
Germany, where it has struggled to gain traction. It would also give it huge power over London’s black-cab drivers, many of whom use Free Now to find fares and who already see Uber as their bete noire. Cabbies are bound to kick up a stink at the prospect of giving a cut of their fares to the Californian behemoth. Antitrust authorities are sure to take a close look at any deal, particularly since Uber would have an incentive to squeeze regular cabs even further.
Should such hurdles make an Uber deal insurmountable, the German giants have few other options. The virus has severely damaged swathes of the sharing economy, meaning Free Now’s finances are unlikely suited to an initial public offering any time soon. They need to hitch a ride out of town, and fast.

—Bloomberg