Where to, Dara? Uber faces an off-road adventure

After the Pune Regional Transport Office (RTO) issued a show cause notice to Uber as well as Ola, the two major cab-hailing firms in India, the drivers called off their strike, which was scheduled to begin on Tuesday. The RTO has asked the companies to explain why the revised fares have not been implemented and given them a week’s time to respond, failing which it said action would be taken. This is just one example of the run-ins Uber keeps having with regulators as well as driver partners.

If it isn’t low prices, Uber India is accused of charging too much. A few weeks back, the government of Karnataka banned surge pricing—a tool commonly used by ride-hailing companies to boost revenue, in Bengaluru, one of the company’s biggest markets in India. In a notification issued on 3 February, the state government introduced a new uniform fare for all cabs in the metropolis, effectively banning any kind of differential pricing.

The San Francisco-based company mentioned this dual challenge in its global annual report for 2022. “…complaints have been filed in several jurisdictions, including…India, alleging that our prices are too high (surge pricing) or too low (discounts or predatory pricing), or both. If one jurisdiction imposes or proposes to impose new requirements or restrictions on our business, other jurisdictions may follow,” the report stated.

Ten years into its India journey, Uber is still looking to find its feet in the country. Aside from pricing, the company and its rivals in the industry have come under the regulatory scanner for charging drivers high commissions. Separately, Uber is caught up in litigation over tax dues. It also faces increasing competition from the likes of BluSmart, Rapido and a host of other smaller regional startups, including Envi, Evera, Shoffr, Lithium Urban Technologies, Namma Yatri and Snap E Cabs.

On top of all this, Uber, like all other contenders in the arena, has to contend with the complete absence of brand loyalty among its drivers and customers, who switch to whichever app is convenient at any moment, or ditch them all to cut a deal between themselves.

Amid these woes, Uber remains unprofitable. In 2022-23, the company’s revenues grew over four-fold to ₹2,744.2 crore, from ₹560.5 crore in 2021-22, according to financial statements sourced from Tofler. Media reports had earlier pointed out that the huge jump in revenue is probably due to the amalgamation of two other entities—Uber India Research and Development Pvt. Ltd and Xchange Leasing India Pvt. Ltd—with effect from 1 April 2022. However, its losses over that same period widened to ₹311 crore from ₹216 crore.

In contrast, arch-rival Ola reported 58% growth in standalone revenue to ₹2,135 crore in 2022-23 and a standalone operating profit of ₹250 crore against a loss of ₹66 crore the previous year. On a consolidated basis, Ola’s revenue hit ₹3,000 crore.

Clearly, as it contends with an ever-shifting regulatory landscape, ambitious challengers and a bleeding balance sheet, Uber has its task cut out.

Both Uber and Ola did not speak to Mint for this story.

Silver lining

It’s not all bad news, though. The shared mobility industry, which was badly affected during the covid pandemic, saw a quick revival as offices reopened and commuters returned. According to market research and consulting firm Redseer, the number of ride-hailing bookings in 2022, at 1.2 billion, topped the pre-covid 2019 levels of 1.16 billion. Uber recovered faster than the others and overtook Ola in the first quarter of 2022, according to data from RedSeer’s March 2023 report, the latest available. The American company has consolidated its position ever since.

Rides are classified into three categories: four-wheeler cabs, auto rickshaws and motorcycles. The gap between Uber and Ola in cabs—the category they dominate together—has especially widened. In the second quarter of 2021, Uber had a lead of about 5 million cab bookings over Ola. In the last quarter of CY2022, it recorded over 20 million more bookings than Ola.

But growth is not a given, especially in the cabs business, where demand is beginning to stagnate. The RedSeer report said bookings were almost flat in the last three quarters of CY2022. Segments such as auto rickshaws and bike taxis offer better growth prospects but with much lower margins. Uber is also behind rivals such as Rapido there. Between growth and profitability, it’s a catch-22 situation for the company.

Regulatory irregularity

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Policy shocks such as the surge pricing ban in Bengaluru threaten the sustainability of the larger ride-hailing industry’s business model. On the one hand, governments across states are increasingly looking at tightening regulations, thereby raising compliance costs. On the other hand, the initial goodwill that the industry gained with consumers has waned.

The regulatory challenges in India can be peculiar as transport is a concurrent subject in the Constitution, which means both the centre and states get to formulate policies. As a result, rules and regulations can differ widely from one state to the next, making it tougher for large companies like Uber to adapt.

For instance, ride-hailing companies need a licence to operate, but in the case of bike taxis, state governments such as Maharashtra are yet to finalize policies, so no such licences are being issued. So, while the central government wants to encourage bike taxis, they cannot ply legally in Maharashtra. Meanwhile, Delhi and Karnataka insist that two-wheeler taxis need to be electric vehicles, but there are not enough of these available for companies to do business.

Companies need licences for cabs, as well, and this can be a very cumbersome process. The licences need to be procured in each state and the validity varies from a month to five years. In some states, they are issued by the transport commissioner’s office; in others, including Maharashtra, they are issued by RTOs.

Meanwhile, surge pricing, where Uber hikes fares when there is a demand-supply mismatch, is an issue that raises hackles across states. Just like the Karnataka government earlier this month, this is a perennial problem that many state governments are trying to address—some have introduced caps on how much Uber can charge over and above the base price.

Uber’s 2022 annual report acknowledged the heartburn its surge pricing tactics have caused. “Our pricing models, including dynamic pricing, have been, and will likely continue to be, challenged, banned, limited in emergencies, and capped in certain jurisdictions. For example, we have agreed to not calculate consumer fares in excess of the maximum government-mandated fares in all major Indian cities where legal proceedings have limited the use of surge pricing,” it said.

Any major regulation on surge pricing (or driver commissions) will have a bearing on the profitability of Uber. If not reversed, this could be a killer blow, affecting the company’s ability to profit from demand-supply mismatches at various times, which enhance driver earnings and lift its own bottom line.

“Banning surge pricing is regressive because it is ultimately a factor of demand and supply,” says Pavan Guntupalli, cofounder of ride-hailing platform Rapido. “But that is one side of it. Companies also use it to bolster their bottomline, so if regulations disallow it, then profits get squeezed.”

Industry observers feel a middle ground will eventually have to be found. “Like in all industries, especially relatively new ones, regulation takes time to catch up with reality. Surge pricing is a factor of market dynamics, so an attempt to completely ban it may need some reconsideration,” said Varun Boppana, managing director and partner, BCG India, a consulting firm. “Working through the time it will take for regulation to settle is the cost of doing business, which is high but unavoidable.”

Sometimes, regulatory pressure stems from the need for politicians to appease unions. Globally, the cab aggregation business has always faced resistance from the traditional local taxi lobby.

In India, some of the unions have considerable clout with politicians. Innovations such as motorbike-taxis have only aggravated matters. Under pressure from local auto rickshaw unions, for instance, Karnataka and Maharashtra have moved to curb this segment. The shifting goalposts are a major concern for all the players.

“It is important for regulatory predictability for companies like us to make forward looking investments. We do seek that,” Prabhjit Singh, president, Uber India and South Asia, told Mint during a meeting last October. “There are times when certain states may have different views on certain topics and we engage very deeply both at the state level and the central level to advocate the benefits of ride-hailing for consumers and drivers.”

Driver commissions

Before the pandemic, customers were spoilt by low fares as Uber and other players looking for a foothold burnt through cash to subsidize fares and retain drivers with higher incentives. That phase of high growth and cash burn ended when the pandemic set in. The industry claims driver commissions today do not exceed 15-20% in general, but drivers claim otherwise.

Not surprisingly perhaps, these commissions are another area that the government is actively trying to regulate. With driver earnings falling and discontent growing, in November 2020, the ministry of road transport and highways issued guidelines stating that platforms like Uber should not charge more than 20% commission from drivers.

Uber knows it needs to keep drivers happy. In its 2022 annual report, the company noted, “Continued Driver dissatisfaction may also result in a decline in our number of platform users, which would reduce our network liquidity, and which in turn may cause a further decline in platform usage. Any decline in the number of drivers, consumers…using our platform would reduce the value of our network and would harm our future operating results.”

Drivers claim the situation has changed in the last six years, especially after the pandemic. Lured by the high incentive-based structure of 2014-15, a number of them bought cabs and got into the business. But they got stuck as Uber reined in the incentives to have a more sustainable business model. As Uber’s commissions went up, drivers’ earnings came down, but their costs kept rising due to high fuel prices.

Banning surge pricing is regressive because it is ultimately a factor of demand and supply.
— Pavan Guntupalli, Rapido

“Earnings have more than halved from 2017. If I had known it would get this bad, I would have never started driving cabs,” said Satya Narayan, who has been driving since 2016. “I bought a Maruti Dzire on finance, and lost all my savings paying for the EMI (equated monthly installment) during the pandemic, when there was no business at all. I did not get any support from the companies at that time.”

Commenting on drivers and customers ditching apps to make deals between themselves, and how this affects the ride-hailing companies, an industry analyst said: “In a price-sensitive market like India, it is a constant challenge and companies like Uber are not prepared for it. Riders and customers will cut corners everywhere to save a rupee and it is particularly true for two- and three-wheelers. Good luck to them if they are banking on this for growth.”

Rising competition

Rising competition is another headache for Uber. The industry that went into the pandemic isn’t the same as the one that came out of it. In 2019, four-wheeled cabs accounted for 65% of the rides, while auto rickshaws and two wheelers accounted for 23% and 12%, respectively. In 2022, the share of cabs had shrunk to just 38%, followed closely by auto rickshaws at 36%, and motorbikes at 25%.

Rapido has a headstart in the auto rickshaw and motorcycle segments. This has helped it increase its share in the overall industry from 10% in the first quarter of 2021 to 19% at the end of 2022. Uber was the largest player overall, but its share went down from 48% to 44% during the same period.

The Bengaluru-headquartered Rapido is taking the battle to Uber. Its entry into the four-wheeler cab segment in December is being closely watched by analysts. BluSmart is another contender. While Rapido has a zero commission model for drivers, BluSmart has made a ‘no surge pricing’ promise to lure customers.

Like Uber and Ola, Rapido does not own any of the vehicles on its platform but unlike them, it wants drivers to pay an upfront monthly subscription charge and no commission otherwise. Knowing that in most cases it is the same driver who works for all the platforms, the lure of higher direct earning is the carrot Rapido is dangling for the driver to choose its customer over Uber or Ola.

New players will come in and try different business models. But there is no guarantee of success.
—Varun Boppana, BCG

“We know the same driver is on different platforms. We can’t stop that but the zero commission model means he gets to make more money through Rapido,” says its chief, Guntupalli. “We will instead charge the driver a daily subscription fee (between ₹5-29 for auto rickshaw drivers and ₹500 per month for cab drivers with monthly earnings over ₹10,000) and make money through volumes.”

“The cab segment is ripe for disruption. There are 22 lakh cabs in the country but only five lakh are online. The rest are not coming on board because the industry is plagued by high commissions,” says Guntupalli. “Before we entered this segment, we realized there was a mismatch—fares have gone up 40% yet driver earnings have come down by 30%. Margins of companies have increased like crazy but their overhead costs are high, so it doesn’t reflect on their balance sheets yet. We will keep it in check and play the volume game.”

Time will tell if these strategies pay off for Uber’s competition. “New players will come in and try different business models, be it through the promise of zero surge pricing or commissions, but there is no guarantee of success,” says BCG’s Bopanna. “There is no place for complacency though. The incumbents need to be watchful.”

Uber is certainly aware of the need for innovation. The company’s prime focus now is to scale up its auto rickshaw and motorcycle taxi businesses while retaining its leadership in the cab segment. Singh claimed that more rides happen on Uber on three and two wheelers than on cabs. Indeed, during an earnings call last year, Khosrowshahi said the auto rickshaw segment accounted for 40% of all trips in Q3 of 2023.

Tax woes

While Uber has had multiple run-ins with governments across the country over its day-to-day operations, it is also embroiled in litigation with the taxman. One case relates to an investigation by the Director General of Goods and Services Tax Intelligence (DGGI) over a goods and services tax (GST) liability of ₹800 crore for driver incentives.

In another case, there is an outstanding demand of ₹114 crore from the income tax department. There is also a notice by the Central Consumer Protection Authority from 2022 blaming Uber for violating consumer rights. All the cases remain pending in courts.

“We are a public company scrutinized by regulators across the world and have some of the highest standards of governance compliance across the board. So we are pretty confident about all the fronts which may be open. None of them make me worry in any material sense,” Uber’s Singh told Mint last October.

With the company facing challenges on multiple fronts, and still looking for a winning template, Khosrowshahi has some tough calls to make on his visit to India, a country he has repeatedly said is critical to Uber’s global growth aspirations.