Uber Autonomous Vehicle Strategy
How Uber uses a hybrid network to solve robotaxi unit economics and scale AI mobility
Before reading about Uber, you can read the following articles on Technomanagers
Many people think Uber is competing with Waymo and Tesla to build the best self-driving car.
This is a flawed way to look at the business.
Uber is not building a car company.
Uber is building the software layer for physical mobility.
Let us break down the Uber autonomous vehicle strategy using first principles.
The Utilisation Problem
Why does Uber not just buy a massive fleet of self-driving cars and keep all the profit?
We need to look at the fundamental unit economics of a transportation marketplace.
Ride hailing demand fluctuates drastically. A Saturday night has massive demand, while a Tuesday morning has very low demand.
If a standalone robotaxi company builds enough cars to serve the Saturday night peak, then most of their expensive cars will sit idle on Tuesday morning.
Idle hardware destroys profitability because you still pay for depreciation and maintenance.
If they only build enough cars for Tuesday morning, then wait times on Saturday night will be too long, and users will leave the platform.
Uber solves this problem through a hybrid network.
They use self-driving cars to serve the base load.
The base load is the predictable, continuous demand that happens every hour of the day. Uber then uses human drivers to handle the burst capacity.
Burst capacity is the sudden spike in demand during bad weather or weekends. By pushing the volatile demand to human drivers, Uber ensures that its partner autonomous vehicles stay constantly utilised.
High utilisation directly leads to profitability.
The Big City Myth
Will autonomous vehicles just take over the major cities?
Software scales instantly, but physical infrastructure scales very slowly.
People assume that cities like San Francisco and Los Angeles generate all the rideshare money.
The latest Uber financial data shows something completely different. Trips in the top twenty US cities represent only twenty five percent of their overall profits.
The vast majority of Uber profits come from smaller cities and suburbs. It will take a very long time for autonomous vehicle companies to map every rural road and complex suburban driveway.
Uber already has human drivers covering these areas. Uber owns the demand in these highly profitable long tail markets while the hardware companies take on the massive capital expense of mapping physical geography.
The Aggregator Advantage
If cars can drive themselves, why do hardware companies need the Uber platform at all?
When a technology becomes a commodity, the company that aggregates customer demand captures the most value.
If Waymo dominates one city and another startup dominates a different city, the end consumer will have a terrible experience.
Users do not want to download five different apps and compare wait times.
Uber is positioning itself as the universal marketplace for mobility.
It does not matter if the vehicle has a Google brain or a Tesla brain. The expensive robotaxi needs a rider to generate revenue. Uber has hundreds of millions of active users. By acting as the aggregator, Uber forces hardware companies to plug into its routing algorithm.
Uber does not need to win the artificial intelligence race. Uber just needs to be the default platform where all the artificial intelligence models come to find their customers.
Commanding The Pricing Power
Whoever controls the user interface controls the pricing power.
If a customer opens the Uber app, they do not care who manufactured the car. They just want the cheapest and fastest ride possible.
This consumer behaviour gives Uber total negotiating control over the hardware companies. Uber can force the different self-driving companies to compete directly against each other on the same screen.
If one hardware company wants a higher cut of the fare, Uber will simply send the customer a cheaper vehicle from a different hardware maker. This dynamic will force the hardware companies to lower their prices to win the ride, while Uber maintains its high profit margins on every single transaction.
What do you think, what’s the future of mobility?
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About Author
Shailesh Sharma! I help PMs and business leaders excel in Product, Strategy, and AI using First Principles Thinking. For more, check out my AI Product Management Course, PM Interview Mastery Course, Cracking Strategy, and other Resources
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