The Uber bond- The finances of future transportation

Uber’s self driving efforts

Almost everyone in the technology space is expecting self-driving cars to be future of personal transport. The day is not far when you would get up in the morning, get ready for work, and as you open your front door, a car rolls right in front of you. You get in the car, start reading newspaper and before you know it, you have reached your office.

Ride-sharing companies like Uber are more excited about this development than auto manufactures because although in a “self-driving, car sharing” economy, the car ownership may go down, but the number of hours that a car spends on the road will increase dramatically. Many people will abandon car ownership in favor of calling an Uber whenever needed. Some of the problems that replacing car ownership with Uber that we have now like availability at night and overall cost of travel will disappear with self-driving cars. As there is no driver to be paid, the cost of the ride is reduced, and there can be as many cars available at night as there are in the day time.

But what is the implication of self-driven cars for Uber, or any ridesharing Company for that matter? Uber at its heart is a network aggregator. Uber connects cab drivers to their customers and takes small fees in exchange for providing the connection. Uber doesn’t own the cabs, nor do they employ the driver. The cab drivers buy their own cars and pay for the maintenance from their pocket. This asset lite model is what has enabled Uber to expand so rapidly.

But what happens when there are no cab drivers? Who will buy the cars that Uber plans to operate? The Simplest solution can be that people buy the cars and hook them to the uber network to earn money from uber. This can very well work, but there is a better option for Uber. A way to have total control over the cars while still being as asset lite as possible.

Introducing The UBER Bond- A aaa rated Coupon Bond with discounted principal repayment at maturity.

Let’s say an average self-driving car hooked to Uber network is worth 40,000 USD. Calculating the earnings per car in a self-driving world is very difficult with the limited knowledge that I have, so let’s assume that the earnings per car per day factoring in the cost of fuel and charges of uber is 50 $ (less than half of what uber drivers make today). That’s 1500$ per month and 18,000$ per year. Let’s assume annual maintenance and insurance costs 10,000$ per year. The high maintenance is because some regular cleaning of interior and exterior will also have to be taken care by Uber.

That gives us 8,000$ in net profit per car per year. That’s an astounding figure. yearly return of 8,000$ for a 40,000$ investment gives 20% rate of return. Of course, you have to consider the diminishing value of the asset as well, but even in that case, this is crazy return on investment. 
So, here is how the Uber bond will work:

One bond representing one car will give a coupon of 10,000$ per year per bond for say 8 years. This 8 year is just average life of the car in Uber network. The maturity amount of the bond will be around 4,000$. The maturity amount is the scrap value of the car when it is discarded from uber network.

Assuming 10% interest rate for the uber bond, the value of the bond at issue can be calculated to be 55,000$ using standard valuation method of future cash flow. Uber can buy a car for 40,000$, add it to its network and sell a bond worth 55,000$ backed by that car, instantly making 15,000$ in the process. Uber will not remain just a transportation company, it will become a financial institution.

Of course, the calculations made here are too idealistic, market forces will shrink the margins for Uber a lot, but the model would still remain same. And Uber and other ride-hailing services are certainly interested in financial products. Uber just launched it’s own credit card. Ola and Grab are also investing heavily in their payment systems. This shows that these so called “Tech” companies are serious about expanding their horizon to financial products to fuel further growth.

So, what do you think will be the financial implication of self-driving cars and other automation technologies? Leave a response below.

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