Uber is not killing car ownership (yet)

Katherine Davidson, Portfolio Manager, Global & International Equities at Schroders.

In five years, Uber has grown from techie trouble-maker to a global ride hailing giant. But our obsession with owning cars remains as strong as ever.

For millennials living in major cities, Uber is a day-to-day feature. As such, there is a tendency to extrapolate that experience to other demographics and markets. This is according to Katherine Davidson, Portfolio Manager, Global & International Equities at Schroders who, as a millennial herself, says she often overestimates the pace and scale of disruption being wrought by Uber and other car-sharing/ride-hailing platforms.

“This may explain why, wearing my ‘professional hat’ as an investor, I have been consistently surprised by the strength of developed world auto sales and the seeming lack of impact of new mobility models. So how big a threat are these services to car ownership?”

The journey so far

Since 2013, Uber and Lyft combined have grown revenues almost 80x. Uber is now present in over 600 cities, has 75 million passengers, and completed over 4 billion trips in 2017. For Lyft the figures are 65 cities, 23 million riders and 375 million trips1. Various surveys have found that around one-fifth of US consumers used ride-hailing services in 2016, and Davidson says that this figure has only risen since.

Source: Various sources, Evercore ISI Research

Unsurprisingly, Davidson says that usage is relatively concentrated in urban areas. “New York City and San Francisco alone account for 15% of Uber’s drivers in the US, while these cities represent less than 3% of the US population. Survey data shows that ride-hailing usage, even within urban areas, skews heavily towards younger, more educated and affluent consumers”.

Source: Pew Research Centre - "Shared, Collaborative and On Demand: The New Digital Economy

The impact on car ownership

Even with these caveats, Davidson says that it may be surprising to learn that ride-sharing, in total, still accounts for less than 1% of miles travelled in the US. “And, so far, it appears to have had a negligible impact on car ownership or purchases – contrary to what one would expect to see based on the massive derating of auto stocks”.

Davidson says that consumers have not stopped buying cars. “US car sales have been stagnant for the last couple of years, but remain at a very high level of over 17 million per year; at or above pre-crisis highs. After peaking in 2011-12 – around the time that ride-hailing services really took off – the number of households with no car or only one car per family has declined, while the numbers of households with two or more cars has accelerated”.

The only household type more likely to be car-free is “over 65s non-homeowners” who Davidson says are very unlikely to be users of ride-hailing. Among ride-hailing’s core user base (age 15-34), the number of car-free households fell in 2016. Contrary to concerns that Millennials had rejected car ownership, this would suggest they were just ‘late starters’, plausibly due to their economic condition”.

Who is feeling the pain?

“The evidence so far suggests that ride-sharing has mostly substituted for regular taxis, rental cars, public transport and walking, rather than private vehicle use” says Davidson.

Davidson explains that in New York, taxi rides have fallen 30% in the last 3 years and the price of prized yellow taxi medallions has plummeted from a peak of $1 million in 2013 to less than $200,000 in recent auctions. “In fact, the tightness of the licensed taxi market is a key reason for Uber’s success in cities such as New York, San Francisco and London. It is no surprise that taxi drivers in these markets have lobbied aggressively against ride-hailing operators”.

Source: Toddwschneider.com

Davidson says that the impact on public transport usage and walking is less visible. “The UC Davis survey found that around 40% of the journeys made by ride-hailing services would have otherwise been made by foot, bike, or public transport, with only 20% substituting for private car use”. She says that the economics of ride-hailing often work out better than public transport if there are several people sharing (either as friends or via UberPool), “and access to cheap and easy ride-hailing services makes people lazy!”

Davidson makes reference to subway ridership in New York, which fell (modestly) in 2016 and 2017 after strong growth since 2009, and bus ridership which has been falling since 2013. Similarly, Davidson says that journeys on London buses have been falling since 2014 despite robust growth in the city’s population and expansion of the bus network.

Miles travelled

Interestingly, Davidson notes that respondents reported that over 20% of the journeys made using Uber or Lyft would otherwise not have been made at all. According to Davidson, this has interesting implications for total vehicle miles travelled (VMT) as ride-hailing usage increases. “If users take extra journeys and shift their existing travel away from public transport, bike or foot towards private or at best pooled vehicles, overall vehicle miles should rise.

“Adding in ‘deadheading’ miles (miles without a passenger), and the increase could be significant. Indeed, we have seen VMT continue to grow strongly, outpacing growth in the number of vehicles on the road”.

Davidson says that this has mixed implications for auto companies and suppliers. “Even if private car ownership were to ultimately fall as ride-hailing expands, higher utilisation and faster replacement cycles could result in a much smaller hit to annual auto sales”. On the other hand, Davidson says that if a significant proportion of those sales were essentially to ‘fleet’ buyers, these could be lower-value sales due to lower uptake of expensive options, potential bulk discounts etc. “Similarly rising vehicle miles travelled results in more frequent replacement of tyres, though again this could somewhat pressure mix as Uber drivers will be more regular and more informed buyers of tyres and may not be as inclined to upgrade to premium tyres as private car owners”.