Tuesday 17th September 2019

Will Uber’s IPO show just throwing money won’t solve automated cars’ problems?

Published on April 23rd, 2019

Uber isn’t lacking in ambition or investment, but it’s lacking profits and progress in key areas, Annie Turner writes. Some big financial casualties on the road to commercialising automated vehicles and services look inevitable, but ultimately we need them to succeed.

On 11 April, Uber filed for its initial public offering (IPO) with the aim of raising $10 billion (€8.8 billion), which would value the company at $100 billion (€88.9 billion) – nine times its annual revenue. Some market predictions had set the value as high as $120 billion (€106 billion). Flotation on the US stock market is expected in early May.

When it published its prospectus, Uber had raised nearly $20 billion (€17.7 billion) privately to fund progress, but has lost money every year since its inception a decade ago, including $6.8 billion (€6 billion) between 2014 and 2018. The biggest part of the business is where it originated, in ride-hailing, but growth here is slowing: as the Financial Times’ Lex column [subscription needed] pointed out, “Uber is huge: gross bookings were almost $50 [billion] (€44.4 billion) last year – up 45%. The catch is that the group cannot afford to operate on the money it generates.”

The prospectus warned investors that Uber will have to invest more heavily to stay in the increasingly competitive sectors it plays in. Fighting off stiff competition in food deliveries and ride hailing is an expensive business and bizarrely, there seems to be no shortage of investors happy to watch their cash burn, and rapidly. Until both sectors are subject to consolidation and viable business models are established, that looks set to continue.

Burning cash is catching

Annie Turner

The Advanced Technologies Group (ATG ­– Uber’s tech unit for self-driving cars) accounts for the largest slice ($1.1 billion (€0.98 billion) over the last three years) of the company’s overall R&D budget. This is not surprising, given that driverless vehicles are core to Uber’s long-term ambitions – most obviously, getting rid of drivers who are expensive and, well, human and therefore error-prone.

Happily for Uber, there seems to be no shortage of investors willing to pump cash into its self-driving car tech. Days after the company filed for its IPO, ATG was valued at $7.3 billion (€6.4 billion) when a consortium of investors jointly invested $1 billion (0.89 billion) in it.

This is a serious fillip to Uber’s self-driving ambitions, as it had fallen behind competitors like Alphabet’s Waymo after an Uber car in self-drive mode killed a pedestrian in Arizona in March 2018. This led the company to shut down its trials in Arizona, which were its largest scale ones, and in other states too.

Indeed, in its IPO filing Uber acknowledged, “We expect certain competitors to commercialise autonomous vehicle technologies before we do”.

Being first isn’t everything

Clearly being first isn’t the major preoccupation with investors: Japan’s Toyota and Denso, which supplies car components, are jointly to stump up $667 million (€593 million) of the newly announced investment. The rest will come from Japanese conglomerate SoftBank’s $100bn (€88.9 billion)Vision Fund, in which Saudi Arabia is the biggest investor.

Toyota and SoftBank already hold stakes in Uber; SoftBank already has 16% and Toyota said will provide an extra $300 million (€266 million) over three years to develop commercial self-driving vehicles.

In return, ATG will have a new board, formed with six directors from Uber, plus one from SoftBank and another from Toyota. Eric Meyhofer, who is head of ATG now, will become CEO.

Good money after bad or a long play?

It’s interesting that this new round of investment is fuelled by Japanese organisations, as the Japanese are famed for their preparedness to invest for the long term, ignoring the tyranny of quarterly results which bedevils so many western enterprises.

Perhaps we ought to be considering the fact that while companies used to debut on stock markets to fund their growth, now it is common to keep them private for longer and take them public to turn their founders, top management and investors into stupendously rich people. Let’s not forget that Travis Kalanick, co-founder and former CEO, who was forced out of office for a whole string of reasons, is still an Uber board member and owns an 8.6% stake in the company.

Nevertheless, how, never mind when, Uber et al will transform their self-driving tech into commercial vehicles and services remains to be seen and some big financial casualties look inevitable.

Poignant comparisons have been drawn between the victim of the Uber crash in Arizona, Elaine Herzberg who was the first pedestrian to be killed by a driverless vehicle, and Bridget Driscoll, who was the first person ever to be killed by a car in 1896, in south London.

At the inquest into Driscoll’s demise, which was judged to be an “accidental death”, the coroner expressed the hope that “such a thing would never happen again”. Some 1.25 million people die every year in fatal road accidents around the world, with the overwhelming majority caused by drivers’ mistakes.

It might not be Uber that succeeds – not least because of the scary number of “inquiries, investigations and requests for information” into some dodgy behaviour at home and abroad – or indeed any of today’s well-known automated car companies, but ultimately, we really, really need this to work.

The author of this blog is Annie Turner, editor of IoT Transport

Comment on this article below or via Twitter: @IoTNow_OR @jcIoTnow