How Tesla Could Disrupt Ridesharing

Since bursting onto the scene early last decade, Uber and Lyft have transformed ridesharing and urban mobility in general, decimating the taxi market. Uber boasted 93 million users and $26.6 billion in revenue in 2020. The problem is that these Transportation Network Companies (TNCs) have failed to turn a profit. But some market analysts believe TNC profitability is attainable if a more advanced competitor enters the scene: Tesla.

An important opening question is: why haven’t Uber and Lyft been profitable? Both companies have relied on venture capital and IPO filings to subsidize operations that have consistently lost large annual sums—including $1 billion for Uber in 2019. Skeptics have argued that between labor costs, car depreciation, and scalability issues due to America’s dispersed development pattern, unprofitability is innate to the industry. TNC bulls, on the other hand, see a promising industry that could reduce the need for car ownership and bolster urban transport networks, and that just needs improvement, namely the switch to autonomous vehicles (AV).

Enter Tesla. The electric vehicle (EV) maker has expressed a desire to compete with these TNCs by launching a “Tesla Network” ridesharing service. CEO Elon Musk wants to pilot a conventional competitor, using human drivers, with the ultimate goal of introducing an autonomous fleet. Tesla had previously targeted 2020 as the launch date, but there is no indication that it has begun.

Cathie Wood, technology investor and CEO of ARK Invest, believes Tesla will be a formidable competitor. A series of ARK blog articles (here and here) suggest that the company has a comparative advantage even pre-automation, including:

• Lower operating expenses: a Tesla Model 3 is 30% cheaper to drive than a Toyota Camry ($0.26 vs $0.38 per mile), thanks to drastically cheaper fuel and maintenance costs. Once Tesla automates its fleet, it claims it will deliver even lower operating costs (Musk once boasted eventual per-mile costs of $0.18 vs. Uber and Lyft’s $2-3).
• Lower insurance costs: as Tesla provides this in-house.
• Less depreciation: Teslas maintain 94.5% of their value after 1 year because of remote software updates that improve vehicles with time.
• Higher premiums for service: because Teslas are still viewed as luxury novelties. 

Moreover, once vehicles are updated to become autonomous, the owners can deploy them out as robotaxis, earning passive income. As Wood explained to Barron’s: 

“Drivers can pay $5,000 down and work the rest of the car off by driving it, while Tesla gets the data that the driver delivers every day for its artificial intelligence engine. When the world goes autonomous—unlike drivers working for Uber and Lyft who will be left out of the party—Tesla’s ride-hailing network of drivers will own an autonomous car that will work for them. They will be entrepreneurs.”

Just how close Tesla is to that point is unclear. Tesla’s AV technology is capable of “autopilot” in many contexts. But a recent collision in Arizona garnered the attention of AV skeptics, who assert that the technology is not yet safe. For his part, Musk disputes this, stating that the vehicle did not have the maximum self-driving capability available.

In the near-term, the bigger issue may be getting Teslas to drivers. The Model 3, the cheapest version, is now priced at just under $38,000 (a 2021 Camry, using ARK’s point of comparison, costs anywhere from $2,000 to $13,000 less). This is a burden for drivers, particularly lower-income ones who are more likely to rely on ridesharing as their primary income, as opposed to more casual participants. 

An additional barrier is regulatory: Tesla, unlike most manufacturers, prefers to sell cars directly to consumers, rather than through intermediary dealerships. This practice is restricted or outright banned in several states. The company has addressed this problem by opening its own “Tesla Centers” to mediate sales.

Tesla’s entry into the TNC market could prove a game changer for the industry. If ARK is correct, the company may be able to scale where Uber and Lyft have not. But a lot still needs to happen regarding the company’s growth and the fine-tuning of AV technology.

This article featured additional reporting from Market Urbanism Report content staffer Ethan Finlan.