Autonomous cars and ride-hailing. These two mega-trends are on a collision course and it has the rental-car industry shaking in its boots.
Rightfully so. The entire car rental industry could soon be upended as autonomous vehicles change the entire calculus of car ownership over the next ten years. Why would a consumer rent a car if the cost of ordering a self-driving car via Uber is 1/10 of today's price?
The straight answer: they won't.
Which means the rental-car industry's $75 billion B2C and B2B businesses are about to take a serious hit. However, that doesn't mean every company in the rental-car industry is doomed. While many will likely go out of business over the next decade, there's still time for a few innovators to take a risk and go on the offensive.
The Future of Car Ownership
Uber is at the forefront of self-driving cars, as we've seen with the speedy launch of its autonomous vehicle experiment in the last month in Pittsburgh in partnership with Volvo. However, Uber is a technology company, not a car-fleet management company.
While Uber will likely build and own a core fleet of autonomous vehicles as way to push forward acceptance of autonomous cars, both by regulators and the general public, it's not likely to want to own a massive fleet of autonomous cars in perpetuity.
Uber wants to go public touting network effects and all the benefits that come from a platform business model. The moment Uber buys its own fleet of cars, it loses the scale advantages that come from its network and low-marginal-cost business model. Not to mention the significant capital outlay required to buy and maintain a large fleet of depreciating assets that will lose a huge portion of their value the moment they're driven off the factory lot.
Hit 'Em Where It Hertz
So, while Uber is creating a small fleet of autonomous vehicles as part of its pilot program, its future doesn't likely include owning a huge fleet of vehicles.
Rather, it would make much more sense for Uber to continue operating in a way similar to what it does now: with individual drivers (or businesses, but we'll get to that in a moment) owning and maintaining their own cars.
However, with the advent of autonomous vehicles, the relative cost of owning a car should decrease drastically, since vehicle owners will be able to let their cars pick up passengers on Uber while they're not using the car, when they're at work or in bed.
Still, Travis wants the future of autonomous cars to get here faster. The question is, should Uber spend a couple billion dollars on its own autonomous car fleet? After all its fundraising, the company has a large war chest to spend. But with new competitors constantly cropping up in new markets like India and at home in the U.S., Uber would be wise to conserve its $15 billion hoard of cash as a way to ward off further investment in its competitors.
So, why not make a deal?
Rental car companies are experts at managing and maintain large fleets of cars spread out across a variety of geographies. They have a model for buying cars en masse, monetizing them, and then exiting them from their fleets. They also have the ability to service and maintain their fleets, which includes a large physical footprint of retail stores and repair locations - something Uber lacks entirely.
We've written elsewhere that the development platform for autonomous cars will be the sea change that reshapes the automotive industry for the next fifty years, on a similar scale to what app stores have done for smartphones over the last ten. I suspect, though, that rental-car companies don't have the technical chops necessary to compete in this fight. The best they can hope for is to hook their existing business model to the autonomous car juggernaut that's fast approaching in the rearview.
A large company like Hertz integrating with Uber as an autonomous vehicle partner makes a lot of sense.
GM has already made a $500 million investment in Lyft as a hedge against the future of autonomous vehicles and the changing nature of car ownership. Let's also not forget their billion dollar acquisition of Cruise. But GM, too, is unequipped to manage and maintain a large fleet of vehicles.
While rental car companies are in serious danger, there is a big opportunity for a few of these businesses to move up the value chain in the automobile industry.
While hardware manufacturers are in danger of becoming commoditized as software companies like Uber, Apple and Google move into the industry, fleet management will likely be a core skill over the next decade as the nature of car ownership changes and autonomous vehicles start to hit the road.
Hertz has already struck a small-scale deal with Uber and Lyft to rent traditional vehicles to ride-share drivers. But this partnership is clearly too little too late. If car rental companies want to survive over the next decade, they need to think much bigger. Otherwise, they're in for a world of hurt.