Earlier this week, Tesla, Hertz, and Uber announced a sequence of deals that have the potential to rattle the gig-fueled mobility market.
First, Hertz agreed to buy 100,000 Model 3 Tesla cars for the full price of $43,000 (a deal worth $4.2B). The following day, it was announced that half of these cars would be made available to Uber drivers for the price of $334 per week (with the promise to lower it to $299 over time).
The key question is: What does each side stand to gain? Let’s take a look at each decision-maker in this value chain: Tesla, Hertz, Uber, the gig driver, and the customer.
Tesla: The Obvious Winner
Let’s start with the obvious: Tesla is the big winner and has the most to gain from this deal, in the future. I see absolutely no downside. Tesla sells 100,00 cars at full price (not even at a slight discount, which one would expect given the size of the deal). Tesla, a firm that usually doesn’t spend a single dollar on advertising, achieves the best possible marketing deal through Hertz advertising the deal and with it, the car. This can have a considerable impact (of course, one has to consider that associating Tom Brady with the car may deter some people from buying it, and I don’t blame these people).
Like most firms, Tesla has been plagued by production delays, but in general, has enjoyed significant economies of scale on two important fronts. The first, and more obvious one, is production. Given the massive investment needed in manufacturing (both cars and batteries), the more units produced, the less their production cost becomes.
The second front has to do with the necessary charging stations, and more specifically with their installation. As the number of cars on the road increases, the number of charging stations needed to accommodate the same geographical area will start to slow down.
Tesla has sold 473,136 electric cars in the first 8 months of 2021, so the 100,000 cars sold in this deal will amount to 15% (at most) of their 2022 production volume. Thus, I expect the impact to be noticeable, but not game-changing.
But Tesla is not only an electric car. Tesla is on track to be the first self-driving car. And while it’s not even close to being a fully self-driving car (what some people refer to as Level 5 or even 4), its ability to take (simple) highway interchanges, change lanes, and drive on two-lane roads, is far better than any existing at-scale system. Self-driving technology uses machine learning systems that need to be trained. The best way to train them is to drive as many hours as possible, in as many challenging situations as possible. Every time a driver retakes control, one more data point is added to the training set of the machine-learning algorithms.
While an average American drives approximately an hour per day (something along the lines of 5 hours per week), the “core Uber Driver” drives more than 35 hours. Based on the Tesla sales I mentioned above, and some rough calculations that I will not bore you with, we can assume that there are approximately 700K Tesla owners who are not Uber drivers. So, 50K drivers driving 35 hrs/week would amount to the same driving time of half of all other Tesla owners that week. Suppose also that, unlike most Uber drivers, most people take the same route again and again. In this case, it is easy to understand the immense implications and how much this will help the Tesla car move toward achieving true self-driving capabilities.
Hertz: The Desperate Player
What does Hertz gain from this deal? I am not sure. Maybe publicity. Maybe relevance. The firm just escaped bankruptcy, so they are not in good financial shape. Hertz is paying Tesla full price for the cars, and also agrees to cover the advertising costs to the benefit of both Tesla and Uber. Clearly, it doesn’t have much bargaining power. .
Part of the bet here is that consumers will be willing to pay more for a Tesla; either because it’s a status symbol for some, or because it is cheaper (if gas prices start to rise) and people are also becoming environmentally conscious.
During 2020, the electric vehicle market in the United States remained flat. The stagnation comes after record sales in 2018 and stands at around 1.9% of all cars in the US. I would expect the car rental market to be less conscious about the environment than the average consumer, and more aware of convenience and flexibility: neither are the hallmarks of cars that still have a limited number of charging stations (compared to gas stations).
Given all of this, I do not see a significant increase in demand for Hertz cars, but I can see how some drivers may want to try them and will opt for the more limited use of a rental as a way of doing so.
To summarize, Hertz is placing a big bet, which allows the firm to become relevant again, but with quite a significant risk.
Uber: Admission of Failure
Uber is partnering with Hertz to offer 50,000 Tesla cars as a rental option for its ride-hail drivers, by 2023. Starting today, Uber drivers can rent a Tesla through Hertz in Los Angeles, San Francisco, San Diego, and Washington DC, with the program later this year expanding to cities nationwide.
What does Uber gain?
First, Uber vowed to be a more environmentally friendly firm. At this point, only 0.15% of its cars are electric. Since Uber has 750K drivers in the US, if all 50K cars are rented, 6% of all cars will be electric; well above the share of electric cars in the US.
Uber has been trying to offer rental and leasing options to its drivers for quite some time. Initially through its own car leasing business, which shut down given its losses, and then through its agreement with Hertz, which preceded this one. Currently, less than 10% of Uber drivers rent their cars. The benefits are evident; more drivers can join the market when needed, since you need to have a car to be an Uber driver. The second potential benefit is that since the rental fee is paid directly from the firm (and I assume that this is the case), the driver is more financially tied to Uber and less likely to multi-home to other firms. My research doesn’t seem to indicate the existence of the second benefit. Drivers that have been leasing their cars through a firm do not seem to be more committed to said firm.
As I mentioned above, Tesla is not only an electric car; it’s also a self-driving car. One of the key questions about Uber is the future of the platform in the self-driving world. In the past, Uber tried to develop its own self-driving capabilities but gave up. Given how crucial the gig-working model is to Uber and how sensitive it is to regulation, the fact that the firm wants to have a front seat in the self-driving model is not a surprise.
After Tesla, Uber is the first that has the most to gain from this deal.
The Drivers: The Short End of the Stick?
Drivers are offered an interesting deal: they rent a more expensive car for $330 per week (compared to $199), but can get up to $4,000 of credits for driving a more environmentally friendly car. The credits are calculated per trip, and to reach the $4,000, a driver has to make approximately 16 trips per workday, per week (well above the average of 7.5 drives per week).
So, unless the drivers see much bigger benefits, this does not seem like a good financial deal, compared to more economical hybrid cars. In the short term, and assuming that consumer demand will remain unchanged, the drivers are the ones that seem to be paying the price for this deal.
Another aspect that may seem small here, but is essential, is Tesla’s goal toward the self-driving car. Since it’s very clear that, ultimately, Uber’s model does not rely on drivers, I do think there is an ethical angle in employing people to train an algorithm, which will ultimately replace them. I know this is very common in many places, and I know this may seem like a very distant future, but I don’t think it is something we should dismiss.
The Consumer: The Indifferent Side
Finally, is the average consumer better off?
I think so...
As electric vehicles and self-driving cars are the future of mobility, I think this is accelerating their adoption. Prices are going to decrease further. Self-driving cars are going to become safer, faster.
But there is a caveat. These are three competing firms that are now beginning to collaborate. Uber was a threat to Tesla on the self-driving front. It was also a threat (and continues to be one) for Hertz in the mobility market, for those who do not own a car (or need transportation for short business trips). Any time competitors begin to collaborate, it means less pressure to offer better service and lower prices, so consumers may lose out on that. However, none of these firms is a monopoly, so I don’t view this as a significant factor.
In fact, there is one important benefit. If you are a consumer thinking about getting a Tesla, this will probably be an easy way to test the product without committing to it long-term.
Overall, I think it is a positive development, but clearly not for all stakeholders. During the week in which Facebook announces its investment in the Metaverse, moving us further to the world of bits and bytes, this deal seems like it brings some sense of normalcy from the world of atoms.
Great point about how Tesla's self-driving data collection benefits from the higher volume and variety of driving that Uber drivers do each week! Tesla would also learn about the most popular routes and route attributes so if they introduced an Uber competitor, they would already have data on millions of Uber trips on which to plan their approach (which cities and routes to target first, # of rides/cars, waiting expectations, etc)
Great article! Definitely agree with your interpretation of Hertz's position; I feel they could also be attempting to increase user experience factor. P2P rental networks like Turo have a relatively streamlined rental process. If Hertz can take advantage of Tesla's connectivity features like "Smart Summon," they could offer superlatively convenient service.
Also, your point about drivers "training their replacements" was interesting. It could be a major talking point when we get to Level 4/5 and how it will change transportation.