Gadfly

The Car Industry Is Losing Its Head Over Uber

Auto giants are chucking money at "mobility", but making cars is a decent business.
From
David Ryder/Bloomberg

Though a student of philosophy, Sergio Marchionne gets right to the point when it comes to one of the big trends sweeping the auto business:

“Contrary to what some of my colleagues believe, we are not in the mobility business. We don’t move people around... At the end of the day, we are only building the tools that allow people to be mobile. I don’t want to buy into the distribution machine like GM did by paying $500 million for a 10-percent stake in Lyft.” 1

I disagree with the Fiat Chrysler Automobiles NV boss about many things, but he's right to be dubious about his industry’s splashing of cash on "mobility services": a catch-all for stuff like ride-hailing and car-sharing. While the shift from combustion engine to electric vehicles is happening and autonomous driving will come too, in time, we’re a long way from automatic car capsules à la Minority Report.

Yet carmakers have been at it again this week. Jaguar Land Rover disclosed a $25million investment in Lyft, while Daimler AG took part in a $500 million funding round for Careem, a Middle East ride-hailing service. Toyota Motor Corp. last year handed an undisclosed sum to Uber Technologies Inc., while Volkswagen AG ploughed $300 million into Gett, an Uber rival. There are plenty of other projects.

You could argue that these investments might give carmakers access to a new sales channel, by leasing cars to Uber drivers for example. Plus they're a hedge against people dropping car ownership entirely.

Still, Uber’s governance meltdown is a reminder of ride-hailing's immaturity as a business. The company lost almost $3 billion last year. Peugeot and Daimler, among others, earned record profits as U.S., U.K. and Chinese car sales hit fresh highs.

Regardless, many carmakers have convinced themselves that making vehicles is no longer enough. In their rush to "mobility" they're chucking around money, hoping something sticks. Bernstein analyst Max Warburton says Ford Motor Co's ambitions to make 20 percent margins in mobility services are "patently nonsense". Yet he worries that "strategies are anchored on this stuff".

In fairness, it’s not surprising carmakers feel under pressure. Most trade on anemic earnings multiples. Even BMW’s market capitalization is smaller than Uber's purported value. The recent ousting of Ford CEO Mark Fields shows what happens if executives move too slowly.

Still, corporate boards are in danger of ignoring history. As Fiat chairman and Agnelli family heir John Elkann has pointed out, back in 1999 Ford had hopes of tripling its price-earnings ratio from 10 to 30 times by becoming a consumer products and services company invested in Hertz, satellite radio and Kwik Fit. Today, its forward PE is 7 times. Fiat made similar expensive mistakes in so-called "value chain extension" too, but it seems to remember them better than some rivals.

Ford’s chief problem now is weakening U.S. sales, not a failure to match Uber. Ford makes most of its profit from trucks, so arguably it would be better focusing on that, not shared shuttle-van services.  

The industry has enough challenges without frittering away cash on nice-to-have services for pampered city-dwellers. As a consumer, I’m delighted BMW and Daimler have parked hundreds of vehicles around my home town (Berlin) for when I can’t face cramming myself onto a subway carriage. But is it a money-spinner for shareholders? Almost certainly not. 2

Amid all the mobility hullabaloo, remember Uber doesn’t sell cars and neither does Alphabet Inc. or Apple Inc. Even if their efforts are very successful, people's attachment to private cars won't vanish overnight. The auto industry shouldn't lose sight of how its bread is buttered: selling more vehicles.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Comments made in a trade magazine interview last year.

  2. Which might explain why their respective car-sharing services have reportedly held merger talks.

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