Uber & the Auto Loan Bubble - An Analysis - August 2016
I live in Washington, DC, and increasingly I notice on-demand taxi logos (Uber, Lyft) on vehicles. This is not surprising, considering the recent successes of these platforms, particularly Uber, and the fact that I live in a large market for them. But, sometimes, and more than I would think, these
Uber-tagged cars I see are nice, new cars, sometimes ones I know cost twice as much as I paid for mine.
And I think to myself, "I have a 2011 Honda CRV that has low miles and is in good shape. It is my most valuable, non-retirement, tangible asset, since we rent our house.
But a car is a poor investment: it depreciates just sitting on the street, driven or not. And the last thing I would do is subject it to the rigors of additional driving and depreciating abuse on Washington's pothole-riddled streets as an on-demand taxi driver, to make a little more money.
And this leads me to this question:
Why would a rational person take out a loan on an expensive, depreciating asset-a poor investment to begin with-then subject that asset to the road abuse of driving it as a taxi in urban/peri-urban environments, for arguably poor pay and
no real benefits as an Uber driver? How has Uber gotten people to make this decision-significantly discounting the future value of their automobile to make money right now-en masse?
I argue that Uber's success tells a story larger than the achievements of some of the brightest people in the tech industry, which in 2016 means the smartest people on the planet, or so we should all believe. Alternatively, the reasons for Uber's success tell the story of post-financial crisis America:
a large and growing pool of people completely out of the workforce (or under/unemployed) saddled with debt that they have been either targeted to take on (in this case auto loans) or have done so out of necessity in order to amble forward.
This is not a critique of Uber as a company; it has simply taken advantage of these conditions. It has acted as businesses should in a capitalist economy, albeit during a shaky, uneven, and crises-prone economic recovery.
Rather, Uber has relied on poor labor market conditions and an auto loan bubble to achieve its initial takeoff and growth, and as I will explain, it is now relying on more aggressive measures to maintain and ensure future growth.
How did it get here?
Since Uber's
founding in March 2009,
many explanations of its rapid success tend to focus on the app/platform, the company's corporate culture, or the culture of Silicon Valley as the primary reasons for its successes and current
$68bn pre-IPO valuation, seen in the graph below:
But, often critiques and analyses of Uber do not take full stock of the macroeconomic conditions that existed during its takeoff and subsequent, rapid success-conditions that may explain more than, say, a critique of the effectiveness of Uber's CEO, Travis Kalanick.
The only real study with any sort of methodological rigor is a 2015 Hall and Krueger article, "An Analysis of the Labor Market for Uber's Driver-Partners in the United States", based on internal Uber data released to the two economists and sanctioned by the company. It is the only official, numbers-based snapshot of the company's growth, although the 'study' is barely more than a thinly disguised puff piece.
The paper comes off as rather defensive, attempting to explain away Uber's treatment of drivers as contractors instead of employees, its lack of benefits, and instead praises the flexibility that Uber offers people to determine when they will heap additional abuse on an already depreciating asset. The study also relies on data from another Uber-approved 'study', which is rather methodologically suspect, which I address at the end of the article
Still, the following two graphs from the Hall and Krueger piece are some of the most telling regarding the rapid success and growth of Uber, and again they are based on official Uber data. The trend(s) from the graphs is pretty clear: few drivers in 2012, but over 150,000 about two and-a-half years later.
And, from the same study, Uber's driver growth by month:
However, all of this rapid growth and expansion has taken place when interest rates have been rock bottom, since the mortgage-fueled financial crisis of 2007/8, in attempt to keep credit flowing to businesses and consumers.
In fact, Uber has never existed as a company outside of recent and current loose monetary policy, especially low interest rates. These too have ticked up slightly since the end of 2015 by about a quarter of a point. These rates affect the interest charged on all loans, and while the impact, across the board, is rather lagged, additional rate increases will especially affect subprime borrowers (auto loans, mortgages, everything), and could "cripple" new auto sales.
Combined with a robust quantitative easing program by the Federal Reserve, the country (and emerging markets) have been awash in cheap, dollar denominated credit. This credit had to go somewhere, and, in the Unites States, one place it has found a home is in automobile financing, up from $0.82tn in 2006, to $1.07tn in March 2016, or "nearly 30% from the post-crisis bottom, and nearly 20% from their prior peak". This has created a loan and asset bubble in automobiles, which, in this country, have the tendency to eventually pop, sometimes disastrously for borrowers.
Here you can see the recovery, and increase, of total auto sales; they have already surpassed pre-financial crisis numbers, of around 17m a month, to the most recent trend of closer to 18m a month (I look at a few other measures of auto loan debt later in the article). Total auto sales were steadily climbing throughout Uber's existence as a company (9.8m in March 2009, almost a Great Recession low, to 17.8m in May 2016):
Throughout this bubble, a lot of people have been able to finance cars that they probably cannot afford. This has been a good thing for Uber: it needs a lot of people willing to finance new, or newish cars, and be willing to put them on the road as drivers. But it needs more than just lots of nice cars financed by an ocean of debt: it also needs someone to drive them.
The second recent macroeconomic condition Uber needed was a poor labor market, or a large labor pool to tap-on-demand-that is either unemployed, under employed, or who have dropped out of the labor force entirely. This analysis does not use standard unemployment rates, because I do not think that this top-level number tells the entire story of the US labor market as well as the labor force participation rate.
As a 2014 Bloomberg article argues, "People are attracted to on-demand gigs because more solid full-time work is still hard to come by in a U.S. economy that has rebounded for everyone but average workers." When Uber started in 2009, it had a large, desperate pool of workers to draw on, a trend that in general has not changed significantly. But, if this does change-if regular people can go back to getting regular, full-time employment-what does it mean for Uber?
This is a snapshot of the labor force participation rate in the US, since the year 2000. There is a noticeable downward trend in the number, and almost a full three percentage point drop in this rate between Uber's 2009 founding-65.6%--and the most recent numbers available, 62.7%. However, people re-entering the labor force (or for some young people, entering for the first time) might not be good for Uber:
The same 2014 Bloomberg article shrewdly concludes that: "Rather, on-demand has thrived, in part, because the nation has dropped a bedraggled and optionless workforce in its lap -- and on-demand's success depends in part on the idea that our nation won't change." But in 2016, that appears to be changing in a very recent upward trend in this top-level number, improving or at least remaining steady five out of the six months of 2016 the data are available for (touching in March 63.0% for the first time in over two years).