Can Uber Compete with Self-Driving Cars?

Uber’s announcement that it plans to start testing self-driving cars on city streets later this month seems like good news for the ride-hailing startup.

The launch of the pilot project in Pittsburgh certainly suggests that a future of driverless cars might be closer than many people have speculated and for Uber, a move to driverless cars would cut costs dramatically. But it’s not quite clear if it will get there.

Like most privately-held companies, Uber’s financials are pretty opaque. There’s no real way to tell how much Uber is spending – and how much money it’s losing.

Judging by just how much Uber has raised and borrowed, though it’s pretty clear that the company has a massive burn rate.

In July, Uber borrowed $1.15 billion from several commercial lenders.

Raising money through debt, rather than equity, makes sense, because it allows Uber to access cash without diluting its investors’ shares in the company. Until now, this hasn’t been much of an issue for Uber because its valuation has been increasing but there are signs that it’s now peaked.

Six mutual funds that have investments in Uber now value those investments below Uber’s “official” valuation, according to Quartz. And Uber’s addressable market is shrinking.

At the end of July, Uber pulled out of China, selling its business in that country to local rival Didi Chuxing.

Uber is believed to have lost around $2 billion in China alone over the past two years but the harshest blow might be losing access to a massive market, with huge growth potential. There are only 128 cars for every 1,000 people in China, and the country’s middle class continues to grow.

Uber will take a share in Didi as part of the deal but it’s not the same as winning a market. It underscores just how difficult the ride hailing business can be.

Last week, the New York Times reported that Lyft, Uber’s main competitor in the United States, was shopping itself around, but failed to find a buyer.

And that’s why Uber’s burn rate is so important – because that could be the difference between staying in the game long enough to take advantage of the shift to self-driving cars and running out of cash before it happens.

But the path to driverless cars might not be so straight-forward, there’s a huge difference between a self-driving vehicle and one with an autopilot that’s supervised by a human.

As well, there will be steep regulatory hurdles to overcome before driverless cars are allowed on city streets. Though, if any company is going to take on regulators, it’s Uber.

Even if things do go well for Uber, even if self-driving cars arrive faster than anyone expected, that might not be enough.

Some people, inducing Zynga co-founder Justin Waldron, think that once Uber is no longer a two-sided marketplace it will lose its key advantage – the virtuous cycle that comes from having the most drivers and the most riders.

“There will no longer be a constrained supply of drivers, so the network effects evaporate. This will give car manufacturing companies the advantage to enter and win the market. The company that can create cars for the cheapest will have the lowest prices. Having a low arrival time will simply be a matter of manufacturing enough cars to put on the road in a given area,” Waldron wrote in a Medium post.

Just what the future of self-driving cars will look like is still an open question – and it might depend on whether it’s Google, Uber or a car maker who gets there first and what their go-to-market strategy looks like.