Discover more from Learning by Proxy with Vivek Srinivasan
How to create a problem 101
When capital is no constraint, you have the freedom to rip up the fabric of any business whether you know the right solution or not.
Find a problem and solve it.
This is the first advice given to anyone looking to start a startup.
A student of history would know that every time man has tried to solve a problem; he a created a new one.
Let me illustrate.
15 years ago in India, if you wanted to travel within a city, you had to either take public transport or find an auto or taxi stand. These were located in every locality where autos looking for a ride would come and wait. All of the autos and taxis had meters which were calibrated to a government rate. The autos always required some haggling. They did not want to go by the meter and wanted something more than the prescribed rates. The taxis never posed this problem, although they were much more expensive and therefore few people rented taxis if at all.
Companies like Meru and Taxiforsure had wanted to make access to taxis easier and they had started call-centre based services. They needed you to order the cab well in advance. This was feasible only if you were on a planned outing. If you had to leave suddenly you had to go down to the road and find a cab.
Then, in 2013 Uber came to India. Loaded with venture capital, the company decided to do two things. First of all, they decided to incentivise the user. At one point in time, it was cheaper to rent a cab than to rent an auto by a factor of 2. Cabs were normally priced 2 times the rate of autos. Suddenly they were half price. This made no sense but the going was great and nobody complained.
Now, to cater to this demand, they needed supply. To meet that supply, they convinced a whole bunch of drivers to buy cars on loan. Loans that they would guarantee. People who would have never been able to raise a loan were now able to raise them because Uber would stand as guarantor.
Also, there was a need to make the drivers feel that they would be able to pay off their loans. Uber hence instituted a policy of incentivising the drivers where they were paid as much as Rs 6000 ($100 at the time) per day if they clocked a certain number of trips during the day. The troubles for the riders started at that time itself. Many of the cab drivers would not want to take on long trips because it precluded the possibility of undertaking 18 trips a day. The magic number that qualified them for an incentive.
The going was still good for drivers. Many of them who had been on hire had never seen a salary beyond Rs 15000 ($200) a month and Uber had opened the doors to fortunes. They started making Rs 1,00,000 ($1200) a month regularly. For the highly diligent, the number could go as high as Rs 2,00,000 ($2400).
Many of them got a second or a third car and brought people from the villages to make them drive on their behalf. The going was good for a couple of years. Ola also raised money from the same fund and engaged in the same battle with the same tools.
Taxi drivers were being introduced to a life and lifestyle that they had never had access to.
India produces some 15 lac (1.5 million) engineering graduates every year. There is such a glut of supply that entry-level salary in some of the largest IT companies in India including TCS, Infosys and Cognizant has been stuck at Rs. 360,000 per annum (~ USD 4000). That figure had not budged since 2010 until COVID gave the companies that gift of attrition.
Coming back, I once met a boy who was driving my cab who had passed out of VIT Univerity which is amongst the top 10 engineering colleges in India. He could make 4 times as much driving a cab as if he had joined one of those big IT firms! An engineer doing an engineer’s job was being paid so poorly. He said he was just saving up to leave for higher studies.
In mid-2015, Manjunath then, 31, was working for a micro-finance corporation based in Bengaluru and earning roughly Rs 30,000 a month. His work would involve moving around the city, collecting cash from clients and carrying it back to its various offices. Life was stable and Manjunath felt content.
“But then I saw one friend was earning Rs 1 lakh and above per month driving his own car in Ola and Uber. Even after deducting expenses of EMI (equated monthly installments), diesel, and maintenance, he would still have Rs 80,000 per month,” Manjunath recalls. “At that time, it seemed like I would earn more than a software engineer. So I thought, why shouldn’t I try my luck?” he says.
For Manjunath, it felt like a dream come true. Like many such drivers, Manjunath switched between the Uber and Ola apps in a single day depending on demand. He was primarily on Ola as he preferred the daily payment as opposed to Uber’s weekly payment.
“I would get Rs 6,000 bonus for doing 18 trips in a single day. First month, I was learning and a little confused. So I had earned Rs 70,000 only and then from the next month I would earn Rs 1,25,000 each. So even after spending on EMI, diesel and everything, I would effectively have around Rs 70,000 in hand for working 15-16 hours for six days a week So then, whatever the customer may have paid we would have got Rs 18/km,” he says.
Source: The News Minute
The attrition that the other cab operators saw was tremendous. Many of them were no longer viable at their prices. Even if they could make do, they could not find drivers.
In late 2017, Uber made changes. After having annihilated all other cab operators and having put all the drivers deep in debt. Many of them had already paid two-thirds of the loan on their cars. Uber decided this was the time to increase their commissions and cut the incentives out.
Back at the headquarter, there were rumblings about money running out. SoftBank wanted an exit. A fund that had overextended itself with WeWork needed to show some exit to its investors. The stories of sexual harassment, dirty tricks, deceiving governments, etc that were makings their way to the press were not helping in any way. They had to IPO, they needed profits, and they needed it fast.
Close on Uber’s heals, Ola followed suit and the drivers had nowhere to go. Protests erupted. But little did change, some hollow promises were made. For the drivers who had invested a huge part of their income paying off loans on their cars, it was inconceivable to default and have their vehicles taken away. Continuing with the current offer meant, they would have very little left for themselves.
Manjunath started to notice the downward turn in mid-2016 as focus of these companies turned towards profitability after years of incentives for drivers.
“Now even if you do 30 trips, there is no promise of any incentive. Plus, with the increasing traffic, 18 trips would take 20 hours which would previously take 15 hours. And the pay for per km has also decreased to as low as Rs 9/km. Same goes for commissions, the commission was 10% initially, then it gradually increased to 15%, then 20% and now 25%,” Manjunath explains.
Source: The News Minute
The companies still have incentive plans which are based on the number of trips done. This only creates perverse incentives as many of the drivers do not want to take long trips as this would hurt their ability to meet the ‘number of trips’ threshold. Ultimately this results in bookings often being cancelled.
There is a whole category of booking cancellation memes. Just go to Twitter and search ‘Uber India’, and you will see. People joke about their superior begging skills when an Uber does arrive.
In the end -
The taxi drivers have been lured into buying cars on EMIs that they can barely pay off, they are not happy.
The consumer is not able to get a cab reliably and is often required to beg and cajole the driver to show up, they are not happy.
And the so-called Unicorns are just money pits that have not even figured out their unit economics yet, they are not happy either.
Softbank lost tons of money in every cab aggregator - They are certainly not happy.
Finally, the traffic conditions have immensely deteriorated in all of the cities with hundreds of thousands of additional cabs on the road and let us not even pick up the topic of pollution.
Who was this all for?
I do not know about solving a problem, but it sure seems like problems were created!