Uber: does the business model make economic sense?

Three hard hitting articles published on the "naked capitalism" blog regarding Uber:

Can Uber Ever Deliver? Part One – Understanding Uber’s Bleak Operating Economics

Can Uber Ever Deliver? Part Two: Understanding Uber’s Uncompetitive Costs

Can Uber Ever Deliver? Part Three: Understanding False Claims About Uber’s Innovation and Competitive Advantages


Some snippets:


Uber’s refusal to consider an IPO may best be explained by the recognition that publishing detailed, audited financial data confirming these massive losses and the complete lack of progress towards profitability could undermine public confidence about its inevitable march to industry dominance.

Uber is currently the most highly valued private company in the world. Its primarily Silicon Valley-based investors have a achieved a venture capital valuation of $69 billion based on direct investment of over $13 billion. Uber hopes to earn billions in returns for those investors out of an urban car service industry that historically had razor-thin margins producing a commodity product. Although the industry has been competitively fragmented and structurally stable for over a century, Uber has been aggressively pursuing global industry dominance, in the belief that the industry has been radically transformed into a “winner-take-all” market.

Unlike most startups, Uber did not enter the industry in pursuit of a significant market share, but was explicitly working to drive incumbents out of business and achieve global industry dominance. Uber’s huge valuation was always predicated on the dramatic growth towards global dominance. Thus if Uber’s valuation and industry dominance were to be welfare enhancing, Uber’s efficiency and competitive advantages would need to be overwhelming, and there would need to be clear evidence of Uber’s ability to generate large profits and consumer welfare benefits out of these advantages.

Published financial data shows that Uber is losing more money than any startup in history and that its ability to capture customers and drivers from incumbent operators is entirely due to $2 billion in annual investor subsidies. The vast majority of media coverage presumes Uber is following the path of prominent digitally-based startups whose large initial losses transformed into strong profits within a few years.

This presumption is contradicted by Uber’s actual financial results, which show no meaningful margin improvement through 2015 while the limited margin improvements achieved in 2016 can be entirely explained by Uber-imposed cutbacks to driver compensation. It is also contradicted by the fact that Uber lacks the major scale and network economies that allowed digitally-based startups to achieve rapid margin improvement.


Still one article to go in this series: "The next article in this series will discuss that Uber’s strategy for earning returns on its $13 billion investment was always based on eliminating both competition, and any regulatory/legal obstacles to the exploitation of anti-competitive market power."


KWAP has invested an undisclosed amount in Uber, so for their sake we must hope that the articles picture a too bleak future of the economics of Ubers business.

Does Malaysia really need another fund?

Article in The Malaysian Insider:

"VCAP Asset Managers launches fund to invest in blue chips"

With so many GLFs (Government Linked Funds) already, do we really need another fund?

Given the recent events, would it not be better to freeze all existing funds launches and pay more attention to the very backbone of Malaysia? In other words, to significantly shore up the institutions, in terms of transparency, responsibility, independence, etc.?

Also, would it make more sense to redeem some government loans with the money, instead of dabbling in the local share market, something that is best left to private players?

One snippet of the above article (emphasis mine):


"But because this is an actively managed fund, hopefully you'll get decent outperformance above and beyond blue chip returns"


Can the CEO of VCAP give some facts regarding the possible outperformance?

It is a well known fact that in the US the large majority of the actively managed funds underperform their respective benchmark. Would this be any better in Malaysia?

I personally believe in two extremes:

• Passively managed funds, investing in a basket of shares with the lowest possible management fee (a small fraction of one percent): ETFs.
• Actively managed funds, run by fund managers with a long history of outperformance; often these managers have a contrarian, maverick streak in them.

VCAP is a unit owned by Khazanah, KWAP and PNB, the words "contrarian" and "maverick" do not exactly come into my mind when I think about them.