Uber Should Beware the DUD Behind Indian Expansion

(Bloomberg Gadfly) -- It's great that Travis Kalanick is seeking leadership help, though the Uber Technologies Inc. CEO might need advice in another area. Let's call it DUD -- distressed Uber debt.

After a dashboard video of Kalanick's spat with a driver, Fawzi Kamel, went viral last week, the co-founder of the ride-hailing service offered "a profound apology" and promised to change his behavior. But his email, sent to all Uber employees, made no mention of a plan to deal with Kamel's gripe about falling incomes.

It's not a problem Uber can ignore, particularly in India, the other billion-people-plus market it's fighting to control after surrendering China to Didi Chuxing. After recent drivers' strikes in BangaloreHyderabadNew Delhi"sustained interest in driving with Uber,"

Even Jain's blog didn't address the problem of debt. The sharing-economy proposition doesn't work in India. The drivers working for ride-hailing apps like Uber and its main Indian rival, Ola, aren't part-timers. Nor are the assets employed in the business -- the cars -- pre-owned. It's not a capital-light business.

For a little more than two years, Uber has encouraged people who wouldn't otherwise qualify for bank credit to take loans from commercial or shadow banks to buy cars for the sole purpose of offering Uber rides. But the liberal financial incentives the San Francisco-based company used to offer on trips have dried up, even as competition among drivers has become intense. Ridership has grown, but not as quickly as debt-fueled fleets.

Why should Uber care if drivers default? A strike by cab owners in New Delhi last month ended after a court told the participating unions their members were free to ply other trades. Such "consenting adults"-type arguments don't work for very long in poor countries. Politicians love victims. And when they get involved, the outcome can be debilitating -- just ask the micro-finance industry, whose business was almost crippled six years ago after a spate of suicides by borrowers led to a clampdown in one Indian state.

There's also a business case for Uber to worry about drivers' debt distress. According to industry estimates compiled by the Economic Times, 32 percent of fleet operators' demand for new cars came from apps like Uber and Ola. This is expected to increase by 25 percent this year. In absolute terms, Uber-Ola demand would still be small at about 125,000 cars, but such growth is impossible without leverage.

Lenders will turn cautious if defaults eat into easy profits, though. Currently, losses in auto finance shave half a percentage point off the 4.5 percent margin on loans. Add a half point for fee income, and take away 3 percentage points for operating expenses, and that's a return on the asset of 1.5 percent for state-run lenders. State Bank of India, the largest of them, must love the business, having earned just 0.4 percent on its entire asset base last year. However, once big-ticket corporate credit revives, the small guys will again go to the back of the queue, especially if they're tarnished for being bad credit.

Mollycoddling customers with attractive pricing isn't enough. Ride-hailing apps must realize that to conquer India, their drivers must retain access to bank funding. If not for the fear of political backlash, then for purely business reasons, Uber needs to worry about that DUD.

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

To contact the author of this story: Andy Mukherjee in Singapore at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.