The Alliance between Car Companies and Ride Hailing Apps

Automobile companies have been facing tough competition amongst themselves. Firstly, increasing traffic congestion in the cities is making the millennials shy away from buying cars. Secondly, the number of automobile companies, as well as the models that they produce, are increasing rapidly every day. Hence, registering any kind of growth is difficult in the market nowadays. This is the reason that car companies are now increasingly partnering with ride-hailing services.

In this article, we will have a closer look at the economics of the deals taking place between ride-hailing services and automobile companies.

Which Car Companies Are Teaming Up With Apps?

Pretty much every car company in India is trying to court cab aggregation services. These alliances are no longer happening between companies which sell lower end car models and cab services. For instance, BMW India has signed an agreement with Ola. BMW is planning to provide cheaper financing and cheaper support to vehicles which are being operated by Ola. Similarly, Ola has also signed a contract with Mahindra and Mahindra which is one of the largest car manufacturing companies in India.

Ola’s rival Uber is not being left behind either. It has signed a contract with Maruti Suzuki which is by far the largest player in the Indian automobile market. Not only will Maruti provide cheaper financing and better services like its counterparts, but it also proposed to set up a driving school where drivers who want to work for Uber can learn to drive.

How Everyone Benefits From This Arrangement?

Such arrangements are becoming common in the Indian market because they work out for everyone involved. The benefits to all parties have been listed below:

  • Cab aggregator services want their fleets to be bigger. A bigger fleet ensures that they are able to serve more customers at any given point of time. This helps the cab aggregators as they are trying to project the image of being reliable companies. Companies like Ola and Uber now have to compete to get better terms such as warranties, discounts and lower servicing costs in order the size of their fleet
  • Car companies gain by selling a large number of vehicles. The cab segment has become a major cash cow for automobile companies. These companies have now created special sales divisions in order to cater to the demand of the cab segment. Also, earlier if a vehicle was used as a “taxi,” it’s brand image would get diluted, and sales by private parties would get impacted. However, nowadays, there is no stigma attached to driving cars which are used as taxis. As mentioned above, all cars including high-end vehicles like BMW are being used as taxis. Hence, customers don’t seem to mind. Car companies are happy to sell to cab aggregators who provide bulk orders. It is estimated that cab aggregators are ordering close to 50,000 vehicles every year!

    Car companies are also happy to sell to cab aggregator companies because they can provide a good deal and sell models which are not being preferred by private customers. Hence, if a new model is being introduced, cab aggregators will be more than happy to buy the leftover stock of the previous model at a discount. Some companies such as Datsun have exclusively targeted the cab aggregators for their sales. It is estimated that 8 out of 10 Datsun cars in India are sold to cab aggregators.

  • Customers of cab aggregation services also benefit. The bulk discounts offered by car manufacturing and servicing companies translate into lower costs for consumers. It is because of these lower costs that cab aggregators can afford to charge a lower price. This is the reason that the price of cab rides have almost remained stagnant even though the price of fuel in India has been increasing rapidly.
  • Government agencies also benefit from these arrangements. This is because a lot of cars sold by automobile companies to cab aggregators are CNG vehicles. These vehicles are known to be non-polluting. In essence, cab aggregators are taking passenger diesel vehicles off the road and replacing them with CNG ones. Customers prefer to use cab services since they work out cheaper as compared to the cost of maintaining a personal vehicle. The new CNG cabs pollute less and also provide additional revenue to the government in the form of road tax for every vehicle sold!
  • The Problem with This Alliance

    Automobile manufacturers in India have now become dependent on sales to cab aggregator firms. However, the problem is that these levels of sales are not sustainable. Cab aggregators are currently in expansion mode in India. However, over a period of time, they are likely to slow down since they would have achieved the required fleet size. This is when automobile companies are likely to feel the pinch. The alliances struck by Indian companies are all transactional in nature. On the other hand, automobile companies in the United States are partnering with cab aggregators at a strategic level. For instance, car companies are tying up with Uber and Lyft to develop self-driving technology. Hopefully, over a longer period of time, such alliances will be more meaningful.


    ❮   Previous  Article Next  Article   ❯

    Authorship/Referencing - About the Author(s)

    The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Corporate Finance