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Ride Sharing Companies Are Needed Disruptors for Auto Industry

They may not be publicly traded – yet – but they seem to be all the rage these days.

I’m speaking of Uber and Lyft, which are garnering considerable attention from leading automakers looking to capitalize on their booming ridesharing services.

On Tuesday, the market learned that Toyota and Uber were collaborating. The reports noted that a deal is in the works that could lead to the Japanese automaker making an investment in Uber, the largest ride sharing service in terms of valuation.

These collaborations represent an exciting time for the once beaten down auto industry in which the so-called Big Three nearly went bankrupt a few years ago.
Collaborating with the ride sharing services does represent powerful opportunities for automakers, but there are nuances that investors should take into consideration before placing a lot of faith in the collaborations bringing meaningful shareholder value.

 · The players so far

The details of the agreement between Toyota and Uber, such as the amount of the investment, were not available at press time.
The reports of their collaboration come on the heels of agreements announced this year by Ford (NYSE: F) and General Motors (NYSE: GM). These agreements entail the companies working with Uber and its main competitor Lyft, with a main goal being to create driverless autos.

The space is already dominated by sophisticated tech companies like Google and Tesla that boast the software producing capabilities to operate self-driving cars.
Without teaming with the ride sharing service companies, the automakers are still capable of pursuing their efforts to build self-driving vehicles. However, by teaming with the leading ride sharing services, the companies have the chance to tap a fast-growing market that can piggyback on self-driving autos. This should help them to become more able to compete with Google and Tesla.

 · Coming back from the brink

It seems like it was just yesterday when Ford had to put up its Blue Oval as collateral for roughly $23 billion in loans it received from a syndicate of banks to keep it from filing for bankruptcy. That was in 2006, when the auto industry was in turmoil.

In 2009, GM did file for bankruptcy. It received roughly $80 billion in government bailout money.

Now, both automakers have recovered. Ford has its Blue Oval back and GM has paid back the government. The companies have reported growth in purchases of their vehicles, but their stocks have been range bound for the past five years. Ford has not managed to reach$18 a share; the closest it came was in 2014 when it traded around $17.42. GM has not been able to move above $50 a share. It nudged the number at the end of 2013 when it hit $40.99.

 · Disruptive action needed

As Ford, GM and other automakers were beginning to recover from their financial woes, they saw how Uber and Lyft were steadily carving out market share for their ride share services. Also Tesla and Google were making good strides with their self-driving car ideas. These tech companies were elevating the possibilities of vehicle transportation and automakers saw that they had to do something to avoid being left behind.

The mass production of self-driving cars would be the exact kind of disruptor needed in the automotive industry. It is still too early for auto makers to profit from such endeavors. But in the meantime, getting into the fast growing business of ride sharing is a good strategy.

So it is no wonder that we are seeing these agreements. GM invested a whopping $1 billion in Lyft, which boosted the second largest ride sharing service to $5.5 billion. Uber has received more than $10 billion in investments, and its valuation is now about $63 billion.

In addition to its investment in Lyft, GM bought another ride sharing service called Sidecar. Interestingly, the company’s founder said he shut down Sidecar’s operations and sell because it was unable to compete against Uber.

 · Ride sharers pulling out the stops

Uber is the largest, but Lyft is making considerable gains. Lyft has been able to do so through a series of actions, including aggressive marketing. For example, earlier this year, it offered 50% off rides in select markets. Uber has rolled out a VIP program for riders that take a minimum number of rides per month. Lyft recently announced a program unheard of mostly in the ride sharing space – allowing riders to reserve their trips in advance in certain markets. Uber, on the other hand, is testing a pilot that would penalize riders if they were late by more than two minutes in getting in their car once it has arrived.

Investors should understand that these types of competitive nuances may present challenges to automakers that have not had to deal with them before. How well the automakers are able to adapt is key.

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