General Motors Invests In Ride Sharing: Is This The Future Of Automakers ?

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Lyft, a ride hailing service start up, announced on January 4th that General Motors (NYSE:GM) had invested $ 500 million in the company as part of a $1 billion round of funding that valued the company at $5.5 billion. [1]. Apart from the financial investment, General Motors will also work with Lyft in developing an on demand network of self -driving cars and set up a series of short term car rental hubs where General Motors will become the preferred provider of cars to Lyft drivers. While the world’s largest ride hailing service, Uber is valued at $62.5 billion, higher than General Motors’ market capitalization of around $50 billion.  Ride-sharing, in the view of many, holds great promise.  Studies (noted below) indicate that the developed world might have reached “peak car” units in urban areas, at least. If consumers start preferring ride sharing to car ownership, General Motors’ foray into this space appears to be the right strategy for future growth.

Banking On Changing Consumer Preferences

A research by Schroders suggests that the number of miles driven per capita in Europe and the U.S. has been on the decline since 2000 and the proportion of young  people  who have a driving license or own a vehicle has fallen in recent decades. The ease of car sharing is listed as one of the reasons for this decline. [2].

Driving License Penetration By Age (%) U.S.

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Consumer automotive behavior is changing with the advent of technology, as ride sharing apps make it easier to share cars, especially in urban areas, where car ownership is lower to begin with.  This trend can lead to a potential decline in car ownership, especially in the developed countries as it appears that the younger generation is not as interested in purchasing cars.  This is according to study by the AAA foundation for traffic study, which reported that from 2007 to 2011, the number of cars purchased by people aged 18 to 34 fell by almost 30%. [3].  Yet December 2015 looked to be the best month for auto sales in the U.S. for over a decade, with light vehicle sales expected to grow 6% year over year.  Primary driver of the growth include low gas prices, cheap interest rates and improving economic conditions.  That said, the overall shift towards ride sharing compared to ownership might change the automotive landscape in the longer term. General Motors’ investment in Lyft ensures that it is part of this changing business models in transportation.

As General Motors becomes the preferred provider of cars to Lyft, it can see an upside in its sales as Lyft expands it network. Although competing with Uber might not prove to be easy for the company and there can be new entrants in this business given limited entry barriers, Lyft is strategically tying up with similar players in other regions to form a formidable network which can counter Uber. [4]. The company has also struck deals with brands like Starbucks to broaden its reach. Lyft appears to have the right strategy to create a large network of users which will benefit General Motors once it develops autonomous cars which can run on the Lyft platform. Although this appears to be part of a long term strategy, the strategic alliance should benefit both players specially as all automakers try to transform themselves to adapt to the changing landscape of transportation this gives General Motors an entry into the ride sharing space.

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Notes:
  1. General Motors, Gazing at Future, Invests $500 Million In Lyft, The New York Times, January 4, 2016 []
  2. The end of the road: has the developed world reached “peak car”?, Schroders, January 2015 []
  3. Millennials Don’t Care About Owning Cars, And Car Makers Can’t Figure Out Why, Fast Coexist, March 2014 []
  4. Lyft joins with Asian rivals to compete with Uber, The New York Times, December 3, 2015 []