
Uber Gets Run Over by Its Own Subprime Auto Leases - SQL2219
http://wolfstreet.com/2017/08/09/uber-gets-run-over-by-its-own-subprime-auto-leases/
======
CamelCaseName
The idea that one could lease a vehicle from Uber, at a significant loss to
Uber, then turn around and use that vehicle to drive for Lyft, is absolutely
hilarious.

~~~
FTA
Yet another example of VC ending up subsidizing America. We could just cut out
the middleperson and go to basic income paid for by VCs.

~~~
beambot
Now, as a thought exercise: who do you think subsidizes VCs? (I.e. who are the
biggest LPs)

For people who don't want to look it up... Some of the biggest are pension
funds! It's not just high net worth individuals or companies, it's also mom &
pop retirement funds.

[https://www.quora.com/Who-are-the-biggest-investors-
limited-...](https://www.quora.com/Who-are-the-biggest-investors-limited-
partners-in-US-venture-capital)

~~~
aphextron
>Now, as a thought exercise: who do you think subsidizes VCs? (I.e. who are
the biggest LPs)

The Fed, with their policy of Quantitative Easing over the past 5 years.

~~~
colefichter
The quantitative easing FUD on HN is getting pretty tiresome. It gets blamed
for everything from VC subsidies to house prices and just about everything in
between.

All three rounds of QE in the USA focused on mortgage-backed securities and
Treasury securities. Are you suggesting there were a bunch of VCs who were
neck deep in the MBS or CDS/CDO rackets in the mid 00's?

See
[https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1.2C_...](https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1.2C_QE2.2C_and_QE3)

~~~
aphextron
I'm not making any kind of judgement to the effects of QE policy, simply
stating a fact.

------
Steeeve
This is b.s. Uber is playing hollywood with it's money.

They are taking cars that are not particularly desirable, selling them to
their own leasing company at full retail, collecting 4 times as much money per
month than any same person would pay, earning money on every mile driven,
and... I'm not sure about this one, but I _think_ they reduce the pay of the
drivers who do the leases (I know Lyft does this).

Then they are "selling" the cars at a loss. But are they selling the cars at a
loss to the wholesale market at large? i.e. putting them up for auction at
Manheim/etc.? I doubt that is happening. More likely they are selling them to
yet another subsidiary or affiliated company.

You don't lease a 15K car to someone at $800/month and lose money.

~~~
calpaterson
> You don't lease a 15K car to someone at $800/month and lose money.

It seems easy to imagine how you can: the driver rents the $15k car for 6
months, paying $4.8k in total before they stop making payments and Uber
repossesses the vehicle. Uber hope to make themselves whole by selling it for
$10.2k...except...they can't sell it for $10.2k because cars depreciate fast
and anyway this one has 30,000 more miles on the clock than it did at $15k.

Only the cars initally cost $20k instead of $15k, Uber had to pay ~4% interest
on the money they used to buy the car, the driver paid closer to $400 than
$800, not all the cars are in fully working order and there are 40,000 cars.

------
jaclaz
I am not sure to understand.

The example 2014 Toyota Corolla at US$122 per week makes in a 130 weeks lease
with Xchange some 122x130= 15,860 US$ and a 2.5 years (high mileage) old
Corolla may still have some minimal residual value, let's say US$ 1,500.

I.e. roughly total reimbursement of the list price of the car:

[http://toyotanews.pressroom.toyota.com/releases/2014+toyota+...](http://toyotanews.pressroom.toyota.com/releases/2014+toyota+corolla+pricing.htm)

Assuming that cars in such a situation are bought "in bulk" and thus with a
10, maybe 15% discount, very roughly it should mean that in the US$
15,860+1,500=17,360 of reimbursement some minimal costs for interests and
expenses are included on an initial spent sum of around US$ 16,000/16,500.

So, at least in theory it seems like a "side-business" that is going to make
even or maybe loose a few hundred dollars each car (for interests on the
loaned money), but this only if everyone keeps the car and pays the leases for
the whole period.

Now, you get one of those (and you get one of those because you have no money
and no good credit record) and after 25 weeks/6 months you give it back.

You pay US$3,300 (25*122+250).

Xchange has in its hands a six month old car with (say) 20,000 miles on
it.That still has a market value, but maybe since you sell it wholesale to
some second hand dealer and you only get - say - US$8000/9000.

So, 3,300+8500=11,800

So in this case Xchange seems like having lost - roughly - US$ 4,500 per car,
half the US$ 9,000 stated.

There must have been some large avoidance of repayment (and repossession of
the cars, etc.) to make that number on average.

~~~
JshWright
> a 2.5 years (high mileage) old Corolla may still have some minimal residual
> value, let's say US$ 1,500.

Even on the wholesale market, I'd wager it's several time that amount...

~~~
jaclaz
I don't know, but I would expect 7,500 to 10,000 miles per year on a normal
car, hence that would have in a 130 weeks/2.5 years some 25 thousands miles
top.

If (as it is reported here and there) an Uber driver _needs_ to make 3,000
miles per month, the car after 30 months would be more likely to be in the
90,000 - 100,000 range, i.e. the same as a 10-12 years car, i.e. an "end of
life" car.

Even if only 2.5 years old, upholstery, seats, plasric accessories, etc will
likley show the wear from use.

Such a car can only be sold to "particular" customers.

But if the value is bigger, then it is another reason why the 9,000 US$ lost
per car are simply too much.

~~~
JshWright
A 2014 Corolla with 120k miles in "average" condition books at $5-7k "trade-
in" value (which tends to map pretty well to wholesale value).

~~~
jaclaz
Good, then if we use the lower US$ 5,000 as a reference, the "complete cycle"
turns to be actually advantageous for Xchange.

15,860+5,000=20,860 against a cost (adding the costs of "basic maintenance",
assuming an intervention every 5,000 miles of 100 US$ each) of
16,500+20*100=18,500

That is 2,360 over 18,500 in 2.5 years, roughly 13% or 5%/year interest
(excluding administrative/managing costs).

------
mack1001
Uber is playing both sides of the table which is ok if you are profitable
overall. But not ok if you are losing money on both sides. Uber will go a full
Groupon soon.

~~~
astrodust
You mean they haven't already? I have no idea how an idea as simple as Uber,
where they clearly don't give a fuck about rules, regulations, or paying
taxes, _still_ can't make money.

It's like a mob running a casino that's laundering money and it bankrupts
itself, you know, like the Taj Mahal in New Jersey. It takes an astonishing
lack of talent to make that happen.

------
brudgers
I saw -$9000/vehicle and 40,000 vehicles and thought, that's only $360 million
of losses. At the scale of Uber, that's just a cost of doing business. It's
half of what it paid for Otto, and probably less than 1% of the startup costs
for producing self-driving vehicles. To put it another way, $360 million one
way or the other is noise on Apple's bottom line. It is 0.05 of the variation
in GOOG market cap over the past five days (~$7 billion).

I'd bet it provided far more bang for the buck than $360 million spent on
advertising...with more bang for the buck over online advertising being a four
star lock. The interesting story of Uber's subprime leases is not the losses,
but the predation on driver partners.

~~~
tyingq
$360 million is, though, a substantial portion of their ~$3b/year of losses.

If I were an investor, I might question how many of these types of decisions
were driving losses. The model may depend on subsidizing rides, but there's no
reason to bleed more than needed.

~~~
brudgers
Concern over local losses at one company in an investment portfolio is what
separates ordinary investors from the class of investors Uber allows to
invest. The Saudi Sovereign Wealth Fund is not going to sweat this. The value
of Uber is the distribution of possible outcomes weighted for probability. The
worst outcome is $0 and that was accepted going in.

The reason companies like Uber stay private is to keep out ordinary investors
and for the ability to ignore the traditional haymaking of Wall Street
analysts. All those subprime leases let Uber gain market and refine its
product. The widely published per ride loss numbers reflect those leases
because they are baked into the overall losses.

~~~
charlesdm
Are there any metrics on how well these sovereign wealth funds are actually
doing?

I often see them making big bets, with some definitely paying off (e.g.
Kingdom Holding and Twitter), but I wonder how well they do across the board.

~~~
URSpider94
Not that they are doing badly, but to some degree they don't have to perform
well to be successful. Their primary goal is to transform a currently-
limitless stream of oil money into a sustainable source of wealth and income
when the spigot turns off in a generation or two.

Same for China overseas investments, it's a way to turn RMB-denominated cash
into hard assets in democratic countries with stable political environments.
Value-for-money comes second.

~~~
charlesdm
This is true. I had a friend, who pretty much built a shovelware game, talk a
chinese publisher into doing a deal. He banked $200k. I don't even get how
that deal even could be made. Hell, he didn't even understand it.

~~~
L_Rahman
The Chinese mobile gaming market is one of the hottest in the world right now.
Tencent (the people who make WeChat) pull in USD $1BN each quarter just from
games.

There was and possibly still is a lot of dumb money in that space right now.

------
b_ttercup
This article seems to ignore the added revenue from a driver having a car and
driving people around for Uber. The better metric is probably the average
profitability of a driver with a leased vehicle.

~~~
onion2k
The numbers in the article came from Uber. If there was a better metric they
could have used you'd think they would have done.

------
Clanan
Uber won't just be out the $360 million on the cars. They'll be out the 40,000
drivers who may not be able to get another leased car.

~~~
aphextron
I wouldn't worry about that too much. Their entire business model is
predicated on the at-will disposability of their "employees".

------
dsfyu404ed
When I first heard about this program my first thought was "Hahahahaha did
nobody at Uber talk to dealership sales department?"

Now my thought is "Hahahaha. I was right."

Uber basically made a subsidiary that specialized in loans that everyone
expects to end with the car repo'd and at auction. It's no surprise they got
burnt.

~~~
pjc50
Even more hilarious is that there are companies that _do_ make money out of
this kind of predatory lending. Uber can't even get usury right.

~~~
jff
That's the end goal of the "We finance everyone!" car dealers, right? Get you
in a high interest rate loan and either the client eventually pays it off
(paying $15,000 for a car worth $4,000) or they default after 6 months and you
take the car back and sell it again.

------
ceejayoz
> A 2014 Toyota Corolla was recently being offered for a term of 130 weeks at
> $122 a week, totaling roughly $500 a month, according to marketing materials
> distributed by Uber.

Only Uber could lose money on a $500/month 2014 Corolla lease.

~~~
tyingq
_" drivers...will be able to return the car with only two weeks notice, and
limited additional costs. The program allows for unlimited mileage...with
routine maintenance also included."_

The core problem for Uber is that the terms made it more like a car rental
than a lease. Uber pays the maintenance, unlimited miles, and there's almost
no penalty for bailing on the lease. $500 a month (~$17/day) to rent a 2014
Corolla is actually well below market.

~~~
jsjohnst
I'm currently renting a 2017 Corolla from Avis for just over $23/day all taxes
and fees included.

~~~
tyingq
There are great deals for certain locations.

------
SHAKEDECADE
The smoke is thick and the flames are really starting to show..

------
ChuckMcM
Wow, if even half of that is accurate that is pretty amazing. I always wonder
about such stories on how much oversight is involved. Clearly for a company
moving fast you have to trust the people closest to the situation to make the
best decision, but do you do that when there $600M in play? Do you review
their plans and pencil out the math?

It sounds like it will be especially challenging to unwind as well.

------
pbreit
The author mentions "sub-prime" borrowers several times but I don't see any
indication that borrower quality had anything at all to do with Uber's
problem.

I always thought sub-prime borrowers were unfairly blamed for the mortgage
crisis. There were a lot of average & prime borrowers walking away from
ridiculous "nothing down, 1%" mortgages.

~~~
jandrese
A house would have to be staggeringly overpriced for a 1% fixed loan with no
down and no points to not make sense. Especially if they qualified for a prime
rate.

Hell, if I had that loan available I would totally take it and run with it.

~~~
bronson
Well, 1% loans never existed. They were just teaser rates. After a time period
(say, 3 years), it would reset to awful ARM rates that the borrower couldn't
possibly afford.

The loan agent: "No problem, just refi before then."

~~~
jandrese
So people were running away from loans that were about to get way more
expensive? Who could have ever seen this coming?

IIRC you can't refi if your house value has dropped below your equity in it,
meaning those people didn't really have a choice.

------
ww520
Uber is about externalizing the cost to others. It's no surprise they bleeding
red once they take on the cost themselves.

------
randyrand
Do people actually care that Uber is running at a loss with rich investor
money? It seems like a good form of income redistribution. You would think the
left-tech scene would be in favor of this.

------
koolba
Does this mean there is (or will soon be) a glut of Priuses on the market?

~~~
toomuchtodo
There is a tidal wave of used cars coming into the used car market due to
substantial subprime defaults, including these Uber vehicles.

------
paul6987
Uggh read below (edited my 1st comment after fully reading the terrible
details that will hugely and negatively affect a friend)

~~~
paul6987
Also, wow my friend whose parent made him go bankrupt at 18 (put his name on
deed of their house & didnt tell him) is going to lose his car he uses to make
money and support/transport his family.

Whoever votes me down has no heart. Uber is run by criminals!

------
bogomipz
>"The Xchange Leasing division had been estimating modest losses of around
$500 per auto on average, these people said. But managers recently informed
Uber executives that the losses were actually about $9,000 per car — about
half the sticker price of a typical leased vehicle."

So their accounting was off by almost two orders of magnitude?

My first thought was "how was this even allowed to happen?" But then I read:

>To fund these leases, Uber obtained a credit facility of $1 billion last year
from a consortium of banks including Goldman Sachs, J.P. Morgan Chase,
Citigroup, and Morgan Stanley."

I think this is what happens when its all funny money. Uber loses hundreds of
million of dollars a quarter and yet big banks have no problem writing them a
check for another billion. I'm guessing none of the banks asked what the
credit facility was for or even any details about the leasing plan it was
intended to fund?

~~~
aetherson
In all fairness, 2 orders of magnitude over $500 is $50,000. They're a lot
closer to 1 order of magnitude ($5,000) than two.

~~~
bogomipz
Sorry yes, definitely not a factor of 100. That's what I get for being up late
:)

But still it's greater than even a single order of magnitude which is a
substantially large accounting discrepancy.

