A bad week for ride sharing: Ofo’s wheels buckle under the weight of losses, as Uber hits a wall in the UK

21 December, 2018

The fate of some major ride share operations has had a rocky week. First of all, Alibaba’s massive bike share company Ofo announced it could be on the downhill track. The the UK Court of Appeals, its highest but one court, found drivers were “workers” with all the implications that follow. If imitated elsewhere, this could challenge the ride sharing company’s planned USD120 billion+ IPO.

Uber’s major legal setback could hurt its planned IPO

In a landmark decision, following years of litigation, the UK Court of Appeal this week upheld a 2016 ruling that classified Uber drivers as employees (“workers”) under UK legislation. The implication means they are entitled to holiday pay, sick pay and a minimum wage.

The decision (which was not unanimous and is likely to be appealed) would fundamentally disrupt Uber's business model. Britain’s GMB, a general trade union with over 630,000 members, estimates drivers could each be owed as much as GBP18,000 in backpay and entitlements.

The verdict upheld the lower court ruling that would require Uber to classify all of its riders as workers, which would entitle them to sick pay, holiday pay, benefits and the minimum wage.

The Court of Appeals found there was a “high degree of fiction” in the wording of the standard agreement between Uber and its drivers. Uber argues they are actually self employed independent contractors who do not enjoy the normal employment rights.

One of the dissenting judges, Lord Justice Underhill, expressed the view that the relationship Uber argued for “is neither unrealistic nor artificial”, accepting it was “in accordance with a well-recognised model for relationships in the private hire car business”.

After the earlier UK ruling, Uber was granted a 15 month probationary licence, basically to get its act in place. Uber is making changes in the way it operates, but if forced to treat all drivers as employees, this would severely disrupt the value of the app-based model. Expect further modifications….

The UK court ruling has no impact on Uber’s activities in other countries but it will no doubt lend fuel to the fire of other unions and drivers around the world – even if for many of the drivers it might mean shooting themselves in the foot. Anything that equalises the cost and conditions with that of taxi drivers seriously dilutes the advantage of car sharing strategies.

The privately held group is anticipating an IPO in the US in 2019 and hoping to raise over USD120 billion. It has been losing very large amounts of money until now and this is the investors’ big chance to cash in. Uber drivers however are complaining that they will not benefit from a public sale, perhaps adding another dimension to the equation Uber will need to apply in its sale. It also has to compete with companies like Lyft, a major competitor in the US.

Ofo’s rocky road

Ofo is one of two big Chinese bike share companies. According to Ofo CEO Dai Wei this week, “The whole of this year we’ve borne immense cash flow pressures. Returning deposits to users, paying debts to suppliers and keeping operations running,” said in a post on social media.

Ofo, which along with arch-rival Mobike has pumped over 20 million bicycles into the Chinese market, may well become financially unviable. It has reportedly been losing around USD25 million per month. Having to refund deposits to millions of users only adds to the spiral.

The bike share phenomenon, part of the sharing economy, has involved millions of bikes being deposited in markets around the world, often ending up in rivers or piles on vacant lots.

It’s a questionable strategy, but largely designed to create the “last mile” data on users who can’t reach their destination by car or other modes.