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Comment by mmakunas | Hacker News Reader

Maybe I'm missing something but that number sounds hard to believe. An S-Class in the US is $100K. Even if a stripped down "utility" version was available at $50K that's $5B worth of cars. Yes, it's a "long term" order (i.e., not paid for and delivered at once), but that seems way beyond anything even Uber would do.

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The deal is probably similar to the way an airline buys planes. E.g consider when Ryanair bought 200 737s for $22Bn [1] which is about the same in it's entire market cap.

An order like this is probably:

* For a delivery spread over 10+ years

* The vehicles will almost certainly be leased/finance

* Each vehicle will probably assume a 5+ year working life and have a residual of about perhaps 25% of list after 5 years given the likely mileage

* There will be a big initial discount given the size of the order

So assume each car, is $100k new, but given an order that size is perhaps a 40% discount. So that's a $60k sale. After 5 years, the car is perhaps worth 20k.

So the unit economics are that each car costs (before financing costs) 40k over 5 years, or $8k a year. This is a relatively low cost given the number of rides it can take and the cost of the driver who will be driving it.

On that basis is doesn't sound that expensive.

[1] http://corporate.ryanair.com/news/news/14908-ryanair-places-...

> After 5 years, the car is perhaps worth 20k.

No way. Absolutely no way. Looking online I'm seeing estimates of 300,000 to 500,000 miles per year in a taxi. If Uber is even NEAR that max, this car is going to have 300,000 miles on it. Hell even 150,000 is a ton of miles on a used vehicle.

Looking at KBB with a base S-Class that's 5 years old with 300,000 miles you're looking at roughly $12k in "good" condition (because, let's face it, people are going to be in this thing constantly and "good" is the rating the majority of used cars are in when they're sold).

Then factor in that Uber is not going to become a used car company (at least I would imagine they wouldn't) they're going to have to sell even lower than KBB to a third party so that third party can make any money. So I'd bet one of these cars would end up selling for $6k to $8k depending on mileage and condition after 5 years.

Lowering the sale price to $7k only bumps the per-year cost to Uber from $8k to $10.5k.

True which is a $250k difference if my numbers are even correct (I mean I think they're closer than parent's but who knows). But $250k isn't that much when the company is a billion dollar company.

A difference of 250m, rather than 250k, which again, I guess still isn't that much for a 60 billion dollar company. Total depreciation on these is going to eat up up a billion in value a year, or only about 2% of market cap, assuming they keep or grow their valuation.

Oh man how could I make such a mistake? I got thrown off by the lack of zeros. I can't even edit it. :(

Cars are devalued by mileage because the average car is taken care of so poorly that small damage accumulates into big, irreversable damage over time. For example, waxing wears off -> unwaxed surface pits -> rust forms -> holes form. If you re-wax the car often enough to prevent it from ever pitting, you'll never see rust or holes no matter how long you own the car. Same for most of the other components.

Individual drivers may not be able to take very good care of their cars, but large companies that use fleets of cars can take them regularly (perhaps even every night, as their default storage) to maintenance garages and have them restored.

Except that, in practice, rental fleet cars are typically only kept until they have fairly modest mileage and then sold off.

Doesn't matter how many miles are on a car, all that matters is how many are left and incremental cost per additional mile due to maintenance/repair. :)

I think this explains why they need Mercedes. It is a nice car that can have a lot of mileage easily.

The average taxi puts 70k miles per year on their car. So after 5 years these will have 350000 miles. Its not going to be worth anywhere near $20k

Great analysis but this makes it sound even less likely. Going from zero marginal costs to something like this seems totally against their current model.

It seems like it would make more sense for a partner company to be the one that has all of this in the books and Uber just leases from them.

so they pay 800,000,000 per year for 5 years?

$40,000/car * 100,000 cars = $4B. that's only a 20% discount over the course of 5 years.

In the states the franchise laws do not allow Uber to buy directly from the manufacturer. Also, the margin on an S class sold in the US is approximately 15%, not 60%.

Thanks for the breakdown, it was a helpful analysis.

"Uber had placed a long-term order" [...] "Uber is particularly interested in autonomous driving vehicles, the magazine reported, adding that such cars are expected to be available after 2020."

Perhaps the long-term order is a commitment from Uber to motivate Mercedes to invest more heavily in autonomous vehicles? If the long-term strategy of Uber is to have a fully autonomous fleet then a long-term commitment of $5bn with one manufacturer seems plausible.

I'm sure there's a volume discount when you order 100,000 of anything, even an S-Class. There's also the possibility of this not entirely being a cash sale.

That is, if the report is even true.

Yeah but how much of a discount? The example in question was already assuming $50k per car which is already a tremendous discount. Even if you cut it in half again to $25k (which there's no way the price per car is that low) that's still $2.5B in cars. That's insanity.

Depends on how this is structured, if it's say 33k cars on a five year lease, renewable twice that's ~2.5B over 15 years. Also, Uber has a huge and arguably inflated market cap, so if they get this deal in exchange for stock it could be very valuable to them in the short and long term.

Which is why I suspect this isn't a simple cash transaction, and may involve equity or revenue share or something along those lines.

Think so too. Most likely Daimler will get a stake in Uber - which makes sense for both sides.

Uber is what you need to make an auto-driving automobile acceptable to the general public. With Uber spin, Daimler can push on the driver-less car in many markets..

Sci-fi days ahead methinks.

Tesla seems to be doing a fine job showing the benefits and safety of autonomous vehicles to the general public and regulators.

Which Tesla vehicle is self driving?

Both the Tesla Model S and X are Autonomous Level 3 capable:

"The driver can fully cede control of all safety-critical functions in certain conditions. The car senses when conditions require the driver to retake control and provides a "sufficiently comfortable transition time" for the driver to do so."

https://en.wikipedia.org/wiki/Autonomous_car#Classification

Its expected their Model 3 mass market vehicle will contain the same, if not a greater level, of driving automation.

Disclaimer: I've traveled down the interstate in a friend's Model S for ~2-3 hours at a time at ~85mph in autopilot mode with no intervention required.

Why would it be in Daimler's interest to push driver-less cars? Their sales would go down in the long run.

Long term, driverless cars are going to happen so they might as well get in early.

If you can't beat them, join them.

Especially if there is no middle-man dealer to pay. On a $100k S-Class, Invoice comes in around $93k. Some people are able to pull off sub ~88k sale prices at dealers.

I wouldn't be surprised if the wholesale (with profit) cost on a S-Class Benz is somewhere around 65-70k. I'd imagine that the cost of building an S-Class (100k retail) over a C-Class (~40k) is nominal.

Respectfully, your inference is entirely off base. Trivial research gives you the wholesale value. A slightly deeper dive gives you the manufacturer margin. Franchise laws prohibit direct sales.

Well, if they expect to use them as self driving cars (which the article mentions), the investment can pay out pretty quickly. Say they can make on average 5$ per ride. To make $60k they need 12k rides. A self driving car should be able to easily make 12k rides in one year (only 32 rides per day).

Only 32 rides per day? I would think that's pushing the limit. You will have to buy cars for peak times, so most of them will see only a few hours of use each day. At a guessed 6 hours of busy service a day, that's 5 trips an hour, or 6 minutes to drive to a customer and 6 to drive him where he wants to be.

Also, a risk here is that other large parties will make the same calculation, flood the market (anybody with money will be able to start a cab company with a lot less hassle from labor laws because you don't need that much personnel) and drive margins down.

To win in this space you probably will need both a lean model of operations and a good image in the customer's eye. Uber currently seems to have both, but committing _now_ to a provider of cars is risky (what if other manufacturers turn out to have better or cheaper self-driving cars?). On the other hand, it also may be necessary to commit now in order to stay lean (committing now probably gets them a nice price cut)

Perhaps they're purchasing these to handle the constant/baseline load of riders throughout the day, and then will continue to use human drivers & contractors to supplement demand beyond that, eg. the peaks times you mention.

So it'd be the best of both worlds for Uber: being able to put the self-driving vehicles to use around the clock and not having to make a capital investment to handle spikes in demand, which would just continue to be handled by existing drivers (for now). Just call in the human backup to help out when required.

I'm also wondering if they made the huge order so that they'd be able to influence and guide the requirements for the vehicles to Uber's specs. It seems that the requirements for a self-driving car for an individual's use differs from that for commercial taxiing.

6 minutes to drive to a customer and 6 to drive him where he wants to be.

You're assuming that each ride is independent, but that's already not the case with their Smart Routes - the driver picks up a customer, then picks up another one on the way, then drops off the first and picks up a third, etc.

The goal stated by their CEO is "perpetual rides", in which the car is never without a passenger.

Perpetual rides may be their goal, but I don't see how they will not get there. For example, there's no way they are going to find as many people wanting to go to sport stadiums as are wanting to get away from them, just after the end of the game, and stadiums typically are so far out of about every other destination that they cannot make a detour there with a paying passenger on board to pick up a second passenger.

That applies to a lesser extent to such things as theaters and cinemas, and even suburbs (who wants to get picked up there at 1 AM to fill the car that that theater goer took home?)

They will get below 50:50 for "at least one passenger on board", but it would surprise me if they managed to beat a 25:75 ratio.

>> "...what if other manufacturers turn out to have better or cheaper self-driving cars?"

Cheaper, certainly. Everyone will have cheaper SD cars than Benz, just as everyone has cheaper cabs than an S-class today. But better? If history is any guide, German luxury will be the gold standard of automotive UX for our lifetimes and beyond.

I don't think they need to tackle peak driving time at the start. They still have all of those regular drivers. Surge pricing should still draw out humans.

That was my thought actually - but reversed: Why on earth would they need that amount of cars when self-driving cars are just around the corner?

If these are self-driving cars, it makes sense to me, otherwise it doesnt.

It's hard to come up with a huge number of cars on the spot once self-driving cars are available. It's much easier to retrofit your already existing cars.

Retro-fitting. They buy plain old cars and then slap their sensor suite on top.

That seems way harder unless they plan on buying a very small number of car models. Every different car model (even the same model between years) has different performance characteristics (do you issue the same orders for "hit the brakes" to a car that needs 100ft to go from 40-0 as a car that needs 50ft?) and physical dimensions which would necessitate different software optimizations and sensor calibrations. Development plus rigorous testing of every configuration means this quickly gets out of hand unless you standardize on 1 or a very small number of models.

Hence buying 100k of the same car.

The deal could be structured like contracts for planes.

Uber placed an order for 10,000 vehicles with the option to purchase 90,000 more.

That's what, 1/9th of Uber's current valuation? And it's the heart of their business.

"it's the heart of their business" but the fact that it's a fundamentally alternative business model from anything they've taken a cent of revenue on is important to note.

It's like if airbnb bought $5B of Manhattan real estate. Yes, it's "the heart of their business" but also - wow.

Sure - but I think it's always been the expectation that Uber/Lyft/Sidecar before it went bellyup were participating in the sharing economy only as a stopgap until autonomous cars are available.

With Airbnb, I don't think anyone expects them to pivot into owning their own property. There's no real benefit.

I don't know, if I were an investor in Uber and saw them place a $5B order on Mercedes S-Class cars, I would think that there's a good chance they're worth $100B.

Haha, I just checked. A recent valuation is $68B. (Dec '15)

Agree. Even if Uber got them at 1/2 price, let's say $60,000, the math doesn't add up. Assuming they don't do some fancy accounting and tax magic.

Or something completely boring like leasing them.

Over ten years, that's $6k a year.

Yeah, I think you are missing _something_ ;)

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