Why AB 5 should be the best thing to happen to ride-hailing since the smartphone

On September 10th, the California State Senate gave its final approval to AB 5, a bill requiring companies to treat contract workers (such as gig ride-hailing or deliver drivers) as employees, with all the implications for regulation of work hours, pay, benefits, etc.

The dust is far from settling on this one: Uber is already doing its Uber thing (Regulation? What regulation?), Lyft is performing jedi mindtricks on their drivers, and millennial news sites are declaring the coming of the neo-socialist revolution.

The next steps are sure to be interesting, as the platforms that have been powered until now by gig-economy drivers try to contend with the new requirements. But as most of the coverage is discussing the victory for gig workers and the death of ride-hailing as we know it, let’s talk about why this legislation could and should be a great development for the industry that will help realize the sustainable and profitable mobility business models we’ve been dreaming of.

When drivers become employees, ride-hailing can become more efficient, unlocking possibilities for optimization that aren’t possible when drivers operate as independent contractors whose compensation is dependent on how many and which rides they complete:

More Efficient and Optimized Supply:

Ride-hailing companies have developed well-documented tools and techniques to motivate and manage driver behavior, designed for an operation in which drivers make independent decisions to try to maximize their individual earnings. But these tools cannot yield perfect, optimal outcomes, and drivers are learning more and more not to respond to them.

The Harvard Business Review even recently published a study explaining why drivers don’t like being manipulated by those tools very much. And it makes sense: if my earnings are based on how many and which rides I complete, it seems a little fishy that an algorithm has so much control over how many and which rides I complete.

But once a driver’s compensation is based on an hourly wage, all fleet optimization decisions can be made by a platform that aims to maximize the total fleet revenue. Drivers receive fair compensation, so which rides to take, when to drive to an area of high demand, when and where to change shifts with another driver, when and where to fuel or charge the vehicle — all fleet operations can be optimally calculated and assigned.

Additionally, drivers treated as employees no longer need to provide their own vehicles, and drivers can work in shifts to break the 1 driver to 1 vehicle relationship that throttles fleet asset utilization today.

Now is the point when the skeptics should say, “But how can we keep drivers motivated and on task? Won’t they just sit around all day?”

The answer for you, dear skeptics, is like any other employee: implement compensation programs to reward drivers for excellent performance (customer service, arriving on time for shifts, seniority in the company), opportunities to advance to new roles(become shift/ fleet managers with responsibility for other drivers), and monitor performance to address poor performance. There is even an existing demonstration of the feasibility of this model: a customer-facing mobility driver who has always been treated as an employee, following assigned tasks and directions without fail: bus drivers.

Once fleet operations are optimized by a platform, we can achieve much more: serve more rides with fewer vehicles (reducing urban congestion and pollution), generate more revenue on each fleet asset, and improve unit economics.

How much better can it actually be? We looked at exactly that question in our previous post. (Spoiler alert: a lot. It can be a lot better.)

Reducing Operational Costs:

The gig economy model for ride-hailing has also caused one of the greatest inefficiencies in the industry: drivers pay private consumer level prices for vehicles, fueling/charging, insurance, servicing, maintenance, etc. The result is that despite the massive growth in number of rides completed every year by ride-hailing companies, they have no economies of scale — the cost per ride remains constant.

When drivers become employees, fleet owners can hire them to operate on their unutilized assets, therefore leveraging their scale and expertise in reducing vehicle acquisition and operational costs and truly unlocking the cost-reducing potential as they scale in size.

This model also benefits drivers by saving them from taking on debt and risk that often comes with providing their own vehicle for ride-hailing.

Existing fleets like rental companies and car-sharing operators also have the advantage of invaluable infrastructure in city centers to park and service vehicles, and can leverage this to create an elastic supply of vehicles and drivers that can serve any ride-hailing/ on-demand delivery platform. Furthermore, the two business models often have complementary demand curves, for example allowing rental companies to allocate additional vehicles to serve ride-hailing on the weekends when rental demand is traditionally low.

But how?

AB 5 is scary for ride-hailing companies because it disrupts their asset-light approach, and presents an entirely different technology problem than the one they’ve been solving until now: how to match vehicles to rides, creating an optimal distribution of supply, how to manage driver shifts, etc.

But AB 5 can finally nudge the industry in a sustainable and profitable direction. Existing fleets, who are practiced and experienced in asset-heavy operations, can leverage their current vehicle supply, hire drivers, and open a new business model of on-demand mobility, even serving multiple ride-hailing providers from one shared fleet. Ride-hailing companies maintain the same customer-facing operation they have today, and can continue collecting the per-ride commission from the fleets that supply their platforms, but will benefit from saving billions of dollars spent on driver acquisition and operations, even moving forward towards profitability.

Similar to other industries where the infrastructure is expensive, such as energy and cellular where one infrastructure supplies many retailers/ providers, here too, fleets provide the shared vehicle supply, and ride-hailing platforms function as retailers of that resource, differentiating themselves on brand, pricing, additional services, etc.

Fleets have the assets and operational processes needed, but they need a technology platform to fully enable this transition, and that’s what we are doing at autofleet: providing the first ever Vehicle as a Service platform, that optimizes fleet supply to serve any source of demand.

So, Gavin Newsom (Governor of California)…do you need to borrow a pen?

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