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Ola invests Rs 100 crore in its car leasing subsidiary

Ola invests Rs 100 crore in its car leasing subsidiary

By Nitya Pandit

In the heated competition with Uber to claim the position of a market leader, Indian online transportation network company Ola has now invested Rs 100 crore in its car leasing subsidiary called Ola Fleet Technologies. According to the document filed with the Corporate Affairs Ministry, Ola’s investment proposal was approved last month.

This Rs 100 crore investment is double the amount that was invested in this subsidiary in February of this year. Even with Ola Fleet’s performance being average, the cab giant has received fresh funding of Rs 1,675 crore from SoftBank. 

Breaking down the car leasing subsidiary

In 2015, the Bengaluru-based company had reported the setting up of Ola Fleet Technologies, with an investment of Rs 5,000 crore. Ola Fleet was its umbrella company’s largest capital infusion. Through this subsidiary, the company trains its drivers and builds its own fleet.

While drivers have to pay a minimum initial deposit and monthly lease payments for the first 36 months, they can own the vehicle after 3 years. Ola Fleet has not shown a consistent performance yet. The subsidiary announced a Rs 13.3 crore loss for FY16, in addition to Ola’s overall loss of Rs 2,300 crore, after a Rs 3.9 crore profit in FY15.

The GST effect

With the implementation of the new GST regime, both Ola and Uber will pay increased amounts of tax upon leasing. The burden of this significant increase in tax rates, from 14.5 percent to anywhere between 29 percent to 43 percent, will fall on the drivers.

The drivers are also partners of the subsidiary programme and are hence termed as driver-partners. These driver-partners choose to be associated with Ola Fleet and Uber, as they cannot afford to buy a car, but can at least make their earnings by leasing one to sustain their livelihood. The new regime will heavily impact them, as they will experience a significant increase in their EMI and will be set back by over Rs 100,000.

Why this investment?

The on-demand taxi industry has completely transformed one-way commutes in India, and competitive players have been on a rise. The players in this market grabbed attention by using technology like it was never used before. Now, however, the competition has intensified, and technology or pricing cannot be the only differentiating factor.

For instance, Mahindra is all set to provide competition to Uber and Ola in the future, by capturing a niche market within the cab aggregator sector, when electric vehicles become the craze. Hence, to stay competitive, Ola launched Ola Fleet.  

Both the cab giants have been functioning on the same business model. The competitors utilise the money from venture capitalists to subsidise the prices they charge, to an amount much below their cost. The model constituted of drivers getting many incentives and earning more, and customers paying less. This helped Ola and Uber destroy most of its small rivals. After more than five years, the bubble seems to have burst, as the money is running out, and while the passengers are still enjoying low prices, drivers are experiencing a significant fall in their earning.

What does the future look like?

While the car aggregators are battling to be number one and drivers aren’t receiving the incentives they wished for, the customer, most importantly, is at the receiving end. Hence, the likes of Uber and Ola should understand the importance of being customer-friendly. The cab giants can build strong passenger network not only by initiating a pre-booking option but also by having an alternative for the app, such as a website.

Featured Image Source: Flickr

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