What is the business model of "Carrot Run"? JPMorgan Chase has made a detailed calculation

Recently, Baidu's autonomous driving travel platform Luobo Kuai Pao has become popular, driving Baidu's Hong Kong stocks to rise by more than 12% on the 10th, reaching the highest point in over a month.

In response, JPMorgan Chase has put forward its own view: It is premature for Baidu to have such a market for autonomous driving taxis, and it is not reasonable from a fundamental perspective. Therefore, the upward trend in its stock price may weaken in the short term.

However, analysts further pointed out that if Luobo Kuai Pao's business improves profitability, it is expected to achieve a break-even point in a single city in the second half of 2024:

With the introduction of the next generation of vehicles and a significant change in the ratio of vehicle safety officers, Baidu's autonomous driving taxi business is expected to achieve a break-even point in several specific cities over the next few quarters.

However, the impact on the group's finances will remain minimal until this business achieves a large scale, which may occur as early as the second half of 2025.

Three key variables for further improving profitability

JPMorgan Chase believes that to improve the profitability of Baidu's Luobo Kuai Pao autonomous driving taxi, there are three key variables: pricing, vehicle costs, and the ratio of vehicle safety officers.

From the perspective of these three variables, JPMorgan Chase conducted on-site research on the autonomous driving taxi business in Wuhan and Shanghai, and summarized the conclusions as follows:

▲ We believe that the current pricing of Baidu's autonomous driving taxi is not commercially viable and therefore unsustainable, because it is unlikely to generate enough GTV to cover costs from an economic perspective under any operating model (taxi, ride-hailing, autonomous driving taxi). We believe the current pricing strategy is mainly to enhance consumer awareness and achieve initial participation. In our view, commercially viable pricing should be higher than taxi prices and lower than ride-hailing prices. We expect Baidu to adjust its pricing strategy for autonomous driving taxis after entering the mass deployment stage.

▲ Currently, labor costs are three times GTV, partly due to Baidu's aggressive pricing strategy, but more importantly due to the implementation of a two-shift system for in-car safety officers. We believe this is essentially a temporary solution because the fundamental purpose of autonomous driving is to replace human drivers. According to the Ministry of Transport's "Guidelines for Autonomous Vehicle Transport Safety Services (Trial)", remote safety officers can be used in the operating area designated by local regulatory authorities, with each remote safety officer monitoring no more than three autonomous driving taxis. We found that the autonomous driving taxis deployed in Wuhan use a 1:3 ratio (each safety officer monitors three vehicles). We believe that the domestic autonomous driving taxi industry will soon adopt a 1:3 ratio, which may reduce labor costs by 67%.

▲ Currently, hardware costs (i.e. depreciation) are equal to GTV. However, management and domestic news reports state that the cost of Baidu's next-generation taxi (Yi Chi 06) will be 60% lower than this generation. Therefore, adopting Yi Chi 06 will reduce hardware costs by approximately 60%.

JPMorgan Chase believes that although the autonomous taxi business in Shanghai is currently facing serious financial losses, with the strengthening of the three variables mentioned earlier in commercial deployment, Baidu's city-level profit margin is expected to increase significantly in the second half of 2024.

Path to Generating Substantial Profits

JPMorgan Chase points out that at present, Baidu's autonomous taxi business faces two major obstacles to generating substantial profits: balancing profits and losses at the unit economic efficiency level and obtaining regulatory approval for city-wide operations.

As long as these two obstacles are overcome, we believe that profits will only be affected by unit economic efficiency and the number of vehicles.

Given the highly developed electric vehicle supply chain in China, the latter can easily reach a large scale. Although it is difficult to predict the time when local regulatory approval for city-wide operations will be granted, we believe it could happen as early as 2025.