A Blog by Jonathan Low

 

Mar 5, 2019

Why Automakers Are Trying To Convince People To Subscribe, Not Buy

The trend lines are already evident. Urbanization is growing globally - and owning a car in a city is both expensive and inconvenient.

And as with traditional lease agreements, the car companies may eventually be able to make more money from subscriptions than from sales.


Henry Grabar reports in Slate:

The wind is blowing toward a subscription model—one estimate has sales dropping 40% in 25 years. Digital infrastructure made this business possible. Smartphones are faster, and more widespread. Car keys are obsolete, short-term rentals coordinated on the fly. Ride hailing has increased. Info about complementary services like train or bus is accessible.The auto industry is contemplating ways to market vehicles as a service. The business model will depend on utilization rates. The new services hew closer to lease agreements than to rental contracts. The startups believe they save people money, and rapid growth suggests users agree.
Bodil Eriksson is a longtime Volvo executive charged with finding a way to get people to buy fewer cars. The new subsidiary she leads, M, is the latest attempt by a carmaker to enter the car-sharing space dominated by startups like Car2go (owned by Daimler) and Zipcar (owned by Avis). This spring, M will roll out hundreds of subscription-accessible cars in a to-be-announced American city, making Volvo the latest automaker to challenge the model of personal car ownership that has defined the American way of life for nearly a century.
Eriksson walked the walk: She gave up her car when Volvo announced M last summer. “Super frustrating. I’m not getting a car until we’ve solved it,” was how she described navigating the carless life, before adding: “And there’s also a little bit of liberation in there. I was so strangely attached to my car; I started all the planning with my car.”
Say hello to a 21st-century auto exec. You’d think those two goals—selling people cars, and renting people cars so they don’t have to buy them—would be at odds. And they might be. But you won’t hear the automakers say so. In any case, they feel the wind is blowing toward a subscription model—one estimate has sales dropping by 40 percent in 25 years—and they don’t want to be left behind.
So a modern city dweller who wants to get behind the wheel will find herself with a bewildering array of services that aim, in various ways, to improve on traditional rental car contracts and lease agreements. General Motors has Maven. Cadillac tried (and says it will relaunch) a lease-style service called Book. Last week, Car2go merged with BMW’s DriveNow, cementing its place as the industry leader with the promise of a $1.4 billion investment. There are many, many more companies trying a version of the same thing, with titles straight out of a Silicon Valley name generator: Flexdrive, OpenWheel, Free2Move, Car4U. So many that you won’t know which two of those names I made up.
For many of these outfits, car-sharing is “probably not profitable, but this is a unique time,” observes Jessica Caldwell, an analyst at Edmunds. The auto industry is in its biggest shift since the internal combustion engine. “You cannot not chase down a direction, because if it turns out that’s the way and you’re not on it, you find yourself out of business and irrelevant.”
The fundamental idea here—improving on the irritating and lugubrious ritual of renting a car—is not new. Zipcar is older than the iPhone; Car2go is older than Uber. But several recent trends have given the industry a boost.
First, the digital infrastructure that made this business possible a decade ago has advanced rapidly. Smartphones are better, faster, and much more widespread now than they were then. It’s not just that car keys are obsolete, but that short-term rentals can be coordinated on the fly. Information about complementary services like train or bus arrivals is also newly accessible.
Second, the rise of the ride-hailing companies has reduced the burden of being stranded without a car—and increased the distance customers can easily travel to access a rental. “Would it be nice to just call a car and have it delivered by a concierge? Yes. But there’s not a lot of friction to move yourself to a vehicle within a five- to eight-mile radius,” argues David Liniado, a vice president at Cox Automotive who has invested in Getaround and Ridecell. For decades, people kept a car at home and drove to get everything. Now that everything gets delivered to your home, getting the car could become the errand.
Third, the auto industry (inspired by Uber) is contemplating various ways to market its vehicles as a service. Many of the new services hew closer to traditional lease agreements than to rental car contracts, with customers taking possession of vehicles for months at a time. Views on the arrival of commercial autonomous vehicles differ, but nearly everyone agrees they will arrive in a subscription or fleet model before they’re available for purchase
Elon Musk wants to enable future autonomous Tesla owners to rent out their own cars when they’re not using them themselves.
Fourth, cities and customers are changing their views. Car2go, which permits users to leave cars in any legal parking space, depends on deals with cities to avoid accruing millions in parking tickets. And cities are overriding parking-hoarding residents to cut deals. “Over the past 24 months, you’ve really seen municipalities understand the benefits of taking away street parking spaces,” says Michael Mikos, who leads Car2go in the U.S. and Canada. “Today, cities are knocking on our door.” Vancouver, the company’s biggest market, has an astounding 200,000 Car2go users—a market, but also a political coalition. (The city also doesn’t permit ride-share companies like Uber and Lyft to operate—for now.)
A more fundamental arbitrage is at work than just innovating the Hertz model. Americans love cars on a deep level, which has blinded us to the fact that the personal car has always been a bit of a pain in the ass. It depreciates rapidly, costs a lot to use ($8,800 a year for a new vehicle, according to AAA), and spends 95 percent of its life sitting around doing nothing. But in the great industrial coup of the 20th century, Detroit got America remodeled so that the automakers’ product became a prerequisite for working (or doing virtually anything else). No country has a higher ownership rate.
Given all that, most starry-eyed car-sharers believe their product will not just enable carless urbanites in San Francisco to go vineyard hopping on the weekend, but convince red-blooded grease monkeys to give up their rides too.
There are limits, but no one is sure where they lie. “It all comes back to this question of whether you need a car to get to work,” observes Robin Chase, co-founder of Zipcar and organizer of a shared-mobility, anti-traffic manifesto to which various companies (including Uber and Zipcar) have tied their mission. “That is the one use case that if you need it, you will own one, and all the other use of that vehicle follows because of convenience and sunk costs.” In nearly all U.S. cities, the vast majority of people drive to work alone.
Still, there are a lot of people in that partial car use bracket: transit commuters with night-and-weekend car needs, to start with. But then, industry figures think, a whole lot of multicar households where both cars are rarely used at the same time. The average U.S. household has two cars.
Some users may decide whether to own a car or use an app based on whether they love their vehicle more than they hate parking it, but for most, it’ll come down to money. The startups believe they save people money, and rapid growth suggests users agree: U.S. car-share membership was at 1.5 million in 2017, according to Susan Shaheen at the University of California, Berkeley; Car2go’s user base alone grew by 20 percent between 2018 and 2019 to 1.2 million users.
The companies, as companies are wont to do, say that the business model is a good one. If it is, it will depend on utilization rates. Volvo is basing M off a Swedish program called Sunfleet which operates a 1,700-car fleet in Stockholm. Eriksson believes that M can put its cars in use (meaning rented, not necessarily in gear) 40 percent of the time. In part, she said, that would be achieved by getting a diverse user base to spread demand around different times of day and week, including while most users are asleep.
That is also part of the charm for cities turning parking spaces over to these companies. Some of Shaheen’s research suggests Car2go’s vehicles are so efficiently used that each one can take 11 private cars off the street. That doesn’t necessarily mean less congestion, but it would create more room on the streets.

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