Automakers have shifted focus from products to services. Prepare for a major shift in the way we pay for automobile usage.
The idea of sharing a car, or subscribing to a vehicle pay-for-use service, predated the smartphone explosion by almost a decade. In 1999, two business-savvy moms in Cambridge Mass. whose kids went to the same kindergarten came up with the idea for what later became Zipcar. They ran the plan past some folks they knew at the Massachusetts Institue of Technology’s Sloan School of Management and were happily surprised by the positive feedback they got.
The two raised about $100,000 with help from investors and had cars on the street within a year. Two years later they raised $4.7 million in capital. By 2006 they had raised $25 million. A few acquisitions and other fun business activities later, and Zipcar went public with a $1 billion valuation in 2011. Zipcar now offers Zip trucks as well as cars. By 2016, Zipcar estimated that its 1 million subscribers had taken 400,000 vehicles off the road. This sudden rise in the popularity of just one type of car-sharing did not go unnoticed in Detroit, Hangzhou, Stuttgart, and Seoul.
Rather than beat ’em, automakers have decided to join ’em.
Business models based on subscription rather than purchasing a physical product have completely upended loads of other industries. Think about the purchases you make now, versus those 10 or 15 years ago. Music fans — aside from a core of vinyl collectors — don’t buy music. They subscribe to a service that provides it. If you’re a photographer, you don’t buy a box of software from Adobe to get Photoshop anymore. You subscribe to a service like Lightroom.
The subscription model works for anything that consumers see as a commodity, including cars, and the timing couldn’t be better. The average price for a car now hovers around $34,000. With 20% down, you’re looking at a monthly note of $540.
And that’s TODAY. The industry is on the verge of introducing cars with wildly expensive, soon-to-be-federally mandated safety features like auto-braking, lane-keeping assist, advanced cruise control and fully autonomous technology. You can easily see the price of an average car going up 10 to 15 percent. Ironically, cars in the low end of the spectrum will see an even greater percentage increase.
At the NEMPA/MIT Technology Conference in 2016, there was a lot of talk from GM about all the technology GM had in the pipeline for “connected cars.” GM was ready to launch in-vehicle WiFi, automatically-generated advanced warning of failures or maintenance items that needed addressing, and ways to automate driving.
Yes, those technologies provided a consumer benefit. But they also enable the company to control and manage a massive fleet of cars. Cars owned by GM, but being shared by users in various ways.
In February of 2016, GM’s CEO, and Disney board member, Mary Barra, described what she called GM’s “Game-changing personal mobility initiatives” in a meeting with investors. Barra said in part, “…we believe together we can work and put an autonomous fleet of sharing vehicles available for use quicker than anyone else. We also believe in the short term the arrangement that we have with Lyft will allow us to capitalize on providing and being a preferred provider for short-term-use vehicles…”
GM’s CTO, Jon Lauckner, made it even more clear, saying, “We’ve had this owner-driver model in place for I don’t know how many years. Now we see ride-sharing really gaining traction.”
GM’s vision is familiar to anyone who owns a smartphone. That’s no accident. GM’s Harry M. Lightsey came to GM from ATT where he was a Senior Vice President. Lightsey sells his vision of connected, self-driving vehicles being paid for via subscription service as “improving safety” and “improving lives.” So how do ride-sharing services converge with subscription-based vehicle usage? Simple. You will use the same app, but when the car arrives there will be no driver. You’ll hop in and either drive it, or it will drive you, where you want to go.
That’s two steps away from the present, though. First, we’ll all get used to paying for the cars we use on a monthly basis, or usage basis, rather than “owning” one. If you’ve been leasing a car, the difference is nothing more than semantics.
GM’s hope to provide vehicle services as part of a subscription shifted from a plan to a reality early this year. Cadillac’s Book subscription service first launched in New York City. The unique part of Cadillac’s program is that it allows drivers to pay a flat monthly fee of about $1,500 to enjoy the use of any one of Cadillac’s vehicles.
The fee includes almost everything we currently pay for piecemeal. The car, maintenance, insurance, and state registration are all handled by GM for your flat fee. No hassles, just a car when you need it. Or an SUV or crossover. Subscribers can pick and choose the Cadillac that meets their needs in any given time frame.
Volvo also offers a subscription service. Called Care By Volvo, it mirrors the basic elements of the Cadillac service and it starts this month. Porsche has also just launched a pilot program along these lines. If you were expecting the luxury brands to hold this ground, think again.
Kia presently offers a subscription service for its affordable 2018 Ioniq Electric car, in California. Like luxury features and safety technology, subscription services are trickling down to the mainstream brands in a flash. So what will be the factors that help nudge drivers towards subscriptions? One factor may be choice. GM, Kia, Volvo, and Porsche assume that their portfolios will meet a subscriber’s every need. But how many consumers stay loyal to just one brand?
For those drivers who prefer to be able to choose a new brand or type of vehicle frequently, large dealer networks may become the subscription provider. One dealer is testing the theory. Eric Flow is the president of management services at Winston-Salem, N.C.-based Drive Flow. Drive Flow is backed by a network of 38 car dealerships and has begun to offer subscription services just like the plans Cadillac and others are offering, except you are not locked into one brand. Subscribers can pick vehicles from whatever brand they want.
Eric Flow told Automotive News, “For us, it was a very natural fit. It’s not necessarily a replacement for our core business. It could be over time; it’s an additional offering.”
So how might the shift to services impact auto sales, and when might a meaningful shift occur? Sam Fiorani, Vice President of Global Vehicle Forecasting, at AutoForecast Solutions, LLC turned the tables and said the first question should not be how much, or when, but where subscription services will take hold. Fiorani says, “Outside of urban areas, vehicle ownership is a necessity.”
In major urban areas, it’s a whole different story. “In the urban areas where these subscription services could be used, people might look to them as an alternative to Uber or Lyft,” said Fiorani. He added, “A large portion of the population of cities like New York do not have cars because of the inherent hassle involved with ownership on the busy and narrow streets. Instead of owning a car, the $2,000 service would allow someone [in Manhattan] to gain the benefits of driving themselves to and from events without the issues of finding permanent storage.”
Fiorani’s take on subscription services is similar to Eric Flow’s in that he thinks they might actually add to overall sales over time.
The satire site The Onion just posted a story entitled “Buick Introduces New Self-Buying Car.” It’s funny, but it’s also exactly what the subscription model is: a way for automakers to cork their sales numbers without every actually having to get a customer with sketchy job prospects, massive household debt and a shrinking bank balance to sign a loan for a car that’s never been more expensive, and showing no signs of getting cheaper.
Former GM Vice Chairman Bob Lutz has been making headlines with the doomsday opinion that everyone in America is going to sell their cars for scrap in five years. He’s missing the point entirely. If the subscription model does for cars what it did for televised entertainment, there may be more new vehicles on the road than ever.