Recently we entered the second phase of next-generation mobility, the Fleet-Emergence Phase that is projected to last about a decade. The covid-19 pandemic is causing metropolitan areas to rethink consumer mobility and goods delivery, and urban consumers to reconsider vehicle ownership concerned about the contagion risk posed by public transportation and on-demand mobility services. Automotive OEMs should use this opportunity to analyze their models and decide when and how to transform. As I describe in my book Transportation Transformation, while personally driven vehicles will continue to be used during this phase, the changes we have seen over the past 10 years in urban consumer transportation preferences with the ascend of on-demand mobility services should have convinced OEM executive teams that significant transformations of their business are necessary. For some OEMs transformations will imply producing vehicles that are based on sophisticated technologies, such as self-driving cars. For others it will imply the adoption of new business models. Offering vehicle subscriptions is one such business model transformation OEMs are starting to adopt. This transformation, as well as the ability to offer on-demand mobility services, will necessitate that OEMs create and operate fleets.
Over the past 70 years, the automotive industry has been operating largely under the same model. They produce vehicles that they sell or lease to consumers through their dealer networks, and directly to fleet management companies. The pandemic, combined with low gas prices, and favorable financing terms (now stretching to 7-year loans) are leading more people to reconsider private vehicle ownership. But the high levels of unemployment that resulted from the pandemic, the uncertainty about how quickly economies will recover and the prospect that such a recovery may not result in the pre-pandemic employment levels , as well as the hassles associated with car ownership (insurance, depreciation of an asset that remains unused over 90% of the time), mean that it may take several years before car sales fully recover. Facing the prospect of a prolonged sales slump, on top of the need for heavy investments in order to address issues such as compliance with new emission regulations and tariffs, should incentivize automotive OEMs to consider a variety of transformation options along the technology and business model dimensions. The adoption of subscription models is one potential business model transformation. At this time, these models should be a top consideration because of the opportunities they offer to OEMs.
Today when a household expect the vehicles they acquire to act like a “Swiss Army knife.” Each such vehicle must be good for commuting, shopping, moving the family around on short and long trips, etc. Whether leasing or purchasing such a vehicle, the household is making a long-term commitment. But if we analyze on a day-by-day basis how consumers use their privately-owned vehicles, as our firm has done for a very large sample, we find, for example, that during the work week they may only need a small vehicle because they are commuting alone to and from work. But during weekends they typically need something larger, maybe a small SUV, to run major errands or take their family on a road trip. Subscriptions provide consumers with the convenience of having a vehicle parked outside their residence for at-will access without the constraints imposed by a lease or ownership.
A well thought out subscription program enables the consumer to:
- Make a shorter commitment to having access to a vehicle than a lease;
- Include in a single monthly payment every other expense associated with operating the vehicle, such as maintenance, insurance, parking access, etc.;
- Select what vehicles will be able to access;
- Access on-demand the features with which the vehicles in the selected subscription tier are equipped, rather than being locked to the features of the vehicle they purchased or leased; for example, extended battery range for electrified vehicles;
- Assess the value they are receiving from the OEM by utilizing this arrangement, compared to leasing or owning a specific vehicle, and determine whether to renew the subscription at the current level or even upgrade to a higher level based on the value they receive;
- Personalize the interaction with the OEM.
To the OEMs, vehicle subscriptions provide an annuity revenue stream, the opportunity for frequent direct and indirect interactions between consumer and OEM that will unquestionably strengthen the relationship between the two parties. The higher frequency and greater variety of interactions will enable the OEM to better understand the consumer’s immediate transportation needs and try to better serve them, in the process increasing the share of the “consumer transportation wallet.” Through these interactions the OEM will also be able to understand the design characteristics and features that must be part of future vehicle designs. Today car dealers and mobility services companies have a closer consumer relationship which they constantly use to their benefit. Frequent and direct interactions will also help OEMs determine how future vehicle designs and transportation-related services will address the consumer mobility needs. In fact, over time I can foresee subscriptions that offer a combination of vehicle access and on-demand mobility services. High-end OEM brands such as Mercedes, Volvo, Porsche, Cadillac, and Lexus are experimenting with vehicle subscriptions some of which include driver-centric services such as parking and concierge access.
The adoption of subscription models will also provide OEMs with a great opportunity to establish a direct-to-consumer sales model. To date Tesla and a few companies selling used vehicles, like Carvana, adopted Internet-based direct-to-consumer sale or lease business models. Incumbent OEMS have tested online sales, but those efforts remained small-scale business experiments. During the pandemic OEMs started to promote online, contactless sales. Ford reports that online sales jumped to 20% compared to low single-digits before the pandemic.
In addition to becoming proficient with direct-to-consumer models, the adoption of subscription models will turn OEMs to fleet managers and operators. It will require them to keep vehicles on the books for long periods, something they have resisted to date. It will also necessitate that they acquire new skills for fleet management and fleet operation. For example, how do you configure a fleet with the minimum number of vehicles to address an anticipated demand during a period, e.g., a year, so that the utilization of each vehicle is maximized? It is not unreasonable to think that most consumers would want access to a small car during the weekday when they commute to and from work, and an SUV or light truck during the weekend when they have to complete a variety of errands or take the family on a trip. Without any optimization the OEM will need to large number of small vehicles and a large number of SUVs and light trucks. The small vehicles are used during the week while the SUVs and light trucks remain idle. The opposite happens during the weekends. GM and Ford, both of which started and subsequently abandoned car sharing services, found it difficult to master that these skills and make their services successful. Simultaneously serving multiple transportation markets will provide a way forward to these OEMs. Consider how Amazon created AWS as a way to utilize its excess compute and storage capacity that it needed to address the high demand seasons of its retail business.
The lengthy market analyses and strategy reviews OEMs conducted in the past did not lead them to fundamental transformations and left them unable to take advantage of the changing urban consumer transportation preferences. The transformations they now choose to undertake and the models they adopt will determine the value chains they will be able to participate and the types of value they can derive. In the book I present several alternatives. Large corporations typically find it easier to transform across the technology dimension rather than the business model dimension. The automotive industry is no exception. A few days ago, while discussing the company’s first-quarter results, GM’s CEO reiterated that the company will maintain its investment pace in electrified and autonomous vehicles. While such investments are necessary, the transformations these companies must undertake are more imperative.
Buy the book to learn about additional transformations that OEMs, mobility services companies, and cities will need to undertake.
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