OEMs at the Crossroads Part 2 | Who Wants to Own a Car?
Written by Jason Craker on
Change within an industry manifests itself in the evolution, and often fragmentation, of its business model.
Sometimes a new model replaces the old, for example, Blockbuster Video and Netflix. Sometimes new and old coexist, with the former consuming some of the market share of the latter; occasionally, the new model increases the size of the addressable market and everyone ends up better off. The example of Airbnb and hotels could be an example of consumed market share or a bigger pie, depending on who you’re talking to - which is kind of the point. The automobile industry is undeniably going through an extended period of upheaval, and speculation about the new normal is rife amongst futurists and industrial experts, albeit sometimes generating more heat than light.
One trend is clear - subscription models are becoming increasingly common, with several big-name OEMs experimenting with this alternative to outright car ownership. Although it’s a model embraced by many other industries (from media content to jet engines), the automotive retail sector’s early flirtations weren’t an unqualified success. However, the demographic shift from Baby Boomers and Gen X to Millennials and Gen Z (both of whom seem very comfortable with pay-per-use as a way of life) is accelerating both adoption and evolution. People are less keen to buy a car, but there are still times when they'll need to use one.
Volvo is a good example of an OEM reacting to changes in patterns of “ownership”. Care by Volvo, its initial subscription service in the UK, bundled a car, insurance, roadside assistance, a range of digital services, and home delivery into a monthly payment. Unfortunately, there’s a three-month notice period if you want to cancel the arrangement or change car. This isn’t exactly flexible when compared to new entrants like Lynk&Co whose subscription service can be cancelled at any time. Lynk&Co even allows customers to “borrow” (rent) a car for a single journey. However, Volvo is upping its game, and since mid-2018, its Car Mobility subsidiary has been trialling a car sharing platform in Sweden’s largest cities. This allows customers to book a car “from an hour to as long as you want” with fuel, insurance, and congestion tax included in the price. The experiment, now called Volvo on Demand, has been very successful, and a phased rollout in other countries is being planned.
Venture capitalists and entrepreneurs understand the potential of these app-driven, on-demand models, especially in cities where parking is at a premium. ONTO was set up to “provide a more accessible and affordable way for people to switch to electric cars” and has grown into “the largest electric car fleet in the UK and is Europe’s leading electric car subscription service.” Their subscription service allows you to change your car each month, choosing from a wide selection of sizes and brands, from volume to premium.
It'll be interesting to see how subscription models evolve and how the role of OEMs will change as a result. Perhaps it’ll go the same way as the bus industry, another highly traditional transportation sector which has a clear division between manufacturers and operators. Manufacturers like Scania and Volvo Buses focus on R&D, manufacturing efficiency, and supply chain management to develop the technology for the bus chassis, while operators like National Express and Arriva focus on providing a service designed to best meet customer demand. Within the automotive industry, there are certainly candidates with the customer experience, capabilities, and large-scale infrastructure to fulfil the operator role today, examples being fleet companies like Lex Autolease and LeasePlan or rental companies like Hertz and Europcar.
Hertz has had a subscription service (My Hertz Weekend) for a while, but it doesn’t compare well to the offerings of ONTO and Lynk&Co. However, in late 2021, it purchased 100,000 Tesla Model 3s and has since added 65,000 electric vehicles from Polestar. Buying power on that scale could give Hertz (and companies like it) the leverage to demand brand-specific functionality, which could help it develop a more competitive offering if they decided to seriously commit to this business model.
Strangely enough, factors outside the automotive industry might be accelerating the adoption of these new business models. There’s a fast-growing trend amongst builders of apartment blocks to provide car club memberships instead of parking spaces. It makes economic sense from their point of view and allows them to improve their green credentials. My son recently moved into a flat in Greenwich, and his building not only offers a shared gym and open-plan working space, but also access to both electric bikes and several electric cars. Barrett Homes and Enterprise Cars are examples of players in this emerging ecosystem. The UK Government even offers a car club toolkit for local authorities to enable them to deliver against a wide range of objectives, including “achieving net zero targets, improving air quality, reducing parking pressures and congestion, and offering a sustainable transport option that can fill gaps in public transport provision.”
I don’t profess to know which of the emerging models will flourish, but I’m certain that the current dominant model, the up-front purchase of one or more cars per household, will almost certainly be superseded within the next decade. I can easily foresee a generational split, with Millennials and Gen Z enthusiastically embracing subscription models, but I wonder whether there will also be a split between rural and city? Will the countryside’s poor provision of public transport solutions encourage those living there to cling to car ownership out of necessity in the same way poor rural internet connectivity has hampered the adoption of streaming and other online services?
One thing is clear, if OEMs aren’t the ones running these new business models, they’ll be no closer to the customer than they are today. If they’re happy to settle for a business-to-business relationship, they need to revert focus to manufacturing differentiation. If they want a business-to-consumer relationship, they need to work harder to catch the wave before it breaks over them.
Catch up with the full series...
Part 1 | Customer Intimacy and the Rise of the Agency Model
Part 3 | Are Cars the New Smartphones?
Part 5 | How to Thrive in the New Normal
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