Car owning vs. car sharing: which will make a lasting impact on car dealer profitability?
Sixty years ago car dealers could sleep easily. Their thirty-something car buyers bought their cars with cash or finance and treated their acquisitions as venerated icons. Three decades later the next generation of thirty-something’s began to cast around for a new idea. Realising that, for most of the time, their car sat parked and depreciating on their drive – global average 90%+, they wanted the advantages of car ownership, without the upfront cost. Dealers responded with a solution. In the 1980’s leasing was introduced and, by the new millennium, leasing and Personal Contract Purchasing (PCP) provided the acquisition method for 65% of the cars sold in the US and major European markets. Manufacturers liked leasing and PCP’s too. Once they had worked out how to predict residual values and pass on the risk, (See Motor Monitor blog post) their captive finance and leasing arms became one of their most profitable components. Car dealers could rest easy again.
But, some of the current generation of thirty-something’s – so called Millennials – might trouble car dealers anew. It seems that this generation want the benefits of using cars with none of the disadvantages of owning them. Some view cars as a commodity, not an aspiration, and want to use them, rather than own them. Will these preferences endure and become mainstream? If so, only dealers who radically change their offer, away from car ownership towards car mobility services, will survive. But, what if these attitudes are a function of temporary factors, such as life-style, income and circumstances? If so, then the Millennials may still prefer ownership, just defer it until their circumstances allow, and car dealers should relax. They’ll lease cars a little later. Are the consultants who predict a lasting change correct or not? The answer to this question has profound implications and not just for the world’s car dealers.
What if they’re right?
While some researchers, such as ABI, present very ambitious forecasts for mobility services – predicting 650MN global users by 2030, more conservative organizations still predict strong growth, albeit not as much. McKinsey think that car sharing is going to happen and forecast that ride-sharing fleets will grow at 15% – 25%+ annual growth per year in cities and jurisdictions that support them. They argue that positive consumer attitudes, effective ride hailing platforms and driving down ride prices, by using standard specification vehicles, will increase user acceptance. Deloitte appears to agree. They report that car sharing in Europe, over 50% or the car sharing market with almost 6MN forecast users in 2016, will grow revenue by over 30% pa up to 2020. KPMG see mobility rising globally but predict different patterns emerging in each market. For the US they predict a fall in the number of two-car families, as car sharing rises, but no overall switch to public transport, unless there’s a change its historic lack of investment and responsiveness. Their UK arm
What researchers agree on first is that a range of factors are driving car sharing and mobility services. According to IBM, globally, adults are digitally
mature. 95% own a digital device and 49% or more use social media. While 86% predict that they do or will own a car in the next decade, their method of ownership could be different. 42% are interested in subscription pricing – mobility as a service – and another 24% are interested in fractional ownership. Younger drivers (18 – 24) expect to increase their amount of car use as they get older(Up 34%) while all older age groups expect to decrease theirs (Down 17%). Their consumer insight is that 50% or more of future consumers have high probability of adopting mobility services and the other half won’t – unless their are clear value advantages.
Mobility services are only one element in the future transportation landscape. There are others which will impact on dealer revenues, whatever personal transport mode is use: electric vehicles (EV’s), autonomous driver assistance systems and 5G communications, to name just a few. Total Cost of Ownership for EV’s is expected to match Internal Combustion Engine (ICE) cars in the 2020’s, accelerating EV sales. Lower service and parts content for EV’s and lower component failure and collision rates will likely reduce dealer’s aftermarket income in any event.
So, if the predictions are accurate, fewer drivers will own the cars they use. Cars are still made, sold and serviced but sales and aftermarket income will fall as fleet owners control more vehicles. The consultancy, Accenture, agree that car makers will still make cars but, if mobility services expand, dealers will sell fewer of them. Just as importantly, KPMG research shows that, for both mobility providers and users, ‘Total Cost of Ownership’ is the most important factor and Vehicle Brand and Personal Image is the least in selecting the service. Accenture predict that, unless they become the mobility provider, car maker’s revenues from car sales and after sales will fall as mobility services emerge as the contact point with the customer. Needless to say, if car makers incomes are diminished, so in turn will the income for dealers.
Are mobility service providers powerful enough to leverage profits from car makers? VW, BMW, Daimler and Honda have market capitalisations between $55BN and $90BN each. Uber is at $72BN and Didi Chuxing is $56BN and both are growing much faster than any of the car makers listed above.
What if, they’re wrong?
While some are convinced that, finally, today’s twenty-something’s have fallen out of love with motor-cars, other’s aren’t so sure. The sceptics suggest that reduced car ownership among younger license holders is a temporary response to high urban living costs, student-loan debt and later marriage. They argue that the costs of buying a car and owning, maintaining and parking it in urban centres has slowed down car ownership and increased the use of mobility services. They point to research that shows that, as young people’s income rises, so too does their level of car ownership. Moreover, as they get older, they settle down, start a family and buy a house – often in the suburbs. A 2018 survey by US-based InsuranceQuotes.com makes the point that 30% of US new car buyers in 2017 were under 40 and they were also the main users of mobility services. Numerous US-based Finance company’s reports make the point out that Millennials are slower to begin car ownership… and home ownership. The starting age for major loans may not imply disinterest but simply cost of living factors.
An academic study at Columbia and Rutgers University in the US concluded that urban-based twenty-something’s actually own more cars than average when their income rises. Their analysis “suggests that planners should temper their enthusiasm about “peak car,” as this may largely be a manifestation of economic factors that may reverse in coming years.”Complementary to this, the 2019 study by US Real Estate Realtors echoes these findings. Almost 50% of home buyers are averaged between 35 and 45 years old, As expected, those over 28 and under 65 years with household income in excess of $85,000 and above were the majority of buyers. Put simply, income is the deciding factor, not age, for most buyer age groups. In the 35 age group, just of half were first-time buyers. It was 24% for the 45 average age group. Over 70% of home buyers for both age groups ove to the suburbs or a small town. Only 18% of average 35 year-old’s and 13% 0f average 45 year-old’s bought in an urban area.
McKinsey Global Institute caution against taking a stereotypical view in their 2016 Urban World report. They forecast that three consumer groups will be the key consumer influencers over the next thirty years, up to 2030: 60+ buyers in the developed world, China’s working age buyers, 15 – 59 and the working age buyers in the US. Of these, due to their wealth, 60+ buyers will contribute 51% of the developed world’s and 19% of global consumption growth. Notwithstanding, the media image of cities being full of young urbanites, the average age of city populations varies by country. In Europe, city dwellers median ages are near 45 while in Africa, India and Brazil the median age is closer to 30.
Are they both right!
Will mobility services grow fast over the next decade? Almost certainly, given their track record and the poor service delivered by alternative providers – public transport and city taxi services. Ask anyone with teenage children if they would prefer their offspring to use a ride-hailing service, where the provider is recorded and identified, or choose between public transport and an unregulated taxi. Ride-hailing is not without risk – see Didi Chuxing murders – but it is more reliable than other options. Between 2011 and 2015 over 500 UK licensed hire drivers were convicted of violent or sexual offences.
Are mobility services going to replace privately owned vehicles? Not anytime soon in the US, western Europe or even China – where 50% of owners are “slightly willing” to consider it, according to sustainabletransport.org. Reasons vary by country but central to them all is that unregulated mobility services all lose money. They have yet to develop a sustainable business model that can absorb high upfront costs, low utilization rates and spiralling customer service levels. The taxi business is only profitable when government regulation makes it so. Otherwise, its low entrance costs, undifferentiated service quality, low customer switching costs and virtually non-existent economies of scale drive down rates as everyone with a vehicle and a driving license becomes a supplier. It was the advent of Uber in major EU cities that led to its unregulated operations being outlawed by the European Court of Justice (ECJ). Uber confronted existing regulated taxi firms…and lost. Uber has not yet made a profit. Rather than taking over from personal cars, it’s more likely that mobility services substitute for a second car in some circumstances and compete directly with regulated taxis and self-drive rental.
Should car makers transform themselves into mobility aggregators? Not unless they have a new business model and they can improve on their Incubator and Merger & Acquisition results of the last forty years. If you ask consumers, they imagine a world of on-demand services provided free, or as close to it as possible. According to IBM “the consumer’s relationship with the car is changing. In the future, the car will know who the occupants are, make decisions for them, and even be a trusted companion. Consumers are eager to welcome the car as another smart device – albeit one weighing 3,000 pounds – that is embedded in the Internet of Things (IoT).” Accenture propose “digitally-enabled car-sharing and ride-hailing—will be a key driver of growth and profitability in tomorrow’s auto markets, far outstripping the profitability potential of traditional car making”. Deloitte add, “The future will further transform from automobiles to automobility, which will unleash new levels of convenience and efficiency for all road users by promoting the relationship between cars, infrastructure, and users.” Along with others, these well-informed organizations envision a shift in income for car makers away from vehicle manufactures and into services. Their argument to car makers is simple: transform and be a disruptor…or stay where you are and be disrupted.
Before they leap, car makers might like to remember four things. First, car makers have had a hard time just integrating other car makers and making profits. Remember, Ford and Jaguar, BMW and Rover, GM and Saab. Second, car makers are manufacturers and engineers, not digital software and platform developers. They have structured, hierarchical organizations that develop product innovations over decades, not months. Third, they are employers and profit-makers. Their shareholders expect a predictable income stream and their employees expect to keep their jobs. Woe betide a car maker CEO when either of those constituencies are dissatisfied. Put simply, Uber, Tesla and Amazon may have kept investors through years of losses; car makers haven’t. Fourth, and finally, few firms are making money in this arena. Avis, established in 1946, has a market capitalisation of $2.7BN and has lost money of broken even in four of its last six financial years. Hertz, established in 1918, has a market capitalisation of $1.5BN and has lost money in all of its last six financial years. Europcar, the largest car renter in Europe, established in 1949 has a market cap. of $1BN and has lost money in three of the last six financial years. How would a car-maker be more able to make money in mobility than a century-old rental company and others with 70 years in the business?