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Volvo, Cadillac and Porsche drive subscription model growth

December 22, 2017

Carmakers are launching rental services even as peer-to-peer car lending platforms gain traction

 

Once every teenagers’ dream was to have their own car. Now they have an app for that. 


Volvo, Cadillac and Porsche are among brands that have launched subscription deals this year, as the industry dips its toe in the water of a world of selling services rather than cars.

 

As car ownership begins to wane in some major cities, manufacturers are experimenting with ways of providing transport ranging from car-sharing schemes to on-demand booking through smartphone apps.

 

“We’re making the change from selling cars to selling mobility,” says Alain Visser, chief executive of Lynk & Co, a new brand co-owned by Volvo and its Chinese parent Geely.

By bundling insurance, road tax and maintenance costs into a single monthly sum, carmakers hope to take the hassle out of running a car, as well as attract new customers to their brands. Lynk & Co, which will launch its electric car subscription offer in China next year and Europe in 2019, plans to allow motorists to change vehicles every month, and dip in and out of the contract as often as they like.

 

“The key is flexibility,” says Mr Visser, adding that consumers, which Lynk expects to be younger than traditional buyers, may decide not to have a car in the summer months if they travel, or may want to take the bus for a short while to save money.

 


Volvo, which co-owns Lynk & Co, and its super-premium performance brand Polestar, both also offer subscription services that allow customers to switch between vehicles.

 

But this comes at a price. Porsche’s Passport service, unveiled earlier this year, is twice as expensive as buying one of its cars on pay-monthly finance because consumers can flit between different cars in its range.

 

This flexibility, being able to swap a small family SUV for the school run for a sports car at the weekend, raises a fresh potential problem.

“The difficulty in those schemes will be managing the supply, because everyone wants an SUV in winter and a convertible on summer weekends,” says Philippe Houchois, an analyst at Jefferies.

 

That is one reason current schemes are so expensive he believes — because carmakers need to set aside additional vehicles for when demand for a particular segment is high.

 

“You have to build in a fairly low utilisation rate, otherwise you’re going to have unhappy customers because they can never get the car they want,” he says.

 


Carmakers, which are accustomed to manufacturing and selling the vehicles through dealerships, will also have to take ownership of the cars under subscription schemes — meaning they have to pay for maintenance as well as accounting for depreciation.

 

“It makes the business more capital intensive because you’re selling the car to yourself,” says Mr Houchois — though carmakers may have an advantage over third parties in accounting for the rate that cars depreciate.

 

“The risk is we underestimated how much the carmakers know about the fundamental values of their vehicles,” he adds.


Early indications suggest that subscriptions are successfully winning over new customers. Cadillac, General Motors’ luxury marque, says that 90 per cent of those who use its BOOK service in New York have never owned a Cadillac before.

 

“We’ve seen widespread enthusiasm,” says Melody Lee, head of BOOK.

 

The service, which is also in Munich and being expanded into Dallas and Los Angeles, costs $1,800 a month.

 

Lincoln, rival Ford’s premium brand, followed suit by announcing late last month that it would soon introduce a subscription service.

 

“Premium vehicles attract a specific type of customer prepared to spend that amount to have the flexibility,” says Ian Fletcher, an analyst at IHS, who predicts challenges will come when mass-market brands try to launch such schemes.

 

“When you come to Ford Fiestas, how do you run a service that isn’t just a rental fleet?”

 


Part of the answer is already coming through peer-to-peer car lending platforms, which again represent another way that ownership in the car market is fragmenting.

 

A number of start-ups have aimed to fill the need for the occasional car ride, with slightly varying models: from car clubs that own their own vehicles such as Zipcar and electric car-sharing service BlueSG, firms that offer other people’s cars to use such as Drivy and easyCar Club, and shared journey car schemes like BlaBlaCar.

 

Such schemes also offer a new market for carmakers to sell into — although are still dwarfed by the potential market opened up by car-booking services such as Uber. Last month, Uber agreed to purchase up to 24,000 XC90 vehicles between 2019 and 2021 in a deal worth potentially $1.4bn for Volvo. 

 

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