Subscription Ownership

Motoring Weekly has written about subscription contracts for vehicles in recent months. This is the next big idea for the automotive industry and one that has been in the technology market for decades. It is similar to a leasing plan only the idea is that the vehicle is replaced during the life of the subscription rather than at the end of the lease. The sales pitch has often been that the subscriber could change vehicles more often – for example, when they needed a particular class of vehicle like a wagon or truck however they have subscribed to use a sedan.

There are a couple of interesting topics that surround this idea. The first is that not many subscribers actually do change their vehicles during the contracted term because they have chosen a vehicle that suits their lifestyle. This type of agreement is probably more suited to commercial use where the payments are put in the operational bucket rather than any capital expenditure. The operational expense of the logistics to swap the vehicles would destroy the value of the contract for the dealer or manufacturer if the consumer took them up on that idea!

The other issue, certainly in the US, is the battle between the manufacturers and the dealer networks and in some States the Governments have sided with the dealers rather than the manufacturers, in the hope that they can save some local jobs. If the deals are direct then the dealer network becomes a service and delivery network which reduces the revenue flow and the need for some employees.

In Indiana there is a temporary ban defined by the State on subscription deals so that the Government can work out a plan and in California they have put them on hold indefinitely for a similar reason. Both States want all subscription contracts to go through the dealers and the California New Car Dealers Association is lobbying the manufacturers to ensure that their members get a cut of each contract.

The crux of the matter is the business model that the manufacturers want to follow. They have all had success selling through the networks, however, those networks also eat into profits – which are getting slimmer by the day. It’s an interesting dilemma, the manufacturers need to sell cars and the dealers are the closest to the buyers. The dealers also are in the prime locations to service the vehicles, something that the manufacturers aren’t. So it is actually in the best interests of all parties to play nicely.

Several other States including New Jersey are looking to legislate subscription contracts. The legislation would put some governance around the servicing of the vehicles, recall policies and who gets what when a vehicle is on-sold as pre-owned. The core issue then is who actually owns the vehicle during the subscription, who licences and registers it as well. The lease on one of my cars has me as the licensee although the leasing company pays the fee, which is then included in my monthly payment. The same should apply with a subscription.

The industry is heading for a spaghetti junction with regards to where it goes next. Will it:

• go fully electric, hybrid, use biofuel, a hydrogen fuel cell or another (as yet) unknown source of power?
• go fully autonomous or a hybrid where cars are switchable between computer or human drivers?
• go down a path of direct selling or keep the dealer networks?
• go for subscription only or a mix of sales models?

In other industries, the manufacturers have tried to go direct via web sites and B2C sales models and have had to revert back to traditional channels. I think the same will happen with car sales, no matter what the fuel source is, whether the car is autonomous or the type of purchase/usage contract.

Most people buy from someone or an entity they trust and the dealer networks are the prime channel to build a relationship with the customer base. There is value in having that relationship for the customer even with a subscription contract.