Car Subscriptions: The Future of Vehicle Ownership?By Antonio Gozain | Fri, 11/05/2021 - 18:00
The COVID-19 pandemic boosted diverse trends across industries. In the automotive sector, OEMs are beginning to offer vehicle-subscription plans in a “car-as-a-service” model as an alternative to leasing, car rental and purchasing. While Mexican culture has favored traditional car ownership, vehicle subscriptions could become popular among younger generations in the next years, according to Anasofía Sánchez, Director General, Waze LATAM.
“We are one of the countries with less financial incentives for buying new cars but there is significant interest from the general public in acquiring one,” said Sánchez during Mexico Automotive Summit 2021.
The vehicle subscription model, similar to subscriptions offered by streaming applications, offers consumers vehicles direct from automakers and third-party leasing companies. This provides flexible terms and vehicle choices not often found in lease agreements, according to Forbes. Subscription models were born as a convenient alternative to leasing. Under this scheme, customers pay an “all-in” monthly fee, which includes vehicle access, insurance, maintenance and servicing. The only incremental consumer expense is gas.
The difference between this business model and leasing is that the latter allows customers to “rent” a car from a dealership for a certain period of time. Customers usually make monthly payments and at the end of the lease, usually between 24 months and 36 months, customers can decide whether to buy the car or change it for a newer vehicle. Although leasing requires a down payment, the monthly fee is usually lower when compared to financing the same vehicle. This model allows drivers to move to a new vehicle every two to three years, while bypassing the nuisance of selling their current vehicle. However, unlike car-subscription customers, lessees have to take care of insurance, maintenance and repairs for the duration of the lease.
Neither service offers ownership. Vehicle subscriptions are targeted for “those who hate commitment and do not mind overpaying versus a standard lease, rental or financing arrangement to access the associated perks,” according to Clifford Atiyeh, Vice President, New England Motor Press Association. Subscriptions can also be used for specific services, such as driving a luxury car. Similarly, if a customer has a road trip scheduled but does not have an SUV, a subscription may be a better fit than traditional car rental or leasing.
The Current Vehicle-Subscription Market
While some subscriptions allow customers to replace the car weekly or monthly, others do not allow them to switch vehicles at all. Currently, Audi, Volvo, Lexus and Porsche offer vehicle subscriptions in certain locations in the US and Europe.
Audi’s offer features a Core plan (US$995 per month), which includes the A4, Q5, S3, TT, and the Premier plan (US$1495 per month), which adds the Q7, S5 Coupe, A6 sedan and A5 cabriolet. Currently offered exclusively in Texas, Audi’s vehicle subscriptions allow two swaps every month. The client must be at least 25 years of age and the same car may be used for a maximum of 180 days.
The Porsche Drive subscription is offered across nine cities in the US and gives subscribers the opportunity to experience driving Porsche vehicles, including sports and performance cars. The loans are flexible from one day to an entire month and customers can keep a single car for up to three months at a time. The cars offered include the 911, Boxster, Cayenne, Cayman, Macan, Panamera and Taycan. Single-vehicle subscriptions for one or three months range from US$1500 to US$2600 per month, while multi-vehicle subscriptions range from US$2100 to US$3100 per month. Porsche also offers daily rentals between US$245 and US$395 a day, with a US$2500 security deposit required.
“Care by Volvo” is the most complete vehicle subscription service, with presence in the EU, in markets such as Italy, the UK and Spain, as well as the US, where the program is widely available. Volvo’s service is virtually a 24-month lease, but with insurance, maintenance and extra add-on insurance items included. As it happens in traditional car leasing, at the end of the agreement, subscribers can purchase the vehicle at a preset price. XC40 subscriptions in the US begin at US$1025 per month.
"We are shifting away from a vehicle ownership culture; we are entering the 'car-as-a-service' model. We are testing this model in some countries since younger generations are more interested in the car as a service to satisfy a need that can be daily, monthly or just occasional," said to Excélsior Raymundo Cavazos, Director General, Volvo Cars México.
Vehicle Subscriptions’ Target Audience
Vehicle subscriptions aim to attract clients who may not represent the conventional customer profile for OEMs, such as young people who cannot afford buying or leasing a car. Also, the nature of vehicle ownership is changing among younger generations who look for easier and more flexible ways of driving a car, while avoiding the upfront capital requirements and long-term contracts involved in financing or leasing a car.
According to a study by digital marketing agency Adtaxi, 51 percent of the participants indicated interest in a vehicle subscription model, “jumping to 66 percent among auto shoppers.” Among interested auto shoppers, 51 percent would pay up to US$500 per month for a subscription, 37 percent would pay between US$600 and US$900 per month and only 9 percent would spend US$1,000 or more per month, “making this the smallest, but also the most likely target.”
The pandemic accelerated change in vehicle ownership models. “For years we have tracked the steady migration of auto shoppers toward digital tools. What the pandemic really did was super-charge that trajectory. There is no longer any question that targeted and robust digital strategies are fundamental for the automotive industry’s success,” said Murry Woronoff, National Director of Research, Adtaxi.
Even in Mexico, where ownership has been a key aspect of the automotive market, the situation is gradually changing. “Ownership relevance is changing as Mexicans are now realizing they just need the service. As consumers change, mobility providers are forced to change alongside them. We have to evolve as the sector needs to change,” said Cavazos during Mexico Automotive Summit 2021.
Vehicle Subscriptions: A Possibility in Mexico?
Vehicle subscriptions may help automakers to stay relevant and attract new customers. However, this opens several challenges. This new ownership model aims to lower barriers between customers and OEMs, building a direct-to-consumer channel which “may upset the dealers who pay close attention to inventory and lot management,” according to an analysis from Red Chalk, which also highlights the difficulties OEMs may face when trying to build a new business while balancing a legacy operating model.
Vehicle-subscription models will require OEMs to build and correctly manage a functional fleet of cars from which customers can choose. Automakers “have traditionally not participated in fleet ownership or operation and may struggle managing the complexities of fleet composition,” according to Red Chalk. While OEMs will compete directly for the market, new third-party players may get involved, as well as companies focused on mobility solutions, traditional car rental and car leasing.
As most other automotive trends, vehicle subscriptions will eventually arrive in Mexico. Although an analysis regarding Mexico’s situation will be necessary, it seems probable that OEMs will begin pilot programs in main cities, like Mexico City, Guadalajara and Monterrey.
The car rental industry is growing every year in Mexico. Revenue in this segment is projected to reach US$1.2 billion in 2021, according to Statista. The number of users is expected to reach 9.8 million, with a penetration of 7.3 percent by 2025. Looking to take advantage of the trend, Volkswagen is getting close to acquiring 100 percent of car rental company Europcar’s stocks through a US$3-billion deal, reported MBN. Europcar has offices in 150 countries around the world and has 125 branch offices and 2500 cars in Mexico.