By some accounts, subscription is on the verge of doing for the whole economy what Netflix and Spotify have done to DVDs and CDs — supplant ownership with access to an ever-refreshing supply for a monthly (or weekly) fee. The auto industry is not immune to the trend, but so far the traditional retail model has prevailed. By Ted Siefer.
Tien Tzuo, a tech entrepreneur who literally wrote the book on the subscription economy (“Subscribed: Why the Subscription Model Will Be Your Company’s Future — and What to Do About It”), argued in late 2016: “Make no mistake, the subscription model is about to take over the entire automobile industry.”
Two years on, this hasn’t exactly come to pass. In the US, BMW, Porsche and Mercedes have rolled out services that do indeed deliver sleek new vehicles at customers’ beck and call — an SUV for a trip to the mountains; a roadster for a night on the town — but these are only available in a handful of selected markets at this point. Only one automaker, Volvo Cars, offers a subscription program that’s available nationwide. For the most part, subscription is a niche service, catering to the luxury end of the market — those willing and able to pay $2,000 or more a month. For a host of logistical and regulatory reasons, conveying vehicles to subscribers has proven more complicated than streaming movies.
But investments are underway in the US that could help subscription gain greater traction. Cox Automotive, an auto sales and dealer services company, has devoted substantial resources to mobility-minded products and services that could make subscription more attractive and feasible for dealers. And a crop of startups are seeking to bring vehicle subscription to the masses, offering monthly plans affordable to those with limited means.
Subscription is on the agenda for the auto industry as carmakers look for ways to market cars differently amid indications that their traditional retail business is under threat. Most automotive brands are exploring mobility initiatives, including car sharing, ride hailing and other types of services built around the car.
Subscription may as yet transform the entire auto industry, as Tzuo predicted, but it’s going to some time and ingenuity. “So far, we’re still in the exploratory process with these,” said Stephanie Brinley, an IHS Markit analyst who covers the North American auto industry, referring to existing subscription services.“I think we’re still trying figure out what’s comfortable for consumers.”
One indication of this came in December, when General Motors decided to pull the plug, at least temporarily, on its Book by Cadillac program, whereby customers could choose among a roster of high-end models. Issues with back-end technology had reportedly imposed a greater customer service burden than anticipated.
GM’s retreat from subscription has left the field dominated by European automakers. BMW’s Access, Mercedes’ Collection and Porsche’s Passport offer a range of marquee vehicles to subscribers — at costs ranging from $2,000 to $3,700 a month. Care by Volvo, by contrast, allows members to switch vehicles after the first year of a two-year term at a cost of $650-$850 a month.
Porsche’s program is only available in metro Atlanta at this point, which is where Clutch Technologies is based, as is Cox Automotive, which acquired the startup in 2018. Clutch is working with the automaker, as well as BMW and Mercedes, whose subscription programs are available only in a handful of markets, including Nashville and Philadelphia.
Cox has placed Clutch, which it helped launch with funding from Cox Enterprises’ Innovation Fund, under the umbrella of a new division, the Mobility Solutions Group, which also includes the startup Flexdrive. Underlying the investment is the recognition that attitudes toward vehicle ownership are changing, especially among the younger and more urban set. A 2018 study by Cox – the Evolution of Mobility – found that 57 percent of urban consumers regard access to mobility as more important than vehicle ownership, a 13 percent rise since 2015.
Clutch is now working with more than 40 dealers and automakers, said Adam Carley, Clutch’s vice president of product and marketing. He said interest in subscription has been surging in recent months. “I don’t think this is the tip of the iceberg,” he said.
Clutch offers automakers and dealers a white label IT platform to run and manage subscription programs. The systems don’t just allow subscribers to use their phones to unlock and port their settings — music, contacts, calendars — into each new vehicle, but they can help ease the concerns of financiers and vehicle providers. The platform allows for the remote tracking of location, diagnostic and mileage data; monitoring of driver behavior; and the use of artificial-intelligence to suggest prospective vehicle “flips.”
The role of car dealers
Still, IT solutions can only go so far in a complex industry governed in the US by a patchwork of local, state and federal rules. One of the friction points vehicle subscription has encountered has been dealerships, which by statute have an exclusive right to sell new cars to the public. In December, the California New Car Dealers Association charged that Volvo was forcing dealers to bear greater insurance liabilities because its Care program offered flat insurance rates regardless of driver risk.
Carley of Clutch concedes that some dealers may have reservations about subscription. “It’s not a light undertaking; there are a number of ways it’s a departure from the existing business model — to have a continuous relationship with the customer and deliver vehicles to them and having a fleet to maintain where you’re potentially keeping a vehicle for longer than the handful of months a loaner may have,” he said, adding, “We’re helping to develop financial models.”
There’s no doubt that the subscription services offered by the European brands cater to the high end of the market. A 2018 US auto industry trend report by Edmunds found that in most cases, subscription was more costly than leasing over three years, especially in the case of Porsche and BMW. “To some degree it’s going to be a luxury thing, because it’s not necessarily cheaper, and I don’t really think it’s being pitched as cheaper,” Brinley of IHS said. “It’s being pitched as being convenient and easier.”
Automakers have been tight-lipped so far as to whether subscription services are making money, but Porsche executives said last year that the company’s Passport project in Atlanta should be seen as a test rather than a new and immediate source of new profit.
Tackling the volume market
Subscription so far hasn’t been a great option for budget-minded drivers, but this may be changing. Several services are aiming at the lower end of the market — and they also tend to be based on the other side of the country, closer to Bay Area, the birthplace of Uber and Lyft and a hotbed for innovation in mobility.
Canvas, which is owned by the Ford Motor Credit Company, the finance arm of the automaker, makes 2015-2016 Ford and Lincolns available to its subscribers at a range of price points. At the entry level, subscribers can get a Ford Fiesta for $379 a month, which includes insurance and routine maintenance.
While swapping for a different vehicle only costs $99, Allison Braley, Canvas’ head of marketing, said most of its customers aren’t interested in switching up their vehicles on a regular basis. “I think some other subscription services may be geared more toward a car enthusiast type who wants the flashiest, newest thing — and at higher price point,” she said. “That’s really not the customer we’re serving. We’re a longterm alternative to car leasing or car ownership for many people who know their needs might change.”
Perhaps the apotheosis of the burgeoning Silicon Valley vehicle subscription movement is Fair, a startup that began operating in 2017. The company’s primary clientele today is ride-hailing drivers, having acquired Uber’s vehicle leasing business. The company says it has about 20,000 customers, 14,000 of them ride-share drivers.
Fair offers a wide range of pre-owned vehicle makes and models for an average cost of $350 a month. The company prides itself on offering a purely digital car-shopping experience. “It’s a big piece of why we’re unique, being able to sign for a car with a finger on a phone,” said Derek Callow, Fair’s chief marketing officer. “We spent over a year getting to the point where we could deliver a digital signature for a car.”
Both Fair and Canvas avoid potentially thorny issues with dealers by purchasing the cars they offer to subscribers. In Fair’s case, vehicles are purchased from dealerships, and it allows subscribers to check out a vehicle on the lot and have it for a three-day trial. Canvas is limited to the Los Angeles and San Francisco areas, while Fair is available in selected metro areas around the US.
Callow says Fair provides an option for a segment of the market that might not have solid credit histories or the means to make large down-payments, such as recent immigrants. At the same time, the service allows customers to avoid the “emotionally stressful” experience of buying a vehicle on a lot. “There’s a lot about the process that’s pretty broken,” he said.
Both the high-end subscription services and the more budget-minded startups have visions of expansion. But their limited availability and growth so far indicates that subscription is a ways from taking over the auto industry. Nevertheless, from Adam Carley’s perspective at Clutch, it’s only a matter of time before the kinks get worked out and subscription surges in popularity. “This is about as viral a product as I’m aware of,” he said.