What happens when OEMs stop selling cars?

The motor industry is on the brink of a technological and social revolution that will fundamentally alter the way it does business. The scale, scope and complexity of the revolution will be unlike anything humankind has ever experienced. Environmental concerns, the “Fourth Industrial Revolution” and a shift in social values is leading to consumers re-evaluating their relationship with the car: In a recently released 2016 IBM automotive consumer study, thirty nine percent of consumers indicated they would consider a car-sharing model while thirty six percent of the 16,000 respondents chose on-demand ride sharing.

Echoing a growing dissent amongst consumers Morgan Stanley believes the car is ripe for disruption; describing it as "arguably one of the most underutilized, polluting, time-consuming, and dangerous machines on earth."

The company estimates the average car is only used 4 percent of every day, with a per-seat utilization of about one percent. The global car fleet drives around ten trillion miles a year while accounting for 45 percent of the world's oil demand. This activity also leads to a loss amounting to "many trillions of dollars" and kills 1.3 million people every year in traffic accidents, Morgan Stanley analysts wrote, quoting the World Health Organization for the latter statistic.

Consumers, painfully aware of the shortcomings of the car in the modern environment, are eagerly receptive to alternative solutions which will offer a cleaner safer environment without impacting personal freedom.

Two such solutions, car sharing and on-demand ride hailing, are already finding substantial support. Unfortunately these solutions, although beneficial to cash strapped consumers and the environment, do not bode well for the long term viability of the automotive industry.

According to a Boston Consulting Group study, given the necessary value, coverage, and trust, car sharing could cut car sales by 792,000 vehicles worldwide in 2021—the equivalent of slightly more than 1% of projected unit sales of 78.4 million new cars in markets where sharing is available.

The greatest number of lost sales would be in Asia-Pacific, where some 462,000 vehicle owners would waive a new-car purchase (1.2% of 2021 projected sales). In this scenario, by 2021 Europe will be losing about 278,000 sales a year to car sharing, marginally offsetting these losses by moving 96,000 vehicles to car sharing fleets; resulting in a net loss of 182,000 vehicles.

By comparison, automakers in North America stand to lose about 52,000 sales a year to car sharing, while selling 44,000 vehicles a year to the same fleets, for a net loss of 8,000 vehicles.

Not only is the industry facing shrinking sales, but development costs for new technologies are escalating, squeezing margins even further. The irony of these new technologies is that they ultimately serve to make car sharing even more attractive to consumers, thereby boosting their profitability even further.

Can Traditional OEMs Take Advantage of Car Sharing?

According to Adam Jonas, who heads Morgan Stanley’s global auto team, Toyota generates 203 billion euros from its 13 percent share of the global new-car market based on sales of ten million units last year. By comparison, a car sharing firm that charges $1.50 a mile could match Toyota's revenue with a mere 1.5 percent share of the 10 trillion miles travelled annually, Jonas told the Automotive News World Congress in Detroit in January.

Attracted by these potential diverse and profitable revenue streams, manufacturers are already testing business models in this environment:

GM recently purchasing failed car-sharing company Sidecar after sinking $500 million into Lyft, Uber’s main rival. From 2017 on BMW will allow customers buying a Mini to choose to rent out their cars via DriveNow, an existing scheme run by the German car maker. The option will initially be available in the US and later in European DriveNow cities such as London. Opel will soon offer “car sharing for everyone”. Similar to the other new entrants to this niche, Opel CarUnity will allow drivers to rent out their cars via a dedicated Opel app for smartphones and tablet computers. Not to be outdone, Ford has also launched a six-month pilot scheme to allow 12,000 customers in and around London, who have bought cars through its financial services arm, to rent out their vehicles using easyCar Club, an online peer-to-peer platform. The pilot will also run in six cities in the US, in collaboration with Getaround. But even as these new models are rolled out, the impact of wholly-owned car-sharing services, such as BMW Group's DriveNow and Daimler's Car2Go, are forecast to cut global vehicle sales by 550,000 in 2021 costing manufacturers more than $8 billion in lost revenue.

Autonomous Vehicles: The Real Game Changer

In the longer term, looking past 2027, autonomous vehicles will have a much greater impact on new-car sales than car sharing per se. Self-driving cars, not car sharing, will be the true game changer. Self-driving cars will erase the distinction between car sharing and ride hailing while providing users with a "significant" edge in the total cost of ownership.

Car sharing services will benefit from the low operating costs of automated vehicles, coupled with their ability to be exactly where users need them, which will increase utilization rates. Their low operating costs will also enable services to provide adequate coverage in smaller cities, resulting in more users and a consequent reduction in private ownership.

Motor Manufacturers See a Silver Lining in the Storm Clouds Brewing

Despite these potential threats, many in the industry believe that the impact is overstated, pointing out that cars in car sharing or e-hailing services cover a much, much higher mileage. So the lifetime of such a car is significantly lower, requiring more frequent replacement, which would minimize the initial loss of sales.

And the industry, known for its resilience and creativity, will no doubt come up with exciting new solutions unlocked by a world craving connectivity and convenience.

Addressing the Barcelona Mobile World Congress tech event in February, Ford CEO Mark Fields told the massive gathering: "We're on the cusp of a mobility revolution."

Fields went on to explain: “We see a world where vehicles talk to one another, drivers and vehicles communicate with the city infrastructure to relieve congestion, and people routinely share vehicles or multiple forms of transportation for their daily commute: The experiments we’re undertaking today will lead to an all-new model of transportation and mobility within the next 10 years and beyond.”

So while the revolution is likely to take place around the core of building, selling and servicing cars, manufacturers will also have to extend their business to provide services around the car to fully satisfy the customer’s ever increasing demands. This is likely to result in innovative offerings never before seen in the industry.

By way of example: To allow consumers more flexibility in their choice of vehicle, manufacturers may very well offer the customer the choice of two or three different car models on a fixed instalment.

For instance, the customer could select to have an SUV in winter, a convertible in summer, and for special occasions a sports car; all packaged from one manufacturer.

Furthermore, with the onset of the connected car there’s no reason why manufacturers should not access the tech environment and offer value-added services to their customers.

"Today's vehicles have transformed from a mode of transportation, into a mobile data center with onboard sensors and computers that capture volumes of information about the vehicle and its surroundings," said Alexander Scheidt, Global Automotive Industry Leader, IBM Global Business Services. "Successful automakers will recognize the opportunity to accommodate this disruption by offering the digital experiences and services that consumers desire."

In a society beset with instant gratification it is quite foreseeable that OEMs may derive additional revenue by offering services such as:

Telematics: Telematics are commonly used for anything from vehicle tracking to onboard notification. This can easily be expanded to include service notification and service booking directly from the comfort of the driver’s seat. Vehicle recovery through a combination of vehicle tracking and immobilization. Breakdown and accident notification which can be expanded to notify other parties, such as family and colleagues. OTA: Currently OTA updates are standard on many premium brands, but in an industry desperate to improve the bottom line, there’s no reason why this should not become a paid optional service, saving customers the irritation of having to visit the dealer. Entertainment on demand: With autonomous and semi-autonomous cars around the corner, what are customers going to do on those long boring journeys while robo-chauffeur is on duty? Well, the answer is simple: They’ll entertain themselves onboard – everything from hi-speed internet browsing to music, gaming and video-on-demand can be offered as pay-for-use services. The retro experience: With EVs and hybrids already a reality, noise, or the lack of it, is a problem. But what happens when a Ferrari or Porsche loses its voice? The beauty with technology such as that developed by Lotus and hi-fi whizz Harman Kardon is that the original load and engine speed generated exhaust sound can be reproduced. Being at the visceral core of any sports car, this may in time become a huge market. So despite the hype around the sustainability of the industry the future is far from gloomy. Despite many studies to the contrary car sharing is unlikely to be the game changer it is made out to be. It will not do to the automotive business what iTunes did to music: it will not redirect a stream of revenues to a disruptive upstart, and it will not spark a widespread change in consumption.

Besides, this is the industry we love and depend on to always be ahead of the game!

Sources:

IBM Study: Consumers Still Want Cars But Not Necessarily To Own Them – PR Newswire Carsharing will have biggest impact in Europe, study says – Automotive News Europe Is Goldman Sachs right that 7 megatrends will dominate the global auto industry's future? – Business Insider (Matthew DeBord) Self-driving cars and the future of the auto sector – McKinsey podcast (Luke Collins, Hans-Werner Kaas, Detlev Mohr)