Carmakers eye subscription, leasing to offset dwindling dealership sales

Car-makers, struggling with one of the longest slowdowns in decades, are driving an alternative revenue stream to counter falling sales from dealerships: Subscription, leasing and shared mobility solutions.

In 2018, Maruti Suzuki, the country’s largest car manufacturer, reported a 71 per cent growth in leasing, and Hyundai’s subscription business grew nearly six times since it launched in March 2019. Mahindra, Toyota and Skoda have also announced plans for a subscription-based ownership models. Japanese major Nissan is expected to launch Nissan Intelligent Ownership for its new model Kicks in the next few weeks. Volkswagen India’s first lot of Polo cars, of 200 vehicles, were completely subscribed within 48 hours of the announcement July 8, 2019. 

These new business models have been driven by the changing dynamics of transportation and vehicle ownership. Unlike the car manufacturers, aggregators such as Ola and Uber and self-drive rental companies such as Zoomcar, Revv and others have reported good growth on the back of shared mobility, subscriptions and rentals and similar mobility solutions. Zoomcar, for instance, plans to expand its fleet size to around 1,00,000 vehicles from 7,000 vehicles in three years. Revv operates above 3,300 cars and wants to expand to 10,000-plus over the year. Hyundai and Kia Motors jointly have invested $300 million in Ola, and Hyundai has invested around Rs 100 crore in Revv separately.

“We believe that owing to disruption in the industry, new business models are becoming more customer-centric. Products such as subscription are picking up strongly as an alternative of ownership model,” says Vikas Jain, Hyundai’s national head for sales.

The subscription model offers a degree of ownership flexibility that is not available through the conventional dealership route. It offers consumers one way of driving a brand new car of choice without actually having to go through the hassles of ownership, including down-payments and road tax. After a lock-in period, the consumer has the option of using it for as long as she wants, paying a monthly fee with an anytime opt-out clause. If she wants to own the car, she can buy it at a pre-determined settlement charge (used cars are put into the shared mobility or second-hand markets).

The business is still small: Subscription accounts for one per cent of industry volume today, but is expected to rise to 10 per cent in five years. Hyundai's subscription business is already accounting for 200 vehicles a month and expects to cross 250 in the coming months.

In May 2019, the Korean auto-major also forayed into the leasing business, where Maruti has been a frontrunner. Maruti leased over 6,700 units in 2018-19, though this is still one per cent of the top-line. “As the market matures, we expect leasing to become a substantial contributor in overall vehicle demand. It is convenient for companies who wish to offer vehicles to their employees and has tax benefits,” says Shashank Srivastava, Executive Director, Marketing & Sales, Maruti Suzuki India.

Shared mobility is the other high-potential business for car makers. It has grown from $900 million in 2016 to $1.5 billion in 2018 and expects to increase to $2 billion by 2020. There are currently 15,000 cars under the car-sharing ecosystem, and this number is to rise to 50,000 by 2020, and 150,000 by 2022, according to Hyundai Motor.

Hyundai’s partnership will offer Ola drivers various financial services, including lease and instalment payments, vehicle maintenance and repair services. The trio of Hyundai, Kia and Ola have also agreed to coordinate efforts to develop cars and specifications that reflect the needs of the ride-hailing market.

What’s driving this new business is that that ownership as a method for accessing an asset is losing grounds across asset types (cars, homes, furniture). Urban youth today demand solutions that are high on flexibility and pay-as-you-go. So carmakers know that this new sales channel will become meaningful soon enough. As Anupam Jain and Karan Agarwal, Co-Founders of Revv, point out, “These solutions are inducting cars into the daily lifestyle of a very large population of people who otherwise would have waited for another one or two decades to accumulate sufficient wealth to buy their first car.”

How does the ownership work out compared with lifetime ownership? It is hard to compare. For example, if a customer wants to drive a Hyundai Grand i10 for 48 months, the monthly expenses under subscription is Rs 15,650 per month against Rs 14,835 a month under a car loan. But subscriptions involve no upfront expense, whereas buyers need to pay Rs 28,291 upfront in the case of a car loan. Insurance and routine maintenance, which comes to about Rs 3,790 a month, is also the company’s responsibility.

The biggest advantage is flexibility — the customer can use the car for any period of time and return it whenever she wants. Another benefit is convenience — repairs and so on are also the company’s responsibility. If the subscription is for a long period (36-48 months), the cost is roughly similar to buying a car, with the added advantages of flexibility and convenience, say Revv founders.

The consumer benefits in the leasing business are less clear-cut. Vinay Raghunath, partner, Auto Sector Performance Improvement, EY India, says in terms of leasing, most consumers choose to buy through their employers, which gives the company the higher benefit of interest write-off and depreciation, the only benefit to the non-corporate consumer is zero down-payment. But low awareness remains a challenge, which suggests that car companies need to reorient their marketing strategies too.