Tuesday, October 5, 2010

An emerging paradigm

A few years ago, back when I worked at a leading OEM, I floated an idea to my supervisor during a casual lunch conversation. He said I was nuts. These few years later, it's becoming clear that, if I am nuts, I'm not alone. I've been sitting on this idea for a little while now, and a couple of articles and auto industry posts of late reminded me to finally put something down.

The Crazy Idea
The idea was that auto manufacturers could not sustain a profitable future based on a "consumer ownership model;" as such, a "loss leader service model" could build up and extend the industry's strengths.

While this idea was my own, I would eventually find that I wasn't the only one to conceive of it. Not by a long shot.

Daniel Stiller, of EVolution Solutions Group, peppers a recent blog post about TH!NK EV with several mentions of this emerging direction, saying "they are not trying to be a car company but rather a transportation solution company. By not being a car company you can get yourself out of that mind numbing paradigm that suffocates true innovation." Stiller says further, that "key to their success will have to be looking beyond the traditional sales model as well as the traditional ownership model."

Mr. Stiller also worked at that leading OEM during my time there, but we never conferred on this idea. Nor were either of us the first to go on record as considering it.

Current Ford chairman Bill Ford, Jr., speaking to a Greenpeace business conference in 2000 said "the day will come when the notion of car ownership becomes antiquated. If you live in the city, you don't need a car." According to this article, "he sees a future where Ford owns vehicles and makes them available to motorists as and when they need access...repositioning Ford as a purveyor of mobility."

The Ford family has an heritage in forward-thinking industry leadership - among their many innovations is the dealership model itself, brainchild of Henry Ford I.

It's important also to recognize that this is beyond what's currently happening with "car share" services such as Zipcar and AutoShare. These are great services, but they are still corporate, end consumers themselves, buying these vehicles from a manufacturer. The emerging idea, by contrast, is that the purveyor is the manufacturer, such that a vehicle does not register a sale in order to get into the hands of an end driver.

Whatever the case, the car-sharing space is being entered into by many approaches at this nascent stage. What's to be appreciated is that car-sharing is happening and will increase, and so it should, because it's a good idea for all. Here's why.

The Problems
The first, and most important problem, with the current ownership model is that manufacturers are building better, longer lasting vehicles. Don't misunderstand - it's great, for consumers, that cars are more reliable and can provide many more years and kilometers of service to an owner or owners. For the manufacturers, however, this is a major problem for two critical reasons:
  • first, because it simply means a person who buys a new car today need not come back to buy a new car for a longer period of time;
  • second, because most higher quality new cars will eventually become higher quality - and more affordable - used cars. Manufacturers are, in effect, pitting their new car sales into competition with their own used cars.
So, quality is a problem for the car ownership paradigm. It's not a problem for the service paradigm, which I'll discuss in a moment. There are still more problems to address - besides the increasingly quality and longer life of the vehicles themselves, is the cost of buying.

Buyers today get far more bang for their buck than when I was a kid in the 70s. Back then, only Caddies and Lincolns had power windows and there was no such thing as ABS brakes.. Today, even entry-level vehicles have power windows and locks and ABS as standard features.

Yet, at the same time, for most, buying a car remains either the first or second highest-value purchase they'll ever make. The recent credit crash is going to hamper new car sales for some time to come. There just isn't the same easy money flowing through the economy to make buying a new car accessible to too many people. As such, we are seeing used car sales make up an increasing portion of total vehicle purchases in Canada.

Less money available to buy new vehicles... used vehicles more reliable...it's a recipe for paradigm collapse. The bankruptcy of several American corporate institutions both beyond and within the auto industry illustrate clearly that these are new times of reduced new car demand. The retraction is hitting plants in Europe in a new way as well. It appears that what was once "normal" demand is a thing of the past.

What's sad is the recent insight on the hopes for the OEMs in the Chinese marketplace. Not wanting to let go of that "normal", OEMs are searching for demand to support their production infrastructure from a country - a billion people notwithstanding - that consistently ranks in the bottom half of per capita GDP globally yet may already be headed for oversupply as a result of the OEMs rushing in.

The Solution
The service model speaks to these issues. The basic idea is somewhat like what mobile phone carriers do - the hardware is just the appliance to secure the contract for wireless services, which is where the real money is.

Instead of having to buy a vehicle, a member pays a monthly fee for access to whatever vehicle is required at the time of need - a 2seater for a single-occupancy workday commute, a wagon or sedan for weekend groceries, a minivan for hockey/soccer/etc., an SUV for a weekend getaway, a pickup for a DIY renovation or yard project...

How does this address the primary problems?
Since this model is still evolving, I can think aloud and dare to dream and cook up all kinds of ideas that may or may not be feasible. But, following the line of reasoning that spawned the idea in the first place, competing initiatives and implementations could revolve around a number of concepts not far off what I'm tossing out below for the sake of discussion.

Quality would become a great thing under the new paradigm because the manufacturer can recycle parts, driving down costs. Better quality means that as new technologies are developed, they can be pushed directly into the fleet network and members can enjoy that new technology "right now", creating new levels of excitement that today's "owners" can't enjoy until they're ready and able to buy again.

New technology won't sacrifice future sales. Rather, it can stimulate new member applications and raise loyalty/retention. I like Mr. Stiller's observation that the old paradigm "stifles true innovation" - indeed, the new paradigm leverages and rewards a manufacturer's R&D leadership, which means innovation would be good for both the consumer and the manufacturer.

The distinction of "new" and "used" cars - and the competition between them - can be effectively retired as a thing of the past. All cars can simply be discussed in terms of service history, and members have access to "a vehicle" that is centrally maintained at peak performance for its service age. From a transportation point of view, we can now see cars the way we see transit vehicles - less emotionally, more a part of the socio-economic infrastructure, and functional from a value stand point. What's a "new bus?" What's a "used subway train?" A bus is a bus, and as "newer buses and subway cars" can be brought into the system, we get new buses on our routes. Some routes get the newer vehicles sooner, some later. But entrance into the system is the same cost, the route is the same route, and the commute time is relatively the same with varying degrees of comfort depending on whether riding on the newer subway train with wider doors and air-conditioning or on an older train with the narrower doors.

From a consumer cost perspective, it would be not only more affordable in the long run, but more manageable as well, as expenses can be forecasted with more predictability. No down payment, insurance can be included by a bulk rate based on larger statistics and metrics, road-side assistance would be included, no more surprise breakdowns and expensive repair bills....everything included for one monthly payment that only changes if the consumer changes service tier.

There is plenty of opportunity for upselling luxury features and amenities, such as "bring your ride to you", trim level minimums, etc. Members can subscribe to as much or as little service as they require. For example, a 20-something, single urban dweller, a suburban family of five and a C-suite executive could all choose from various packages of service level t meet their needs and tbeir budget.

The key here is that the burden of depreciation - vehicles are among the most rapidly depreciating items anyone can purchase - is no longer heaped upon the individual buyer. The manufacturers are in a much better position to bear the depreciation because these vehicles would depreciate less, buoyed in part by the value of the parts recycling , as well as the fact that manufacturers can amortize their costs further out into the future than any individual buyer.

What makes this different from a rental operation?
Good question. Again, the cost to any "owner" will be higher, including a company who buys cars to enter into fleet service for hire, which is passed to the consumer as higher rental fees than is reasonably affordable vs. leasing or financing. Further, the manufacturer can leverage and integrate the recycling value right into its production process in a way no rental company can.

But the single clearest difference is that a rental operation gets by with less control of its forward revenue projections - consumer rental demand is not easy to predict when there's relatively low "future rental" commitment. One of the factors that makes darlings out of the wireless carriers in Canada for stock analysts is that their "three year contracts" allow them to reasonably look three years out out at future revenues based on subscriber commitments.

For the new paradigm, signing members to term contracts (one, two, three years? How about bundling OEM choice into a new home purchase for the length of the mortgage - five, ten, fifteen years...?) means the OEM can see ahead with much more certainty than any current rental company could possibly see. Yes, what's signed on paper today would not be realized to the penny, but the contracts in hand would certainly create a much better view than market analysis of the rental industry and extrapolations based on current market share.

Okay, end of rambling - while there's plenty more that could have been mentioned, future posts will likely revisit this with new information in due time. For now, the matter is clear - as we leave the Industrial Age behind and press ahead into this new Information Age, vestiges upon which the successes of the Industrial Age were based like this "consumer ownership paradigm" must be reconsidered for new and better ways of doing things, ways that speak to the current and prevailing economic, social and environmental factors impacting our future on this planet.

I'm not sure what is to come. But I'm increasingly sure that we've got to get comfortable thinking outside the boxes we've built over the last 100 years and entertain the reality that progress will not support old ways of doing things indefinitely.

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