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Manufacturer subscription programs are changing auto financing

August 10, 2018
Subscription programs that allow for more flexible vehicle ownership could wind up being a bust. But if investments from just about every major OEM on the market, a handful of startups, and numerous dealerships are any indication, this is a fad that will be around for some time to come.   
What "flexible ownership" means differs drastically among programs. Some offer total flexibility to swap in and out of cars whenever the consumer wants, but at a hefty price. Others offer used vehicles and fewer amenities for a lower price. Some OEMs have traditional lease programs that include insurance and maintenance, while other dealerships are bypassing the manufacturers altogether.   
It’s hard to tell if this trend will grow to 30 percent or more of the market, as traditional leasing has, or if consumers will come to see it as a glorified rental.
Grayson Brulte, president of consulting firm Brulte & Co., said in January that these programs are largely going to serve as the testing grounds and starting point for a world in which fleets are 100 percent autonomous and the need for car ownership is largely diminished.
"On a traditional three-year lease, [the industry] knows how the system works, but if you’re on a one-month, two-month, three-month lease or you’re constantly swapping out vehicles, [the industry] has to learn," Brulte said. "You’ll see interesting pilots pop up in cities around the country and you’ll know it’s working when they announce, ‘We’ve added two more cities to the platform.’ "
4 luxury OEM programs driving subscriptions
This is the top end of the market, where the trend started to take off beginning in 2017 with the introduction of General Motors’ Book by Cadillac program.
All of these programs allow consumers to swap cars within the OEM’s brand at will and to do so through a white-glove concierge service, which delivers the car to the consumer’s home or desired location.
That level of service comes at a steep price. Services in this category such as Book by Cadillac, Porsche Passport, and Mercedes-Benz Collection all start at or near $1,600 a month and can range as high as $3,000 a month. Access by BMW recently cut monthly prices to $1,100 due to consumer demand. 
Toyota’s forthcoming Lexus program and Fiat Chrysler Automobiles’ Jeep subscription program could fall into this category as well, but pricing details have not been revealed. The Lexus program is scheduled to launch during the 2018 holiday season, with Jeep coming in 2019. Carpe by Jaguar Land Rover also launched in June, but it’s exclusive to the U.K. with no plans to expand into the U.S.  
Edmunds found that consumers in these programs would pay on average a $27,124 premium for these subscriptions versus a traditional three-year lease. However, they also provide the greatest amenities and service for the price.
Finding a Fair price
The car subscription startup named Fair came onto the scene last year in a big way by adding $1 billion in capital from a group of investment banks in October 2017 and then buying Uber’s Xchange Leasing program to become the ridesharing company’s exclusive leasing partner.
Fair offers vehicles on its app from as low as $150 and $300 a month but can also get up to $1,000 or more depending on the vehicle.
Chief Executive Scott Painter said last year that the company is able to offer this lower price because it offers only used vehicles and focuses on affordability based on how much typical consumers spend on car payments and mobility combined as a percentage of their income.      
 
"In our model, we must understand what you can afford and we constrain your shopping experience to that because we don’t show selling prices or cap costs on cars. Everything is shown in the form of a monthly payment and we don’t show you cars you can’t afford," Painter said. "Everything we do at the beginning of the app experience from a data collection point of view is getting to the bottom of that question: How much can you afford? And it turns out everyone can afford something. You could be a single mom, working two jobs and you can only afford $150 to $300 a month. We’ll show you a ton of cars in that price range."
 
Fair is expanding rapidly as it seeks to meet the demand of Uber drivers nationwide seeking temporary vehicles. Fair also addressed how it will deal with the used vehicles coming out of the subscription program with a partnership with Ally Financial and the SmartAuction platform. 
 
Dealership programs turn to 3 tech providers
 
If dealerships have the fleet financing arrangements from their bank partners, they don’t need the OEMs to offer a subscription program. However, most still look to partner with one of three technology providers offering a consumer interface and inventory system.
 
Cox Automotive’s Clutch Technologies, Flexdrive, and Mobiliti are the main players in this space selling the technology to dealerships. Cars usually start at about $1,000 a month, include maintenance and insurance but won’t be delivered to a consumer’s home like the luxury OEM models do. In this way, dealerships still become the mobility hubs for an individual’s city and increase the consumer loyalty.
 
"A vehicle subscription service is for people who want a car but aren’t ready for ownership," Mobiliti CEO and Co-Founder Chance Richie said in May. "It’s similar to a lease, but without the things consumers dislike most about leasing, including long-term contracts and upfront costs."
 
New OEM lease offerings
 
If the previous programs listed above are following the Netflix model of offering a monthly price for full access, there are other OEMs offering something closer to an annual Amazon Prime membership.
 
Hyundai Capital America and Volvo Cars are the primary players in this category.
 
Hyundai started with a pilot in California called Ioniq Unlimited+, which offers an electric vehicle for $275 a month, a 36-month term, no down payment, unlimited miles, and free charging. This year, Honda expanded to Ohio offering conventional combustion engine cars for the same price and terms as the Ioniq
 
Care by Volvo is a subscription program for the OEMs XC40 compact crossover but offers a shorter term — 24 months with the ability to swap to the newer model after a year — starting at $600 a month. Bank of America is the lender behind the program.  
 
"It’s a more attractive price for the consumer," said Mark Abbasi, Hyundai’s vice president of product development. "If you look at month-to-month programs it’s quite expensive — it’s a premium price and we wanted to come out with something that’s more affordable and provides more value to the consumer. That three-year term helps you get there."
 
There’s also a small San Francisco-based startup dubbed Less, which offers consumers three cars during a 36-month contract starting at $550 per month.
 
Ford’s 2 used-car subscription models
 
Used cars are much easier to price because the initial depreciation of driving off the lot for the first time is already factored, Fair’s Painter explained to AFN. The industry is also flush with low-mileage used cars right now coming off record-high lease volume, which makes subscription programs a good way for companies to use up some of that volume, he added.
 
Ford Motors took the used-vehicle route with the launch of Canvas in May 2017 offering users access a number of off-lease Ford vehicles starting at $329 a month, according to the Canvas website. Ford looks to take a similar approach with its upcoming Lincoln subscription service, which will offer more luxury features on off-lease Lincoln vehicles.
 
"Our biggest challenge was simply seeing how customers responded to and used the product, and using that feedback to help refine it and add features that would better their experience," a company spokesperson told AFN earlier this year. "For example, we found that features like adding a second driver are hugely popular with our customers."
 
Other programs look to make a splash  
 
Two companies are seeking to break into the car subscription space but either hasn’t found their niche yet or are seeking OEM partners to bring them to the next level.
 
Los Angeles-based Borrow is a car subscription service that rebranded from PrazoNow in November 2017. The company only offers electric vehicles starting at $499 a month on a three-month term. Likewise, Carma Car is part of the Techstars Mobility accelerator and is seeking expansion for its program starting at $400 a month for sedans such as the Ford Focus, Honda Accord, and Chevy Cruze in the base package.
 
The complete list of subscription services’ starting monthly price:
 
Access By BMW:  $1,100
Book by Cadillac: $1,800
Borrow: $499
Canvas: $329
Care by Volvo: $600
Carma Car: $399
Carpe by Jaguar Land Rover: $1,057
Clutch Technologies: $850
Fair: $150
FCA’s Jeep Subscription: TBD
Flexdrive: $750 (on average)
Hyundai Plus/ Ioniq Unlimited+: $275
Less: $550
Lexus: TBD
Lincoln: $625
Mercedes-Benz: $1,600
Mobiliti: $1,000
Porsche Passport: $2,000
 
 

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