How to thrive despite looming oversupply of cars0
by Casi on 15.10.23
Last updated at 16.10.23 01:09 PM
Technology and flexible car access can save OEMs from a crippling lack of demand by 2025. Casi's CEO and co-founder, Hans Kristian Aas, was featured as a guest columnist, where he shares his insights on how car subscription and leasing can help OEMs get their cars on the road and overcome the industry’s oversupply challenge.
Key takeaways from this article:
- Decreasing demand and orders will hit automakers and build up a potential over-supply of vehicles going into 2024 and towards 2025.
- Leasing and subscriptions are ways to mitigate these risks, but they both have their benefits and challenges.
- Attractive deals from leasing companies allow OEMs to sell off parts of their over-supply stock, but it does not tap into the market of customers that require more flexibility than what a traditional 36-month leasing product can provide. Selling to leasing companies is exactly the same as it’s being done currently, and it doesn’t change anything for the OEMs, but it does relieve the pressure for a bit.
- Car subscriptions enable that direct customer relationship and offer users the option of deciding their own flexibility when it comes to commitment time and additional services. That flexibility is much appreciated by many customers in this tough time.
- The entry barriers for car subscriptions, new infrastructure, and systems mean only a few OEMs like Lynk&Co and Care by Volvo have been able to build at scale (20k+ fleets). Currently, only these players are tapping into the revenue streams of this market in a significant way.
- OEMs need to take action now to avoid a steady decline in order size and revenue in the coming years.
The automotive industry found ways to handle the supply issues of 2022, but this year’s demand issues, caused by signs of recession, high interest rates, and inflation, are harder to overcome. A report from UBS estimates that global car production will exceed sales by 6% this year, leaving an excess of 5 million vehicles that need to be sold with lower margins.
Some are more prepared than others, and Tesla is the one to beat. Tesla owns its entire supply chain and can quickly adapt to market changes throughout the organization. Other OEMs are not set up as technology companies, and restructuring to an entirely new business model isn’t done in a day.
Still, the alternative to taking action is a continued market decline in the coming years. Order reserves from 2022 saved H1-23, but a drastic reduction in new orders will lead to a below-par 2023, with predictions for 2024 and 2025 looking no better.
So, how can OEMs overcome this challenging situation, and which new tools can create lasting, profitable business models?
Subscriptions or leasing? Two solutions with different results
Both car subscriptions and leasing provide access to a vehicle on a monthly basis, even if leasing usually requires a multi-year commitment. In contrast, car subscriptions offer flexibility for as little as one month’s notice period. Many consumers in the market for a car currently manage increased buying risks through leasing. This will likely keep growing parallel to declining car sales in today's economy.
The issue is that leasing offerings do not benefit OEMs more than traditional car sales, with the leasing company purchasing cars and handling distribution. Relying on increased sales to leasing players is one new revenue stream, but OEMs need to bring more flexibility and alternatives for those who feel buying a car is a poor investment or too expensive. This is where car subscriptions shine.
Technology provides new revenue streams and benefits for consumers
Powered by technology, direct distribution through subscriptions can add a new revenue stream without remodeling the entire business model. Yet, many OEMs have been reluctant to build them at scale.
Subscriptions do not only meet increased demands for flexibility, but car manufacturers also become less vulnerable to market volatility because they build relationships with customers, know their pain points, and can adapt accordingly. According to a recent McKinsey & Co. report, attitudes are constantly moving towards car subscription services as people become aware of them.
Naturally, there are challenges in this model, too. Offering mobility as a service requires infrastructure for operations, fleet tracking, and direct distribution, and efficient consumer communication, which most manufacturers still need to implement.
Car subscriptions are also still new to people and are widely perceived as a pricey alternative. This can be solved by scaling these services to offer more competitive rates, but that still requires the willingness and effort to scale these services to increase profitability per car.
Still, the benefits of the car subscription business model outweigh the negatives. When access to a car is treated as a service, financial and practical implications are much lower for drivers, meaning they are more likely to acquire the product.
For EV growth, studies also show that EV adoption numbers increase when drivers do not have to make the large initial investment of buying the car. Our research has shown five times more EVs on subscription than ICE vehicles in European fleets. Our consumer insight studies clearly state that the perceived flexibility of car subscriptions beats the uncertainty of getting a new EV.
What are we left with?
Markets could not predict COVID-19 or the war in Ukraine, and unprepared for sudden downturns in car sales will come back to bite OEMs. Both car subscriptions and leasing have their challenges and benefits, but in today’s market, they are both ways for OEMs to future-proof their business. Technology can empower these business models and help OEMs transition into the future of mobility and putting the customer first.
See the article on Automotive News Europe here. Enjoy!
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What’s the difference between car subscription and flexible leasing?
With many similarities between the two concepts, there are a few differences to consider when determining which product to offer.