OEMs’ Subscription Plans Could Revolutionize Auto Industry
On first blush, BMW’s first tier $2,000 per month service may look like a disconnected price point. Perhaps, more judicious consumers will run the numbers and be intrigued.
June 12, 2018
Industry Voices
Have you ever heard of a salesperson at a car dealership cavalierly saying, “At this price, we’re not making anything on selling you this car, but we’ll make it back when you bring it in for service”?
As salesy as it sounds, it’s probably true. However, Volvo, Porsche and BMW went ahead and took this dynamic to the next level, eliminating the maintenance element by offering car subscription services.
BMW recently announced Access by BMW, offering a form of mobility-as-a-service at two pricing tiers ($2,000 per month for a range of 5 Series and X5 vehicles, and stepping up to $3,700 for their M performance versions) which offer the vehicle, maintenance and insurance as one package.
BMW joins other recent subscription programs by automakers such as Volvo, Lincoln, Cadillac and Porsche.
The primary hook is the convenience of mobility-as-a-service and the ability to choose from a range of premium vehicles as desired.
However, the maintenance aspect can’t be overlooked. The success – and learnings of these business models – are important en route to autonomous cars and their fleets.
Today, there is a tacit struggle between OEMs, owner-operators (i.e. consumers) and third parties over the billions of dollars at stake maintaining and repairing complex products.
The move toward subscription service models by BMW and others is an example of this battle playing out. To be successful with these offerings, the OEMs will need to find ways to lower the cost of maintenance.
Maintenance Advantage: OEMs
In the automotive sector, the owner-operators ceded their ground long ago. While one may change a tire, maintenance beyond that is best left to the professionals. One of the last efforts locally in this battle was the 2012 Massachusetts “Right to Repair” ballot question, which required vehicle manufacturers to provide owners and independent repair facilities with the same diagnostic and repair information available to authorized repair facilities, dealers and the manufacturers themselves.
MRO: New Turf for OEMs?
Subscription services by auto manufacturers illustrate the new importance of maintenance, repair and operation (MRO). What’s at stake for the auto industry? In 2017, 17.2 million new vehicles were sold in the U.S. Any owner knows those cars need care.
When thinking about the future role of MRO in automotive, vehicle subscription services become an important marker for where the industry is headed.
In this new model, OEMs gain control over the entire vehicle lifecycle from design to sales and service networks.
In turn, traditional dealerships may be relegated to showrooms as extensions of the OEM or completely absorbed altogether.
As this network takes shape, OEMs will need to extend their systems and vehicle configuration knowledge to the point of service to optimize vehicle maintenance. The knowledge they will gain about this lifecycle by first offering subscription services will be a prerequisite for managing autonomous fleets in the future.
Current and future vehicles look forward to new lifecycles – where traditional vehicles are phased out to be replaced by those compatible with vehicle-to-infrastructure standards, or where autonomous cars are regulated, a result of increasingly stringent requirements for safety and operation.
Access by BMW Price Teardown
On first blush, BMW’s first tier $2,000 per month subscription service may look like a disconnected price point. Perhaps, more judicious consumers will run the numbers and be intrigued.
Take the entry-level BMW X5. At $67,000 to buy, the real cost is $80,000 to own based on Edmunds’ standard assumptions over a five-year period. This combined figure equates to a monthly cost of $2,450.
To refine the number, we can take out the $10,000 five-year cost of fuel which reduces the monthly real cost to own to $2,280 and add that back to Access by BMW to reach a $2,166 per month real cost.
Vehicle depreciation, the largest expense, may seem like just a paper number. However, it manifests itself as real dollars for consumers when the asset loses value and results in the loss of money that could be used elsewhere.
Although a simple price teardown, it illustrates how the subscription model could make sense.
Will subscriptions work for consumers?
Consider the following points:
Where someone lives. Assuming the pilot expands and pricing is standard, vehicle-as-a-service appeal may vary by region. Nashville, home of BMW’s pilot program, has a more moderate climate. Maintenance costs may skew higher in locations with harsher weather conditions.
Penchant for “the new car.” The ability to swap cars can give Access by BMW the edge over traditional ownership, assuming the service isn’t delivering five-year old vehicles.
Length of ownership. The subscription service may begin to make less sense for anyone driving a car for more than five years. Past the five-year mark, owners begin to recoup dollars once the vehicle is typically paid off.
If time really is money. Avoiding wait time at dealerships, booking appointments and taking time from family and work is a big attraction to the subscription.
Vehicle complexity. Premium vehicles require a premium service visit to the dealership or authorized mechanic and unplanned, expensive maintenance costs can be alleviated.
Conclusion
The price teardown and considerations are a look at the viability of subscription models to gauge their pragmatism on the path to autonomous cars and smart cities. In terms of MRO and automotive, it hints at the potential for a new business model on the horizon for both OEMs and dealers/repair shops – with real economics at stake.
Subscription models move service costs (which are normally billed to customers) into a monthly fee. This creates new value for the OEM ecosystem. OEMs have built business moats with their manufacturing expertise and supplier networks.
As mobility evolves, they will take a new look and work to improve MRO to lower the cost of maintenance and gain a competitive advantage over other vehicle service offerings.
This is the battle for maintenance in real terms.
DoShik Wood is director-marketing at Aras Corp., a software company.
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