Disrupting automotive through adaptation of technology business model (1/2) - 3 Reasons why car ownership is dying
In the US 28% of cars are leased. While it is uncommon to lease inexpensive vehicles and family cars, close to half of all luxury cars are. That percentage is only higher in one other car-segment: electric vehicles (EVs): In the first 3 quarters of 2015 75% of new EVs have been leased!
The most common explanation is that EVs are still too expensive to buy. Another popular reason is that customers do not trust the durability of electric powertrains and lithium-ion battery technology. Finally, customers claim that driving range might be an issue and thus prefer leasing over buying (more on my thoughts on driving range anxiety)
All 3 reasons play a major role. All of them have been researched by J.D. Power back in 2010. However, they don’t sufficiently explain the high lease rates among EV customers today. Here are three insights why car leases are 3-4x more common in the EV segment and why car ownership is becoming rare among young customers.
1. GenY (Millennials) Adapts New Purchasing Habits
On average, EV buyers are a younger and wealthier than the buyers of the same combustion engine model. That shouldn't come as surprise with high costs of EVs. But, the median real income among young adults is reaching modern time lows. Young adults earn less in real terms today than 1980. At the same time cars have become more expensive over the years. Since 2009, the average car transactions prices have risen by $3,000
The combination of low income and high prices leads to less new car sales among GenY (compared to prior generations). Additionally, their increasing demand for used cars might be an indication of lower purchasing power. Still, GenY has become the second largest car-buying generation in the US. Finding a product offering for these customers is essential for car manufacturers. But how can this segment be won over: Lower prices? Greener cars? More technology?
2. Technology Changes Challenge Car Manufacturers
Companies like Zipcar, Uber and Lyft have made us mobile through the usage of internet technology and data analysis. We don’t need to own cars to gain the mobility that an automobile provides. For a low monthly and/or usage fee we can explore the world. No need to spend 5 digits $ amounts upfront.
Today, there is also a diverse set of technologies challenging the traditional car segment. Powertrain technology is going through disruptive changes with EVs and hydrogen cars slowly providing viable alternatives to combustion engines. In-car navigation system suddenly have to compete with Google Maps. In-car voice recognition is expected to work like Siri (not call up aunt Carrey all the time!!!). With all these improvements happening, why should a customer buy a car today for the next 10 years, when the car of tomorrow will finally have properly working technology? What if a customer buys a car today but 1.5 years from now can't receive the newest software upgrades because of his old hardware model (happens too Tesla users frequently)? Are cars going to depreciate even faster as software technology becomes an integral part of the vehicle?
3. Smartphone "Addiction" Moves Center of Freedom
A car was once perceived as the ultimate freedom machine (Do you still remember your grandparent's look you when you told them that you could live without a car?). Slowly, technology products are creeping into that role. However, I personally do not believe that the society has become addicted to smartphone devices. It is that desire for freedom, information and connectivity that attracts us to them. Today, that desire is satisfied through smartphones.
That is why 7in10 US drivers engage in smartphone activities while driving. For example, of those who shoot videos behind the wheel, only 27% think they can do it safely while driving. But, they still do it! This means: People know that it using smartphone while driving is dangerous but it seems to still be worth it for most. Thus, the phone has become the new freedom, information and connection machine! The car on the other hand is seen primarily as means of transportation. 37% of car owners do not believe that cars are necessary for them and 30% of drivers across China, Denmark, Germany, and the United States would already rather give up their car than their smartphone... and these are trends including all age groups!
Among GenY it is even more dramatic. More millennials would give up their cars, computers or TVs before their smartphones! To attract a customer segment that wants to use cutting edge technology, car manufacturers have to update their offerings. But, as millennials are unable/unwilling to spend 5-digit amounts on cars with outdated technology (compared to the beloved smartphone), car ownership will continue to fall among younger generations.
There also lies the great chance for car firms: learning from technology firms that are able to attract GenY successfully. Business model innovation based on tech insights is needed to create opportunities for startups and help established car firms get back on track by making driving attractive and affordable (more on next week's blog post on how to attract millennials through business model innovation).
Sini Ninkovic analyzes the EV market and its customers since 2012. He helped bringing BMW's i3 and i8 to market and currently works as Product Planner for Lucid Motors.