Servitization in the auto industry

December 9, 2022

Servitization is an emerging business model in the service-based economy. It is a bundle of a product and its essential services, with usage-based customer payment. The World Economic Forum calls this shift the “experience economy,” in which products evolve into services and services evolve into experiences, with data the foundation for delivery.

The servitization concept is not new. Xerox pioneered it in a pay-per-page business model for its printers and photocopiers in the 1960s. Rolls-Royce’s Power-by-the-Hour initiative for aircraft engines is more than half a century old. Nearly half of Rolls-Royce’s revenue is generated through this business model.

The automotive industry has not had much success in adopting servitization. The revenue share from this business model continues to be low, in single digits. What are OEMs globally doing in their servitization journey? Mercedes-Benz for example shut down its subscription service called “Collection” after a 2-year pilot. Ford sold it. Jaguar Land Rover relaunched it. Some offer features on a subscription basis. Here are some more details.

Toyota and its gamification

Toyota launched Kinto in 2019, a company that will manage a car subscription program and other mobility services in Japan, including the sale and purchase of used vehicles, automotive repair and inspection. Unlike other subscription programs, Kinto has gamified the service. The company planned to introduce a service that will award points to customers based on how they drive. Toyota did not explain how safe or “ecological” driving would be tracked, but the assumption is that the vehicles would be equipped with connected-car technology to monitor driving. Points can be applied toward payments, the company said.

Avoiding flat subscription fee

At a convention in February 2020, Volvo Cars said the automaker learned some lessons since it introduced its “Care by Volvo” vehicle subscription program in 2017. Through the program, consumers can acquire a vehicle for two years by paying a monthly flat fee. That also covers insurance, maintenance, potential repairs and wear and tear. Volvo Cars USA CEO Anders Gustafsson that an early lesson involved the need to revise the original flat-fee insurance coverage because rates vary widely from state to state. - WardsAuto.com

Features on subscription basis

It might seem counterintuitive, but automakers have been increasingly paywalling features and services for their vehicles, including some features that are physically built into the car. BMW made headlines after several news outlets spotted that it was selling subscriptions for heated seats in its vehicles. It’s not just BMW offering paywalled extras - other manufacturers like Volkswagen, Audi, Toyota and Tesla have tried out subscriptions for certain features and services on demand. - EuroNews

Customer data from pilots

Mercedes-Benz first rolled out its "Collection" subscription service in Atlanta in 2018 with the goal of appealing to customers who want to have access to a fleet of fancy cars but don’t necessarily want to own one. The program offered subscribers access to 30 models for a monthly fee. But it never expanded beyond the initial pilot cities. The service was suspended after two years due to mediocre sales. But Mercedes did not away empty-handed. The automaker was able to collect “a mountain of data” on its subscribers, many of whom were, on average, 10 years younger than the automaker’s typical customers. This would help the car company’s better target millennial-aged car buyers in the future.

JLR relaunches subscription service

Jaguar Land Rover (JLR) launched its "Pivotal" subscription service in 2020, offering flexible ownership with a single monthly payment that covers rental, insurance, tax, servicing and repairs. The company has more recently launched in 2022 a new dedicated website to combine its online purchase, subscription and rental services into one place. The ‘Own. Subscribe. Rent.’ proposition allows JLR customers to acquire vehicles outside of the traditional retail model.

Ford sells subscription service

Ford sold off its vehicle subscription service "Canvas", ending a two-year experiment that aimed to bridge a gap between renting and leasing. "Canvas built an impressive business and we learned a lot about subscription services, fleet management and the technology that underlies both," said Sam Smith, executive vice president of strategy and future products at Ford Credit, in a statement.

Maruti Suzuki’s Subscribe

In spite of these starts, stops, pilots and changes in direction, Servitization continues to be an option vehicle makers cannot overlook. In India for example, Maruti Suzuki has close to half the market share in the passenger car segment. Its Subscribe is a new way to own a car that gives you all these benefits and more.??

The above examples and more concepts from our research on Servitization are covered in the upcoming book “Advances in Digital Manufacturing Systems” (Springer, 2023) as a chapter. Link to book below.

To continue to receive Infosys Knowledge Institute newsletters, please do follow us and subscribe to the newsletter.