Software Defined Vehicle, part II (Circularity)
Another interesting topic related to the software-defined vehicles is access. A lot of digital ink has been spilled about the consequences of the evolving automotive retail environment where the questions of how/where/from whom? consumers purchase vehicles in the future are being redefined. It's not just the process and place that's undergoing change, however; the actual financial arrangement consumers enter may be poised for disruption.
We've recently received another crash-course in the linear relationship between leasing volume and used car inventory/pricing. Vehicle leasing was cut in half – to below 20% of overall sales – during the height of the pandemic, and has only recently started to rebound slightly with increases in new vehicle inventories and incentives. Historically-speaking, the only real options consumers had were to purchase a vehicle with cash, finance it, or lease it. Subscription models, either by OEM or 3rd party, have had mixed success over the last several years, though they're now sprouting up with a more regularity as new/used vehicle pricing and interest rates remain high, and the subscription economy expands.
It isn't necessarily that a subscription is a financially better deal in the short/long run (you have to pay for the additional convenience and shifting depreciation to someone else, for example), but driving behaviors/patterns have shifted for many people (in many cases, permanently) meaning there's a renewed focus on how expensive and dated traditional vehicle ownership is for some people in some situations. The idea of securing a vehicle and fulfilling your transportation needs – vs. I'm getting a new car! – in a fashion similar to how you order a new appliance is very appealing to younger generations, of course, but also to older ones who have well-documented disdain for the traditional negotiation song and dance.
Fleet management used to be a term that was mostly relevant for rental companies or companies with a large capital investment in vehicles required to execute their operations (read: delivery services, construction, etc.). Today, one might imagine a scenario where subscription takes hold and lots of smaller, regional, or specialized entities offer short, medium, and long-term vehicle access. It could be a company perk, targeted to people with temporary needs, or even set up within municipalities that may be interested in influencing things like urban planning and downtown design, parking, and public transportation.
One of the downstream consequences (literally) of subscription and non-traditional access arrangements may be to enable the idea of vehicle circularity.
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A typical vehicle goes through a normal lifecycle where it's retailed as a new vehicle, may be traded-in and retailed/wholesaled and retailed again until it's ultimately totaled by accident, wear, or obsolescence. At that point the vehicle simply becomes scrap or parted. In a future circularity model, however, a vehicle may have multiple retail or subscription cycles, but during this process it would return back to its manufacturer. At these use points, a vehicle could theoretically be updated (both in terms of hard and software) or reconditioned, and serve again as an additional revenue-generator (traditionally, this has been the domain of dealers).
In theory, these vehicles could have a longer overall effective lifecycle than existing fleets as the manufacturer may be better equipped to fundamentally revitalize a vehicle than an individual retailer may be willing or able to. There are some OEMs who are thinking about this type model seriously already, as it not only provides them with recurring revenue streams – some estimates put the collective impact at $400-600B industry-wide – but also aligns with sustainability goals/practice, and trends well with consumer expectations around their needs. ?
Other impacts on things like material usage and sourcing, production practices, recycling and design improvements could have profound effects on the full length and breadth of the automotive supply chain. The recent influences on the industry from a production, supply, retail, and pricing standpoint are accelerating the way people view how they get around, and their collective hands may be forced. Experts don't expect the used car industry and pricing index to recover for years, if ever, meaning the calculus around where and how you may choose to live, work, go to school, and vacation may all be in play.
If nothing else, sustained and increased vehicles costs via interest rates, availability, pricing, or otherwise – such as OEMs focusing specifically on high-price/high-margin vehicles – will eventually have a lasting effect on the vehicles people choose, how they "purchase" them, and if they buy them at all.