Buying A Car No Longer Makes Sense; Car-Makers’ Business Models Need Tweaking

The rapid expansion of app-based taxi hailing services like Ola and Uber, and the advent of the driverless cars a few years down the line, will change the game for car companies. In just about a half-decade or, maybe, a decade, their target consumers will be less the retail consumer and more the fleet owner, where volume discounts will be the norm. They have to profit from volumes, and not fat margins. Car dealers may bear the brunt of this change. The car industry’s business and marketing models will have to be changed.

Consider two stories that are indicative of a future trend.

In September, The Economic Times reported that Uber may buy upto 200,000 cars to expand its operations in India.

Earlier this month, many newspapers carried interviews with Softbank chairman Masayoshi Son, who has an investment in Ola, that he may be willing to buy upto one million electric vehicles to expand taxi services. Electric vehicles are not available in such volumes in India yet, but who can say they won’t be if demand is forthcoming in such volumes?

These numbers may not happen all in one year, but between just Uber and Ola we are talking of nearly 1.2 million cars being bought by bulk buyers. And it could be more, if funding comes to other taxi aggregators and fleet operators.

We could thus have 1.5-2 million cars being bought and owned not by individuals, but companies. Now contrast this with last year’s total car sales of 2.7 million.

The simple takeout is this: ours may be the last generation where private car ownership will be privileged over car leasing.

While the new consuming class of Indians may still view car ownership as status enhancing, many more Indians will be looking at the car as a cost, as a functional utility whose costs have to be weighed against benefits. With taxi aggregators (not just Ola and Uber, but even the Merus and Tabcabs) recruiting drivers by the thousand in Indian cities, and given congestion and parking issues, trying to own and operate your own car is foolhardy. Weighing EMIs and running costs, not to speak of depreciation and repair charges over a car’s lifetime, against status benefits, using cabs and autos will always be cheaper for most households.

Apart from the huge expected increase in aggregator fleets, a third development that will impact car ownership is driverless cars. Google, Uber and even some car companies are experimenting with this idea. While driverless cars are already being tested in the US and Singapore, it is certain that they will be sold commercially within the next decade, and possibly by 2030 in India too. Driverless cars will not only become ubiquitous, but will also dramatically lower the cost of taxi travel for citizens.

Picture this scenario: if you can hail a driverless (or even a driver-operated) taxi from anywhere and at any time, why would you need a car? You can be an automobile enthusiast who enjoys driving them, but beyond status and driving pleasure, for all practical reasons you may not need to own a car.

Even if you like driving for pleasure, why would you want to drive only one kind of car, and that too by incurring a huge cost? Why not use different cars for different periods by paying lease charges? This way you get to drive many cars for much lower costs.

A car is a depreciating asset, and when an individual uses it, he uses it sub-optimally. Consider how many hours you use your car – maybe to go to work and return – and how many hours it is sitting idle (probably 22 hours a day). A cab, on the other hand, could be used more than 12 hours a day.

Your costs will be the purchase price (or monthly EMIs), fuel, servicing and repair expenses, drivers’ salaries, and parking costs, including the purchase of parking space in your building, among other things. Parking spaces are sometimes more expensive than small cars in some metros. Using a taxi aggregator’s cab will cost you much less and save you from the additional headache of negotiating huge traffic snarls and finding parking spaces in congested locations.

Even if you want to have a car available with you always, it will be much better to lease it for the period you want it, rather than keep one till it becomes unusable.

In future, most cars will be sold to giant taxi operators and other corporations that will run and maintain it and lease it to anybody who wants them for whatever period.

The age of mass car ownership began about a 100 years ago, when Henry Ford and Alfred Sloan made cars affordable to the ordinary citizen. But with app-based taxi services and leasing coming of age, not to speak of driverless cars that are round the corner, the age of mass car ownership will come to a close over the next decade.

(A part of this article was earlier written for and printed by DB Post)