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Here's why automobile giants are offering car subscription services to their clients

Car subscription works out very well for those who are in transferable jobs and do not want to worry about owning/transporting a car across cities or those individuals whose car requirements keep altering with their lifestyle changes.

ET CONTRIBUTORS|
Updated: Nov 21, 2019, 03.23 PM IST
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In an economy that is facing slowdown, subscribing a car may be a smarter choice than buying one and locking down finances for three to five years. It’s certainly a trend whose time has come.
By Anupam Agarwal & Karan Jain

Winds of change are blowing through the Indian automobile sector. While technology is changing the engine-design, policy updates are encouraging manufacturers to be more environment and safety conscious and ride aggregating apps such as Ola and Uber have already changed the way people commute.

However, the strongest driver of change in this industry is consumer behaviour. While car ownership in India is still considered a status symbol, problems such as congested roads, inadequate parking, volatility in fuel prices, high interest rates, lack of credit history and rising insurance premiums are some of the reasons consumers are putting off their car buying decision. People are, instead open to exploring improved public transport alternatives such as metro rail and air-conditioned buses and other shared mobility solutions. Thus, shifting a car purchase decision from aspirational buying towards need based usage.

In the first ten months of FY 2019 alone, the top Indian cities have seen a lethargic growth in passenger vehicle demand. Delhi, Mumbai, Chennai and Kolkata – the top four metropolitan cities that accounts for 11% of the country’s passenger vehicle market, witnessed a drop in the sales between 4% -12% from April 2018 to January 2019.

Amidst the shift in consumer buying decision process, the cogs of the traditional “buying or owning” are fast being replaced by “leasing” and to the latest “subscribing”. This newest trend of “Car Subscription” is gaining popularity, especially amongst the urban young middle class, where the needle has shifted from owning to experiencing; and subscribing a car makes the car ownership and driving easy and hassle free.

Vehicle subscription is defined as a service where a customer pays a recurring fee for the right to use one or more automotive vehicles. So, how is this different from leasing out a car?

The fundamental difference between car leasing and subscription lies in flexibility, pricing and availability. In a car leasing scheme, you can own a car by paying a fixed monthly lease rental, without having to worry about down payment or the hassle of resale.

However, the typical lease tenure is three or four years, with heavy penalties levied if one ends the lease prematurely. Shorter tenures (e.g., two years) are sometimes available, but the lease rental becomes very high with shorter tenures, since the lease provider tries to recover bulk of the car’s value within this tenure. And most importantly, retail leases are generally not available in India.

Indian lease market is almost entirely made up of “CTC leases”, in which a corporate allows its senior executives to take a lease from their employer, and deducts the monthly lease rental from the CTC of the employee. So, unless you are senior executive in a corporate offering this facility, you will find it very hard to qualify for a lease.

While leasing is definitely better than buying in some situations, especially when one does not have sufficient savings to make a down payment and do not want to get bogged down with high-interest car loans, hefty EMIs and significant insurance premiums, car subscriptions are cheaper, provide greater flexibility and are available to everyone.

To start with, the lock-in period is much shorter (three months), and prices are lower. What’s more, every time you renew the subscription, the monthly fee reduces further. As easy as ordering a pizza, car subscription works out very well for those who are in transferable jobs and do not want to worry about owning/transporting a car across cities or those individuals whose car requirements keep altering with their lifestyle changes.

According to Automotive Subscription Services Industry 2019 Global Market research report, the automotive subscription services market, having key players such as General Motors, Porsche, Volvo Car, Ford Motor Company, BMW, is forecast to record a CAGR of 71.38% in 2023.

Seeing the direction in which the wind is blowing, automobile giants such as Hyundai, Nissan Mahindra & Mahindra, Volkswagen have already started offering subscription services either directly or in partnership with third-party companies. With prospective customers’growing affinity towards shared mobility and digital technologies, the car subscription model is well on its way to disrupt the existing norm of self-owned cars.

In an economy that is facing slowdown, subscribing a car may be a smarter choice than buying one and locking down finances for three to five years. It’s certainly a trend whose time has come.

(The writers are co-founders of Revv. Views expressed are their own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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