The industry hopes a shift away from private ownership does not have to be a problem
Izabella Kaminska
Network operators such as Uber and Lyft don’t necessarily want to own the vehicles they rent to the public © Bloomberg
Car manufacturers don’t just sell customers a transport solution. They sell an aspirational lifestyle.
So it should come as no surprise that many have started to worry about the impact autonomous driving technology will have on their profits, if and when those aspirations are made irrelevant.
Some industry practitioners believe that when travelling in autonomous vehicles becomes the norm, there will be little to no incentive to own a private car at all. Instead, fleet managers or ride-sharing networks will rent cars to the public as and when demand requires, undermining the opportunity for manufacturers to increase margins with bespoke extras.
The industry’s response is that the shift doesn’t have to be a problem for profitability. People will still need cars; business models will have to adjust. Rather than marketing cars to individuals, manufacturers will have to be better at marketing themselves to professional fleet networks or operators.
But this view ignores the role private car ownership plays in pricing vehicle transport more widely. Network operators such as Uber and Lyft don’t necessarily want to own the vehicles they rent to the public. Asset ownership can be burdensome and these businesses understand that tying balance sheets up in fixed assets can impede growth.
It can also expose owners to all sorts of inconvenient risks and costs, such as accident and damage liability, maintenance and fuelling expenses. For private owners, the utility and convenience drawn from exclusive ownership makes those costs and risks seem worthwhile.
This has sparked speculation that the sector might emulate the “opco-propco” model used in retail and hospitality. Companies are split into two entities, with the operational side engaging in a sale and leaseback with the property-owning entity in a way that improves the overall credit standing of the duo and lowers its funding costs. The “propco” might then be organised as a sort of investment trust, opening the door to low-risk mutualised ownership.
The problem is that investors in vehicle fleets would be exposed to a lot more risk than in conventional real estate investment trusts, because the depreciation rate of autonomous vehicles is an unknown variable in a world where private ownership has been upended.
In conventional vehicle securitisations, the cost-effectiveness of lease payments is tied to how well the cars keep their value in the second-hand market. If the market is expected to be strong, the collateral value of the car can be used to discount the effective rental costs.
Without private buyers for former fleet vehicles, however, it’s hard to imagine how residual values might be propped up. Resale value might have to be determined solely by scrap value, increasing leasing costs all round.
Here lies the paradox for the autonomous market. If private ownership becomes obsolete, fares will lose an important source of subsidy through the residual value channel. Ironically, rental rates could then rise to levels that made private ownership seem more compelling rather than less.
Some say the solution lies in collective autonomous membership schemes, where a one-off investment (less than the cost of buying a car outright) entitles a member to ride in any available vehicle. But the problem then becomes one of liquidity management and ensuring members don’t demand to use the scheme’s cars at the same time.
The only way to resolve that difficulty is to ensure a fleet has at least one vehicle per member on hand, making the cost of membership entirely substitutable with private ownership. The key benefit then becomes the capacity to summon a vehicle quickly, rather than having to wait for one’s personal car to arrive from half way across town.
Whatever the industry hopes, that benefit might not be enough to compensate for the burden of not being able to keep personal items at the ready in one’s boot. They may need to think again.
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