Why Investors Need To Pay Attention To GM’s Maven Reserve and Cadillac BOOK Programs

March 22nd, 2017 by Trefis Team
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General Motors (NYSE:GM) launched its car sharing service, Maven, last year. Using the service, customers can rent a GM vehicle using a mobile phone in exchange for a membership fee and a fee charged depending on the vehicle used and the neighborhood of the customer. Recently, the company launched a deluxe service under Maven in which customers can get full use of a Chevrolet vehicle for 4 weeks with insurance, $100 gas, and parking fees taken care of by the company. This service has been rolled out in San Francisco and Los Angeles, and is likely to be launched in other cities, too.

The Maven Reserve service is not too dissimilar to the Cadillac BOOK service GM launched earlier this year. Under that program, the U.S. auto maker allows customers to get access to a Cadillac brand vehicle with insurance and other costs taken care of for a flat monthly fee. The added feature BOOK has compared to Maven Reserve is that customers can exchange their vehicle for another Cadillac vehicle up to 18 times a year using their mobile phone app.

Both these programs are interesting and hint that the company is seriously reconsidering the economics of the auto business. Currently the way the business functions is as follows: auto makers design and manufacture a car, out sourcing much of the manufacturing to third party suppliers of various parts. The finished vehicles are shipped to dealerships who handle the sales of vehicles to end customers and are also licensed to handle the after sales service for these products. From the customer’s perspective, they have to cover a portion of the manufacturing costs of the vehicle and also pay a cost to maintain ownership of the vehicle. These costs are spread out over the life time of ownership in the form of a purchase price (or a loan fee), registration fee, insurance fees, fueling costs, maintenance costs, parking fees, and depreciation. At the end of the period of ownership, customers can make the difference between purchase price and depreciated value by selling the car on the used vehicle market.

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What these new programs can do is change the way things are done by tinkering with various sub parts of this life cycle of vehicle ownership. Both these programs take away the initial expenditure on the purchase of the vehicle. Instead customers can pay a portion of that price for whatever period they need the vehicle. Secondly, they take away expenditures from the cost of ownership by taking care of registration fees, insurance fees, fueling costs, parking fees, and maintenance costs by transferring these costs from the car owner to the vehicle manufacturer.

This raises the question of where auto companies are going to get the money to sustain these programs. As we know, the auto industry is a really low margin business. If auto companies decide to pay out a portion of the cost of ownership to increase ownership, they need to free up that cash from some other part of the car manufacturing-to-ownership life cycle. One possible place where these cost reductions could come from is reducing the total number of vehicles manufactured. If vehicles aren’t going to be owned full time and aren’t going to stay idle in a garage or a parking lot for 90% of the time they are owned, and instead are rented out to someone who pays for that use, car companies can manufacture far fewer vehicles. The upshot of this will be that these vehicles will depreciate a lot faster than the cars currently do, which will require car companies to change their manufacturing processes to keep up a steady supply. This will probably require them to move away from the current sheet metal manufacturing process to injection molding or carbon fibers or tubular frames or something entirely new. Either way, these are the kinds of changes an industry as old as the auto industry requires and will probably need to survive the impact of technological changes brought about by the advent of cheap lithium ion batteries, autonomous driving capabilities, and on-demand ride sharing services.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors

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