TUSHAR SHARMA, a 29-year-old executive, has been driving a hatchback for seven years. Over the last year he has been planning to upgrade to an SUV, but down payment and high EMIs pose a problem. It was then that he discovered buyers can actually subscribe to a car, as opposed to buying it.
How does car subscription work? It’s about vehicle-as-a-service. Here you experience, not own the car. Other benefits include lower cost of ownership and flexibility to change cars frequently.
The customer gets the flexible, hassle-free ‘vehicle-as-a-service’ by paying a specific amount (upwards of ₹20,000 for a premium category of car) to the subscription company every month. He doesn’t need to bother about anything except fuel and monthly subscription charge. Down payment, insurance, taxes and regular maintenance are all borne by the subscription company. In case the customer exceeds a specific number of kilometres, he/she needs to pay a differential amount at the end of the subscription tenure. Most companies offer car subscriptions for 12, 24, 36 and 48 months. In India, the most popular subscription model is 24 months for 15,000 km.
Owning a car is considered a status symbol in India. But that’s changing. Car subscription is offered by Maruti Suzuki, Hyundai India, Quiklyz, the leasing and subscription business of Mahindra Finance, ORIX Auto Infrastructure Services, and Revv.
According to a Boston Consulting Group report, car subscription is expected to become a $30-40 billion market globally in the next 10 years. Subscriptions have already grown from a fringe idea to a mainstream business in the West, especially in the U.S. and Europe. While car subscription models constitute 30% of total automobile sales in the U.S., in Europe it is 25-30%. Prominent players include BMW, General Motors, DriveMyCar Rentals, Fair Financials Corp., Clutch Technologies, Tesla, Zoomcar, Lyft, Porsche, Toyota Motor, Wagonex, Volvo, and others.
However, it is still early days for car subscription in India. Only 1% of total automobile sales follow the model.
“The criterion of buying has shifted from functionality to aspirational,” says Shashank Srivastava, senior executive, marketing and sales, Maruti Suzuki India Ltd. “Automobile industry is undergoing a massive change with respect to the buying process or consumer preference, whether it’s the type of vehicle they buy or the kind of technology they are looking at,” he adds.
“Subscription is a usage model which provides flexibility to consumers. Since all services are part of the package, it’s hassle-free,” says Mohammed Turra, senior vice president and head, Quiklyz, the leasing and subscription business of Mahindra Finance.
Gathering Pace
The car subscription model is a tripartite agreement between car subscription companies, automobile manufacturers, and customers. The subscription company (or the lessor) invests upfront in the vehicles that customers want to subscribe to. The selection depends on the customer’s preference for the model, variant and colour. The company procures the vehicle from the original equipment manufacturer (OEM) or dealership. The dealership gives a discount for the services to the subscription company.
OEMs also direct customers to car subscription companies that they have tie-ups with. “The subscription company then interacts with the end user. Once they confirm the order, the company places the order with the automobile dealership,” explains Dipankar Sen, business head, vehicle & equipment leasing, ORIX Auto Infrastructure Services.
“For every car requirement we place the order with the dealership. So the entire transaction works as an individual purchase,” he adds. Unlike in the West, India doesn’t allow the registration of a car in the name of a subscription company. The registration is done in the customer’s name. All other charges, including maintenance, servicing, insurance, etc., are borne by the subscription company.
Additional Revenue Stream
For auto majors such as Maruti Suzuki, Mahindra and Hyundai India, the model offers an opportunity beyond car sales to diversify their profit pools.
Maruti Suzuki, which launched its car subscription services in July 2020, currently covers 25 cities, including Gurugram, Bengaluru, Delhi, Mumbai, Ahmedabad and Chennai. India’s largest carmaker has seen a CAGR of almost 292% in subscriptions in the last three years — from 10 per month in FY21 to around 600 in FY23.
Mahindra Finance’s Quiklyz has a fleet of 8,000 cars. Last year, it tied up with Mahindra Automotive, another M&M firm, to offer SUVs in Mumbai, Delhi, Pune, Noida, Bangalore, Gurugram, Chennai, and Hyderabad.
Hyundai Motors India, meanwhile, offers subscription services in Bengaluru, Hyderabad, Mumbai, Delhi NCR, Chennai, Pune, Kolkata and Ahmedabad, among others. Charges start from around ₹22,199 per month, depending on the city.
French car-leasing major ALD Automotive operates in the country with a fleet of more than 14,000 vehicles in over 280 locations, including Mumbai, Delhi, Hyderabad, Chennai and Bengaluru. The company claims to manage over 1.45 million vehicles across 44 countries, catering to more than 100,000 corporate clients.
“The subscription model comes with perks, including zero down payment. Consumers don’t have to worry about registration, road tax, insurance, resale, car maintenance, servicing etc. The customer only pays for fuel. So, a lot of people are beginning to consider this as a good alternative to car buying,” says Srivastava of Maruti Suzuki. Unlike in vehicle financing where customers are bound to pay monthly EMIs for a particular period, he/she has the flexibility of closing the subscription in between the tenure. One needs to pay only the differential amount.
“Manufacturers have found ways of offering their products at affordable rentals through the subscription model,” says Sen of ORIX. “For the customer, it is a rental paid for using the car for an agreed period. After that, the customer can return the vehicle to the leasing company or buy it.” ORIX is a subsidiary of ORIX Corp., Japan, and offers services, including subscription, leasing, rentals, and other mobility solutions.
Kavan Mukhtyar, partner and leader, automotive, PwC India, says for companies, the subscription model has a positive impact on sales since there are no entry barriers such as insurance and down payment. “The model is a horizontal trend, but in a certain price bracket. I don’t see it happening in the entry-level segment at all. It will be in the mid-segment and above, especially more in the mass premium and luxury car categories. It’s more of a price segmentation, rather than product configuration,” says Mukhtyar. He feels once the subscription business picks up pace in India, it will have a positive impact on EV sales as well. “Customers won’t need to worry about the residual value and range anxiety. If customers have a problem with charging or range, they can return the vehicle back to the subscription company. So, subscription is a great option if you are trying a new technology,” adds Mukhtyar.
Unlike car leasing, which only caters to corporates, car subscription is meant for retail customers.
“Subscription in some manner is a variant of leasing itself. The only thing that a subscription model does is to give a marginally higher level of flexibility compared to what a traditional lease would offer,” says Suvajit Karmakar, MD, India and sub-regional director, Asia, ALD Automotive India.
Most Subscribed
According to industry estimates, premium SUVs (₹15 lakh and above) are among the most-subscribed cars in India, followed by hatchbacks (₹10-15 lakh). Mahindra Bolero Neo, Maruti Swift, Kia Seltos, Hyundai Creta, Maruti Brezza, Mahindra XUV300, Mahindra XUV700, Maruti Baleno, Tata Nexon, and Maruti Celerio are the most preferred cars, according to ALD Automotive.
At Quiklyz, Mahindra XUV700, Tata Punch, and SUVs by Hyundai and Maruti are the most sought after. “There is a good traction of SUVs and crossovers in our platform, compared to entry-level hatchbacks,” says Turra.
At ORIX, Swift, Ertiga, Brezza and Baleno lead the subscription chart. “The model selection also depends upon what sells for a particular brand. If a particular model sells very well, you will see the subscription number is on the higher side,” says Sen of ORIX.
For Maruti Suzuki, Brezza, Baleno, Ertiga, Swift, Grand Vitara, XL6, WagonR and Celerio are among its most popular subscribed models. “Customers prefer higher variants with Sunroof 360, rear camera, heads-up display and similar features. Top variants account for 47% of the company’s total car subscription portfolio,” says Srivastava.
On the tenure, Srivastava says 3% of Maruti’s cars subscribed are for 12 months, 17% for 24 months, 32% for 36 months, 33% for 48 months and 15% for 60 months. “About 80% of subscriptions are beyond 24 months,” he adds.
Gen Z Factor
Millennials and Gen Z are the target audience for car subscription firms.
Maruti Suzuki has identified three main customer segments where subscription is prevalent — aspirational millennials, convenience seekers and prime/rich consumers. Aspiring millennials are new to the job and do not have a credit history. “They want to buy a car but don’t have enough money for down payment,” says Srivastava. The second segment includes convenience seekers — people who seek the convenience of using a car without actually buying it. “These are people who would like to have a car to go around in the place where they are posted for a short time. It is a fairly large segment,” he adds. The third segment consists of those who want to try new cars or technology every second year.
According to PwC’s Mukhtyar, car subscription will be an urban phenomenon in the next three-four years, particularly among those below 35 years of age, who are more open to new ways of living especially on not owning assets such as a vehicle or a house.
Unit Economics
Subscription rentals depend upon parameters such as the cost of the vehicle, and expenses such as insurance, maintenance, tyre and battery changes, and accidental repair, among others. All these are borne by the subscription company.
Turra from Quiklyz says there are three components of the subscription economics — interest rates, revenue from services and the amount the company will earn or lose after the resell of the subscribed car.
Interest rates charged to customers are similar to car loan services. Subscription firms currently charge 9-10% interest, slightly higher than traditional car loans by banks and NBFCs.
According to an analyst tracking the sector, if a company wants to recover the cost of a ₹15 lakh vehicle in five years, it will recover ₹10 lakh from the customer, and assume recovering ₹5 lakh in profit after five years by selling the car. The ₹10 lakh will be recovered in the form of a rental fee of say, ₹30,000 per month, which will be charged to the customer as a principal amount with interest. Part of it will cover the principal amount because the subscription company has borrowed that ₹15 lakh from the market.
However, since the registration of the car is done in the customer’s name, it burdens the company if he/she defaults on payments. Repossession is also a complex issue. “As an estimate, around 1% of the 10% interest could be allocated to cover credit losses or provisioning for potential losses. Additionally, about 1.5% of operational cost would go towards activities such as customer onboarding and lease management. Another 1-1.5% would represent the profit margin. In an ideal scenario, interest costs would make up 60-70%, around 0.5-1% would cover provisions, 1.5% would be allocated for operational costs (around 10-15% of the total cost), and the profit margin would range between 10% and 15%,” says the analyst quoted above.
In terms of revenue from services, the company can potentially earn a 10-15% margin. For example, the combined revenue for insurance, car servicing and marketing (for new models) will be 8-10% for a ₹15 lakh vehicle.
Once the lease tenure concludes and the company sells the car, the predicted value might match or be lower than the actual value, leading to potential profit or loss.
Road Ahead
“With the adoption of electric cars, the car subscription model will grow. Our estimate is that the model will grow by 3-5% in India in the next three-five years,” says Turra. PwC expects the subscription business to grow from the current 1% of total car sales to 10-15% in the next four-five years.
Maruti Suzuki’s Srivastava says growth will depend on the maturity of the industry. “In India, vehicles are a sign of aspirational ownership, whereas in the more developed countries, cars are about functionality. That’s why in other parts, subscriptions are much higher compared with India.”
“As the psychology of the consumer changes, the number of cities covered increases, and used cars are included within the model, car subscription will be a good option,” he adds.
Of the 11,000 inquiries that Maruti Suzuki gets about its subscription model every month, only 5-6% actually get converted, says Srivastava.
“Car subscription is still evolving in India. It will take some time to reach the masses,” says Saket Mehra, partner, Grant Thornton Bharat.
One thing is sure. The trend of car subscription models for commuting is gaining traction, and it may well turn out to be the next big source of revenue for Motown.