The Smart Mobility industry is disrupting how we understand, among other things, our relationship with our cars. Within it, car-sharing is becoming a fast-growing space, especially in Europe.
Growth is accelerating so much, that in cities like Madrid we already have up to five different companies operating. The question, though is, is there room for all?
Madrid has nearly four million vehicles (bikes and cars) susceptible to being replaced by car-sharing companies. Car2Go is the market leader with an estimate of 211.000 users in Madrid alone. Assuming that at least 40% of those users own a vehicle, the company’s market share within car owners is of 2,2%.
Car2Go, as well as that of its competitors, circumscribes their availability to the city center. Roughly half of Madrid’s population lives outside this area. This means that there is plenty of room to grow outside the current operational area.
The bottom line: Car-sharing is booming, and it’s here to stay. The goal of these services is to take over car ownership in high-density urban areas. The transition period between one and the other will be dramatic as car density will increase considerably. Detractors will argue that car-sharing services increase cars, not the opposite. Car-sharing companies will defend that they’re taking cars off the streets as people won’t own a car anymore. Both will be right. At different points in time.
The market is big and ready, but, is it worth it? Are these companies making money? Why would any of them enter such a crowded space?
I ran some financial scenarios for Car2Go based on their public numbers and my estimates.
- The amortization of old (400) and new cars (450). All of them are Smart cars but of different generations. I assumed a car price markdown of 5% as Smart and Car2Go are both under the Daimler umbrella. I also applied a 24 month amortization period for the older cars, and a 48 month one for the new ones.
- Battery charging costs. I assumed they’re charging most cars using the official electric vehicle rates. This rate is cheaper than the average household electricity price.
- Repairs and accident costs. These are, by far, one of the most substantial costs. The average lifetime of a car under a car-sharing service is roughly six months.
- Salaries of all car operators. Operators are in charge of moving the car to the assigned charging stations and back. They’re one of the most significant expenses for the company.
- The revenue model of the company is based in euro per minutes driven. The current rate is that of 0,21 € / minute. They recently included pre-paid minutes which lower this rate.
- The average trip is 20 minutes. I based this average on my own experience (living in one of the most active Car2Go areas, just on the border of their operational area).
- The average car utilization per day is 15 trips per day per car. This rate is the official one published by the company, one that’s rather impressive. It’s one of the major Key Performance Indicators of the business.
- The average number of trips between charges is 7,5. I based this estimation on the average trip time, distances and the official Smart Electric Drive range.
- Scenario I: Current state of affairs. The company recently expanded their current fleet with 450 cars more. I’m assuming that such an increase will drastically lower the average daily car usage. At least during the first months.
- Scenario II: Increase market penetration. While adding new cars temporarily decreases the use per car (scenario I), the increased density will pay off on the long-term. I projected a new scenario where the average daily vehicle use grows by 2% after a year or so.
- Scenario III: The next logical step is that the company extends their operational area. This scenario implies larger operational costs, but also increased time per trip and more revenue.
- Scenario IV: The efficient future. I projected the final stage of efficiency. Improved car specifications that lower the cost of repairs. Longer trips without recharges, and improved algorithms that increase the number of cars an operator can handle.
As it stands (scenario I), car-sharing is an excellent business if you hit certain operational improvements, but it requires a significant upfront investment in cars. Not any car though, but an electrical one (EVs). The numbers don’t add up if the cost of operating the vehicle is based on anything else. This includes the use of hybrids, even those ultra efficient like the Kia Niro (3 liters / 100 km).
The last company to enter the game in Madrid was Wible, a joint venture between Kia and Repsol. I’m not sure what numbers they’re running, but using plug-in hybrids is a significant disadvantage.
Beyond the cars employed, the business requires certain operational finesse. One of the most critical indicators for the business is the number of daily rides per car. The higher the number, the bigger the revenue. However, several factors restrict the growth of that indicator. The longer the car is on the streets and not charging, the higher the use of that car. That means that battery life, charger locations and speed of charging are critical factors.
While the car needs to be available, this isn’t enough to maximize revenues. Cars need to be available to the users at the right time and location. Nailing when and where is essential to achieve peak daily use of the vehicles. It’s not an easy problem to solve, mainly due to the time-changing nature of the demand.
There are several ways to increase such availability. One of them is growing the car fleet. This is what Car2Go did in Madrid. The theory is sound, but on the short-term, the daily vehicle use will plummet. Offer and demand don’t grow simultaneously. The company duplicated the offering, but demand doesn’t grow at the same rate. Hence, it will take some time to expand the user base and by proxy, the daily vehicle use.
Another essential factor is distance. The longer the distance, the longer the time spent driving. The longer the drive, the more revenue for the company. Nonetheless, the limited availability zone of most car-sharing companies, cap the average distance vehicles can cover.
Expanding the operational area, though, comes at a cost. It requires more charging points to cover all new areas. It also increases the number of operators needed to move the cars, as the proximity between vehicles decreases.
Why it matters: While the car-sharing business is a profitable one, it’s also susceptible to specific parameters. A small decrease in one of the critical indicators can put you in the red fast. It’s a business that demands high efficiency and tight value chain integration.
As some of the scenarios show, car-sharing is profitable, but it’s not a money machine yet. The financial analysis I ran only contemplates one city. Granted, Madrid is one of the top cities for Car2Go, but they also operate in 25 other locations.
Even if we export Scenario I with a slight markdown in other cities, the business generates between 14 – 20 million euros of yearly revenue.
Daimler, Car2Go’s parent company, had an EBIT of 8,4 billion euros in Q1-Q3 of this year. Of that, Mercedes-Benz made 5,3 billion euros alone. Car2Go is a blip in Daimler’s financial statements.
Then why are all companies getting into car-sharing? Two words: declining sales. Daimler’s Mercedes-Benz revenue is down by a whopping 7%, and it’s expected to keep worsening. The truth is, car ownership is in decline everywhere. And it will only accelerate further.
“In a report ahead of the Las Vegas and Detroit shows, Morgan Stanley, an investment bank, said the motor industry was being disrupted “far sooner, faster and more powerfully than one might expect.” It predicted that conventional carmakers would scramble in the coming year to reinvent themselves.”
The driverless, car-sharing road ahead. The Economist. Jan 2016
What’s next: This disruption isn’t only touching car makers, but the whole auto industry ecosystem, including insurance, part makers or oil companies. Disruption will evaporate revenues faster than what most organizations can grow other models.
Competing with a new model
While the initial investment to start a car-sharing operation is steep (~15 million euros per city), the car industry is getting involved in droves.
This struggle to find the next big thing is driving a fierce competition. Nonetheless, the industry has been competing for decades. Larger models, better consumption, powerful engines, aerodynamic designs, etc.
Be Smart: Competition in the car-sharing space is very different from that of the car industry. We’re going from an ownership model to a service one. Barriers of entry in one and the other are utterly different.
Failing to see this difference will be the downfall of most competitors. A glance at the current offerings shows how misguided most are.
Because users don’t own the car, the number one feature for them is availability, not style. Other features are secondary. Users don’t care about the car model. They care that when they pick the car, they can reach their destination without incidents. All features are subordinated to one big goal, maximum availability.
If a company isn’t available in my area or at a particular time, I’ll switch to another brand. The cost of switching is close to zero; brand loyalty is non-existent.
The Daimler advantage
The question is then, how to maintain top availability and differentiate from the other car-sharing companies.
Daimler is one of the few car-sharing services that has executed a long-term, value-chain-wide strategy. The German automaker understood early on that, while car-sharing is the goal, to achieve dominance in that space, it’s not enough to deploy cars.
For starters, Daimler has invested in all stages of the value chain. They not only own the sharing service layer but the lower physical car layer (Smart), as well as the top application layer with Moovel.
Electric Vehicle Production
Control of the physical car is a massive advantage. Daimler has embarked in a company-wide effort to electrify all their vehicles. One of the consequences of this is that they’re expanding their footprint into the smart energy space. They now produce their own battery packs that get assembled in their EV factories.
But batteries aren’t only used for cars. They’re also deploying them to create energy storage stations too. This storage capacity allows them to control part of the surplus electric grid capacity.
The bottom line: Control of energy storages allow Daimler to create an alternative grid that can feed their car-sharing fleets at a fraction of the cost of the competition.
“I have been saying for a long time now that the best way to determine how serious an automaker is about electric vehicles is to look at their battery supply chain and their efforts to establish production for their EV programs. In that regard, Daimler appears to be the most serious amongst established automakers in my opinion.”Mercedes-Benz unveils aggressive electric vehicle production plan, six factories, and a ‘global battery network.’ Fred Lambert. Jan 2018.
It’s worth noting though that their battery cells are manufactured by SK Innovation, a South Korean cell maker that also provides them to Kia. I expect SK to eventually become Daimler’s exclusive provider, in the same way Panasonic did with Tesla.
Why it matters: Having control over the EV cycle gives Daimler a massive advantage over their competitors. The company can rollup any improvement in battery life, charging speed, or modularity of car components to their different business units, including Car2Go.
One app to rule them all
It is plausible that other competitors can rival Car2Go’s availability capacity. Most will compete, but their businesses will most definitely be less efficient.
Be Smart: The transition between car ownership to car-sharing services will be long. While users and manufacturers are feeling the effects now, it’ll take years to complete. Long-term financial survival is paramount. Any company not operating their car-sharing services efficiently, won’t have enough runway to survive the race.
Daimler knows they can’t rely on operational efficiency either. At least not on the short-term. That’s why they’re making sure they also own the user’s behavior.
When the cost of switching is low, there is only one thing to do, play on the user’s laziness. If a single application covers all transport needs, it’s costly to switch to another for a single use. The key here is aggregating all transport needs under one roof and make it the user’s default. Such aggregation acts as a lock-in mechanism. It’s a direct play from WeChat’s book.
That’s precisely what Daimler is trying to achieve through their Moovel application. They’re aggregating all transport services available to their users and making sure of the lock-in.
There is an abundance of startups attempting the same aggregation play. Their capacity to achieve this though is greatly diminished in comparison with Daimler.
The company doesn’t only run Car2Go. They own MyTaxi/Hailo, the largest taxi fleet in Europe. Besides, they’re investors in Taxify and Careem too. They have an investment in several limo services, as well as peer-to-peer sharing services both in Europe and the US. In a nutshell, they control, taxi, limo, and private transportation. Their autonomous vehicle division already deployed their first buses, giving them a hold on public transport too.
All these services, as well as those provided by BMW through their latest partnership, are aggregated under the Moovel application.
Why it matters: Participating in the whole transport stack gives Daimler much better leverage to aggregate further services under their app. Such all-in-one control allows them to generate lock-in effects that will serve all car-sharing operations.
The ultimate goal is the autonomous vehicle (AVs) layer. Autonomous cars will blend the car-sharing and taxi businesses. AVs will improve efficiency all across the board.
From a car-sharing perspective, it will allow Car2Go to cut out all human operator expenses. Cutting the human element also unlocks other efficiencies. With no operators, cars will be free to relocate to demand-heavy areas without any extra cost.
Daimler has already invested in cutting-edge technology that allows them to predict if a user is in need of a car. I have no doubts they’ll integrate this soon enough, giving the whole system maddening predictive powers.
The big picture: Smarter and cheaper ways to serve the changing demands of users will unlock new business models. Despite what they’ve claimed, I wouldn’t discard price surging strategies, as well as different services for different users.
Their strategy around AVs is similar to the one they’ve been following with their electrification efforts. They’re investing in the whole value chain, including legal frameworks or AV infrastructure like autonomous valet.
Owning the autonomous vehicle stack is a priority for Daimler. They’re doing pretty well so far, but I’m not sure how well it will stack up against much more advanced players like Waymo or Baidu. I fear that they don’t own the critical technologies for AV, in the same way, they don’t hold exclusiveness around battery cells. They need to lock that if they want to keep their advantage.
Car-sharing is the future of personal transportation. During the next few years, we’ll attest to a sharp decline in car sales. The transition period will be bumpy. Cars in the road will soar, and car-sharing services will take the heat. The only way that won’t happen is if cities set bans on fossil-fuel fuelled cars.
Go Deeper: That’s been the case in Madrid. The reason why Car2Go has expanded their fleet isn’t only because they’re hitting a growth ceiling. The city of Madrid is expected to shut down all fossil-fuelled car traffic in a large chunk of the metropolitan area. The only way to move within the restricted area will be with public transport or electric vehicles. Car2Go is already gearing for a soaring demand in EVs.
Winning the car-sharing game takes much more than deploying a fleet. Strict financial control is paramount. To achieve that, it’s essential to own the upstream and downstream parts of the value chain.
Those that don’t invest in a holistic strategy won’t have enough reserves to survive the transition period.
Daimler is already feeling the heat around their legacy business models. That said, they’re the automaker most invested in the future. If I had to bet who in the industry will survive this disruption wave, that would be Daimler.
Kudos to Dr. Zetsche and all the work the innovation teams are doing.