Recently S&P Global Mobility put out an excellent post on the latest attempt by OEMs to pursue the Holy Grail of Recurring Revenue. The average American family holds a new car for about 6 years, so OEMs pour funds into advertising and marketing and product development in the frantic hopes that when that once-in-70-months day comes, they will be the lucky one to make the sale. This is exhausting, to say the least. And so, as S&P’s Vivek Beriwal writes (emphasis added):
The ability of original equipment manufacturers to extract revenue from a vehicle once it has left the dealer's lot is the holy grail for the motor industry. It's by no means a new quest, either. The industry has long recognized the imbalance between the revenue that accrues to OEMs at the point of sale and the financial riches harvested during a vehicle's life. Jac Nasser, ex-president and CEO of Ford, even made cradle-to-grave services a cornerstone of Ford's strategy in the late 1990s. More recently, many OEMs would rather be seen as mobility companies than plain old automakers, a nod to the spectrum of services in which they see growth opportunities for their brands.1
Of course, today the pursuit of recurrent revenue is embodied primarily in software and telecomms, as OEMs try to extract dollars from the car via “connected car” services such as navigation, usage-based insurance (UBI), and much more. Whether this campaign will succeed or not is a very open question, given the loss to OEMs in recent decades of in-car communications revenue (went to the smartphone), navigation revenue (went to the smartphone), and entertainment revenue (went to… well, you guess).2 Not a great track record. But that is a matter for another post.
Today I have to admit I was “triggered” by the mention of Jac the Knife, who indeed launched his own campaign to capture more of the lifetime revenue generated by the car, overwhelmingly by acquiring companies who accessed that revenue at different points. So here are two charts from my past life as a consultant, the first showing the timeline of Nasser-driven recurring-revenue M&A (apologies for the garish early-2000s PowerPoint color palate!):
To be honest, not all these purchases were services-related (see the acquisition of Volvo, for example), but the point is made. A lot of stuff was bought, most aimed at trying to get at the revenue generated by the use of cars, not just their purchase. Collision repair, car recycling, drivers schools (!), limousine services, car insurance, the works.
But those of you as ancient as I am will recall what happened next: Jac moved on to other opportunities, as they say, and Ford’s C-suite collectively realized how darn hard it was to integrate and run all this stuff, and reversed most of the purchases. Thus by 2008 this is what remained from that chart:
Ford Direct UK used cars is still with us, but of course Volvo is now under Chinese ownership.
I am not taking a shot at Mr. Nasser here: conceptually the idea is brilliant, to move away from once-a-decade sale to every-month-a-check. A quote which I very much agree with was (possibly apocryphally) ascribed to him: “Here is how the car industry works: we make cars, and everyone else makes money.” But wow did it turn out to be incredibly hard to actually execute.
This possibly bodes ill for the latest Grail Quest, via connected car services, but maybe not. Because they are so asset- and even labor-light, these services might be a lot easier to launch and integrate than the “analog” acquisitions of the Nasser years. (My own concern is actually not so much with running these services, as persuading drivers to pay for them.)
We shall see. But once again, as S&P pointed out, we have been here before: hope springs eternal in the OEM breast3, in pursuit of Ongoing Revenue.
The more I study the car business, the more I come to believe in reincarnation.4
One can argue that OEMs actually first grabbed a piece of ongoing revenue via car loan financing, which was launched on a mass scale by General Motors in 1919, via its new GM Acceptance Corporation, and which was followed quickly by Ford Motor Credit, in 1923.
Remember built-in car phones? CD players? CD and DVD-based maps loaded into a cartridge in the trunk?
Thanks, Alexander Pope:
“Hope springs eternal in the human breast; Man never Is, but always To be blest. The soul, uneasy, and confin'd from home, Rests and expatiates in a life to come.”
― An Essay on Man
It took a lot of discipline for me not to make the obvious dumb pun there…