Autoline This Week #2617 - Undecided If An EV Is For You? Try A Subscription

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This is AutoLine this week.

The show that gets you inside the global automotive industry.

AutoLine this week partnered with the Consulate General

of Canada in Detroit to produce this episode.

Hi, I'm John McElroy, and welcome to AutoLine this week.

If you're in the market for a new car or maybe you're

thinking about getting out alone to get one,

maybe you're thinking about leasing.

Or have you ever considered taking a subscription service?

We're going to get into that today because I've

got the CEO of a new startup called Autonomy that

is offering subscription services.

Scott Painter is the CEO and co-founder of the company.

And Scott, it's great to see you again.

Nice to see you, John.

And before we get going into autonomy,

I should let the audience know you're

the proverbial serial entrepreneur.

You started TrueCar and you've been

involved in a lot of other efforts, John.

What made you think that you had to get

into yet another startup, this one called Autonomy?

I think great entrepreneurs, great companies

solve a particular problem.

I've been focused on trying to make buying and owning a car

easier using technology for my entire career.

It seems like all of these companies

have really been focused on that same mission.

So let's get into subscription services.

For viewers who are not familiar with that,

what is a subscription service when it comes to a car?

Sure.

A subscription is very similar to an open-end lease.

It means that you get to have access to the vehicle,

use it like it's your car, but you're not

making a fixed-term commitment to that vehicle.

And I think one of the things that I recognized

when we were trying to build companies that really were

helping consumers to get more educated

was that we needed to go further into the transaction.

And the beauty of a subscription is you're not buying the car.

And because you're not buying the car,

the process is completely on your phone.

And your entire contract is right there in front of you.

It's vaulted on your phone, so there's no back and forth.

There's no triplicate.

There's no offline signatures.

And interestingly, because we're also

not fixing you to a term, you're not borrowing money.

So there's no interest rate.

It doesn't show up on your credit report as debt.

You can pay for it with your credit card.

So there's a lot of things about a subscription that really

are part of the solution that enable a purely digital

experience.

I've been part of this movement in the industry

over the last 25 to 30 years to try

to figure out how to make a transaction truly digital.

And whether it's a car loan or a traditional car lease, which

is really deemed as fixed-term debt,

it is not the same thing at all.

It really does enable this magical digital experience.

And it's very fast.

When you sign up for a subscription,

and maybe the easiest way to give you an analogy is when we all

see these scooters around town where people are riding

the scooters, the way you do it is you simply walk up

to the scooter, you scan the app, you install the app

on your phone, and the app then requires

that you provide a driver's license and a credit card.

That is exactly what you're going to do

with an autonomy subscription.

What we've decided to focus on that's a little bit different

is electric cars.

Our fundamental belief is that we're

going to be driving electric.

The industry has really embraced that idea.

I think that when Tesla went to a trillion-dollar market

cap with the Hertz order of 100,000 vehicles,

that really did reflect the tipping point

in terms of consumer perspective, industry perspective.

And it's not as though one or two OEMs have said,

we're going to make an electric car.

Every OEM has said, we're going all electric.

And that's a really big deal because you've not only

got a really big, incumbent group of dealers

and manufacturers that are so focused

on the internal combustion vehicle

and that amortization of the investment that's

been made in that infrastructure over a long, long time,

all that has to be abandoned.

To say we're going to go all electric

is a really big transformational moment.

And that decision, I think, presents

an entirely new set of issues for the industry

in terms of not just how are we going to drive that vehicle,

but how are we going to ensure it, maintain it, repair it?

How are we going to make sure that they've got enough charge?

There is a lot of attendant issues with going electric.

But I think many of those, as we'll talk about today,

are answered by subscriptions, which

tend to be just a much more modern contract

and certainly consistent with being digital.

So you said a mouthful there, and I

want to get into more of the details.

But let's say I want to subscribe to a car from you.

I have to make a commitment for some amount of time,

or how does that all work?

So it's a month-to-month program,

but you do have a three-month minimum.

What we really want to discourage

is people thinking of subscriptions like a rental car

because we're not a rental car.

We don't have the rental car infrastructure.

We want people to keep the car for a flexible term

because that's more consistent with modern life.

And if you think about how our program is priced,

we're currently, if we were thinking about it on a daily

basis, we'd be about $21 a day.

A rental of a Tesla Model 3, for example,

is a little over $100.

So we're not just a little bit cheaper than a rental car.

We're about five times cheaper than a rental car.

So we do have to have some kind of a financial hurdle

to staying with that car for longer than a week or two weeks.

So let's say I sign up for three months

and decide a couple of months into it.

No, I don't want to continue.

What happens then?

You simply return the car.

And again, because it's not credit,

it's not going to show up that you defaulted on a car loan.

Hyundai came out with a program almost two decades ago,

around 1999, there was this program

where you could basically get the car

and if you lose your job,

you could go ahead and return the car.

There was this idea that you're not going to be married

to that car and it's not going to affect your credit

in a negative way.

That was really the precursor to what we're doing here.

This gives you the ability to say,

you know, I'm a college student,

I'm working in another city, I'm in the military,

I'm going to have to go on deployment.

There are so many cases in modern life

where flexible need for a vehicle is real

for a shorter period of time.

And it's also a period of time

that we don't know going into it.

So this really gives you that ability to drive the vehicle

and then when you're simply done with it,

you return the vehicle.

And again, you pay upfront and as you go,

so it's not like a car loan in that sense.

And so it also doesn't get treated like a car loan.

So I'm sure everybody watching now wants to know

they're interested, what's it cost?

Sure, we have an entry level program.

So let's just talk about our launch vehicle.

We decided to launch with the Tesla Model 3.

Our belief is that that particular vehicle

is sort of this generation's Prius.

It's being made at mass production levels

in excess of 500,000 Model 3s were made last year.

They're going to make a little over 650,000 this year.

So that is just by itself standing still

more than 65 or 70% of the entire electric car market.

The Model Y is right behind it.

And so is that being added to our program.

So the Model 3 is 490 a month, 4,900 down.

So it's very much similar to a modern lease.

The cap cost reduction in a modern lease

is about 10 monthly payments.

We have a start fee that represents

about that same thing.

However, one thing that does make

the autonomy subscription unique

is that we allow you to customize your monthly payment

for any number up to $1,000 a month.

So you can dial your monthly payment from 490 up to 1,000.

And then the start fee, which starts at 4,900

comes down to as low as 1,000.

So we have a lot of customers who choose 490, 4,900

and a lot of customers who choose 1,000 to 1,000.

And it really doesn't matter.

But what we do see is a really interesting pattern emerging

where the customers who choose 1,000 to 1,000

tend to have higher credit, better liquidity.

And there are also customers who say

they're waiting for their car to be produced.

The average wait time for a Tesla Model 3 right now

is about nine to 12 months.

There's a 75,000 person wait list on that car.

And even though Tesla is making them in very large numbers,

it does taking them some time to get that car.

So those customers are coming into a subscription.

We also see a lot of customers who

are a little bit fearful of range anxiety

or the charging infrastructure or battery issues.

And what we're really starting to see

is that a lot of this really just is a fear.

When we first started the electric car revolution

with Tesla, for example, we thought

we were going to just see stranded Tesla drivers all

over the highway, whether it is running out

of electricity everywhere.

And that's just not happened.

I think the cars are very good at letting

you know when they need a charge,

they tell you even where to go to get that charge.

But level one, level two, and level three charging

is still a really emerging thing.

If you look at California, for example,

where there are four times more electric vehicle

registrations than any other state,

we now have level three fast charging,

that DC fast charging that can get a 250 mile charge

in about 30 minutes within 10 miles of every California.

So it is going to be a real case of chicken or the egg

where you see electric vehicle registrations follow

with that level three charging system and network.

Tesla is really leading the way.

But one of the things I just learned

is that all of the Tesla supercharger stations

are now interoperable and they will allow you

to charge other vehicles other than just Tesla.

They've even got the adapters right there.

But 85% of people who buy an electric car

are still level one charging.

They just simply get the converter that comes with the car.

They plug it into a 110 outlet.

They get between 20 and 30 miles per night.

I think a subscription is another perfect use case

for range anxiety.

You can give it a try, see if you like it,

and see if it's really a fear

or if it's a real problem for you.

If you don't have level two or level three charging

in your immediate area,

then it might not be yet time for you to go electric.

Yeah, so back to the cost.

If I don't want to put anything down,

it's going to cost me a thousand a month.

Or I can start to put down payments down

and reduce my monthly charge.

But what's that include?

I mean, service maintenance.

Does it include insurance or anything like that?

Yeah, so title, registration, maintenance, repair,

and roadside assistance are all included at no charge.

We, of course, have to charge you tax.

One of the great benefits, though,

of a subscription is that, like a lease,

you don't have to pay tax up front.

So when you get the vehicle, you're not paying tax,

but you do pay a use tax on a monthly basis.

And so all of those fees get bundled

into your monthly payment.

We are, right now, allowing our customers

to put our car on their own insurance policy

similar to how a lessee would put a lessor

on their insurance policy.

That's how we launched our program.

However, we will be launching this summer

month-to-month auto insurance,

which allows our customers to buy directly from us

a month-to-month auto policy,

which makes it so they don't have to go

and make an annual commitment.

The reason, you've got to be legally insured

to drive a car on public roads.

We can't put you in the car without insurance.

So putting you, or putting our car on your insurance

is step one.

Step two is offering a month-to-month program

that precludes you from having to step up

to that annual commitment.

And then step three, and this is really cool, John.

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so why make it harder with a dozen different apps

that don't talk to each other?

One for sales, another for inventory,

a separate one for accounting.

Before you know it, you're drowning in software

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That's odoo.com.

Because we're connected to the car,

we're gonna allow you to have daily auto insurance.

If you don't move the car,

you don't get charged for insurance,

you're gonna have three choices in your insurance

based on your level of risk.

It'll be the low deductible

with a little bit higher level of coverage at the high end,

and it will be maybe a higher deductible

with sort of the minimum level of coverage on the low end.

But if you drive the car,

you'll get billed three, five, or $7 a day.

So instead of having to come out of pocket

for multi-thousands of dollars for an insurance policy,

for the first time you'll be able to get

episodic daily auto insurance.

That's pretty unique.

I've never heard of that before.

That's pretty good.

So how's it going and who are your customers?

So we've been building the platform for the last two years.

And my partner and I, George Bauer, started FAIR,

which was the first used vehicle subscription program.

And the things that we learned in building that program

in order to get that to scale

where we had nearly 100,000 activations

in the first two years,

is that this is not a traditional auto purchasing program.

It's not a subprime auto program.

What we found is that,

and especially as we move up scale with the electric cars,

the average cap cost of these cars for us is about $50,000,

is that we've got a 730 average FICO score.

We've got a near prime customer.

So we're really focused on that 640 to 730 range.

It doesn't mean that prime customers aren't gonna use it.

There's a lot of value propositions to what we're doing.

The big ones are that it's cheaper, it's faster, it's easier.

I think that we're looking at customers

with an average income of about $150,000.

We launched the program to the public here

in Southern California at the end of January this year.

So we've been out there for about five months.

In that time, we've already amassed a fleet

of nearly 1,000 cars.

So we buy cars as customers show up.

And one of the cool things about electric

is that wait lists have emerged

as really the signal of demand.

And just like buying an electric car,

we have a wait list as well.

We can't really keep up with demand.

So we're already at a point where we've got

about 30,000 app installs,

about 1,000 qualified paying reservation holders.

We're delivering at this point,

nearly 10 to 15 cars every single day.

And that's really the pace at which the business has grown.

And for us, it's really about building

those key performance indicators

that lead to the demand signal.

Right now, there's only three ingredients

for our business, demand, supply.

We need capital to buy the cars.

We operate a little bit differently

than a traditional car dealer or a traditional manufacturer

or even a traditional finance company.

We own the cars.

And because we own the cars, we're a fleet operator.

That means that we can also handle

much of what people find distasteful

about buying and owning a car.

We handle title, registration, all of the maintenance.

Everything is included with that car.

And so when you get the vehicle,

you don't have to manage any of those things.

It's simply effectively rented to you or subscribed to you

and you're driving our vehicle.

And if the car has any need for maintenance whatsoever

or roadside assistance, you simply in the app, let us know.

We deploy a roadside assistance team.

We also have a crash app.

So if you have an accident of any kind,

everything is done there.

There's no need for offline paperwork at all.

Scott, as you know,

if you go back about five, six years ago,

subscription services was all the buzz in the industry.

A number of automakers made a run at it.

Mercedes, Cadillac, Porsche, Volvo.

Most of them have fallen by the wayside.

Not all, I think Porsche and Volvo are still operating,

but one of the things that they ran into at the dealer level

was managing their inventory.

You could sign up for a subscription service

that would allow you to pretty much take any vehicle

in the brand anytime you wanted it.

But that meant the dealer had to have all these vehicles

sitting around waiting for somebody to come use it

or not use it, which adds cost.

How do you get around this problem?

Well, so first of all,

most of the manufacturer subscription programs

really proved out one point,

which is subscriptions are really a phenomenal platform

on which to reset the customer experience.

I think that all the subscription programs,

whether it was book or care by Toyota,

I mean, you had all these great innovative ideas.

And when OEMs jump into a space as aggressively

as they did with subscriptions,

you know that there's something there.

The problem with the OEM subscription programs

is that they were simply slotted into

another flavor of a lease.

And when you go ahead and you take a fixed term lease

with a 36 month commitment

and you compare it to a subscription with an open ended term,

presumably a shorter term,

you're gonna have a higher monthly payment.

And so the real trick in doing this

is you gotta understand that that car has to work

over the course of multiple subscribers.

And the reference you just made

is to the Porsche program

in the sense that Porsche has this

really cool value proposition

of you get to drive any car in the lineup,

which meant that dealers had to have every car lit

at every time.

And if the customer wanted to return that car,

it's sort of like turning their entire inventory

into a rental car fleet.

And that was never really the intention behind subscriptions.

Subscriptions are about two things,

better asset utilization over time

and a customer for life.

So that car really does have to work

for three to four to five years

to get that depreciation and that use

to really align with that sort of that use case.

And in a subscription like the one that we offer,

we have that wait list.

So there is no value proposition

that you're gonna get a brand new car.

It just so happens that because we're early in our process,

we are filling this with new cars.

We're already starting to talk with other manufacturers

outside of the Tesla lineup.

As we go from Tesla Model 3 to the Tesla Model Y

and the presumably other Tesla models,

we're also talking with the new entrance,

whether it's Polestar, Luce, Rivian, Fisker,

and there are many others.

And then we're also talking with the incumbent OEMs,

which are pretty wonderful

because they have existing fleet programs.

They also have dealer networks

that can support these cars out in the wild.

And so while the direct to consumer manufacturer models

that are emerging on the electric car side

that are new entrance are different,

it doesn't mean that we don't like them both.

And I think that what we need to be mindful of

is we always want to have a wait list.

What we do not is we're not a rental car company.

We do not wanna have a garage somewhere filled with cars

waiting to be subscribed to.

The real key to this business model is

put the car behind,

or put the car with a customer who's gonna treat it nicely,

a good customer that pays their bills,

let them drive the car.

When that car comes home,

that car goes into rotation,

goes back into the queue to be matched up with demand.

And again, as long as we've got plenty of customers

and we don't have enough cars,

that's gonna be a good outcome.

So right now you're in Southern California.

What are your plans for the future?

Well, the three areas for us to grow

are clearly geographic expansion.

As when we launched, we got a lot of media coverage.

Turns out that over half of our inbound interest

was coming from Northern California.

So we just went ahead and opened up to all of California.

We're now delivering cars not only to the Bay Area,

but to Sacramento and even farther North in California

down to San Diego.

So we are statewide in California today.

And that's partly driven by the fact that the laws

that govern auto retail, auto finance

are all state by state laws.

And so we didn't have to change anything in our contract

to go from Southern California to Northern California.

One of the cool things about electric cars

is they tend to be more connected.

They tend to be more technology driven

and a little bit more autonomous.

We're looking forward to a day here

where rather than actually delivering the car,

the car will drive itself up to your driveway,

lock itself and wait for you to come out

and light it up with the QR code in your phone.

I think that as we're building that geographic expansion,

we'll then also follow EV registrations.

We're looking at Southern Florida.

We're looking at the Washington tri-state market,

Texas, Arizona, Nevada, Washington state.

These are really big areas for electric vehicle registration.

So we're gonna follow that lead.

We're gonna look where the customers are

that are buying electric cars today.

We think those are the markets

that we're gonna expand into next.

From there, it's gonna be about broadening the lineup.

There are 38 different make model trims of car

that have already been announced for the next two years.

That's gonna be an exciting time to be a consumer.

GM has, whether it's the Cadillac Lyric

or the Hummer EV or the Equinox,

the Blazer, the Silverado,

you've got Ford with the F-150 Lightning,

the best selling vehicle in the world going all electric.

I think that it's gonna be a pretty exciting time

to think about what you wanna drive and drive electric.

The third area for us to grow

is gonna be product line expansion.

So as I mentioned,

we're gonna be getting into that usage-based insurance.

That requires that we become a captive.

Right now, we are setting up the MGA

to be able to do the month-to-month auto insurance product.

So we will be representing another insurance underwriter's

product that's tailored for us, but it's not our risk.

That third phase is gonna involve being a captive

and being sort of in a Novel space

with respect to our auto insurance

and it being part of your monthly payment.

So that's our sort of narrative for growth.

It's geographic product and product line expansion.

Scott, what have you learned so far?

What are your customers telling you?

What is, put a smile on your face

and what set your hair on fire?

Well, I think that the biggest barrier

to electric adoption is physics.

You can't drive what isn't being made.

There is so much more demand for electric

than people realized.

You've got 1.6 billion non-electric cars on planet Earth.

I'm a student of the used car market.

I think it's been pretty interesting

to watch what's been happening

with the scarcity of used cars

and all of the external factors

that have taken new car demand

and shifted it to the used car market.

I think that we're very encouraged by the fact

that there is such a small population

of used electric cars.

There's going to be scarcity in that market

for a very long time.

And it's not just Tesla.

It's going to be anybody who makes an electric car

is going to be producing an asset

that is going to have a very strong,

almost abnormal residual value for decades,

simply because there are not enough

given that the whole industry is shifting to go electric.

And that, I think encourages us,

we're a structured asset finance business.

I go out and have to raise a lot of money

to buy these cars.

And if those cars were depreciating more aggressively

than their internal combustion engine counterparts,

that would be a problem for us.

Yeah, what's your sense of the market right now

in the sense that interest rates are going up very strongly.

Inflation has very much impacted the prices of cars.

In many cases, retail franchise dealers

are charging well over MSRP.

Does this affect your business

or does this open the door for you?

Well, you're talking about some pretty powerful forces,

whether it's inflation, scarcity, supply chain issues,

production issues on the new car side,

the fact that electric cars are beginning to surge,

certainly range anxiety, battery issues are a big problem.

I think affordability is the biggest issue.

And when you have interest rates rising,

I mean, almost all of our cycles in the car business

have been interest rate driven

around some kind of a black swan event

over the last 100 years.

So I think it is a very powerful thing to watch.

I'm actually very, very concerned about something else.

I think that if you think about the scarcity,

which is what drives supply demand, equilibrium,

and ultimately what drives the market clearing price

of a used car, almost everything we've seen

in the market to date about used vehicle scarcity

has been driven on the demand side,

meaning consumers have decided to drive a used car

because they couldn't find the new car

that they were looking for.

That's created more demand in the used car market

than there is supply.

And supply in the used car market today

is 42% driven by lease returns.

In March of 2023, we're going to take a pause

on lease returns for about nine to 12 months.

And we're gonna have all of a sudden a supply side

or a supply driven scarcity issue

compounding the demand driven issues around scarcity.

I think that we're gonna see something

that we've never seen before in the used car market.

And if sort of analysts and people watching the economy

are using the used car market as a canary in the mine

around are we experiencing inflation?

Are we okay as an economy?

What's about to happen is very terrifying.

I think it's a good sign for going electric.

I think all of these things,

we could not have asked for a market

where consumers are now having to put 10 to 15 times

more cash into their gas tank than to drive electric.

I drive a car that just based on how much I drive

and what I drive, I'm putting almost $6,000 a month

into my gas tank.

I could be driving those same miles for $600

if I was driving electric.

That is a really, really big financial motivation

for people to go electric.

And I think that all of these things compounding

is a good thing for us in terms of where we're at.

I'm encouraged by our business.

I'm terrified for the economy and what's about to happen.

And I think that we are so far being very reactive

to a lot of these factors.

I think what's about to happen structurally though

is not something that most people are looking at.

Wow, Scott, boy, you sure gave us an earful there.

It's gonna be fascinating to watch.

I think as long as you can get cars,

you're going to have a lot of demand for it.

But with that, we're going to have to wrap it up

on very interesting what you're doing with autonomy.

I'm gonna keep a close eye on it

because I've been watching your other businesses

in the past and you've always done very interesting things.

So thanks for coming on AutoLine This Week.

John, thanks for having me.

Good to see you again.

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of Canada in Detroit to produce this episode.

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Autoline This Week #2617 - Undecided If An EV Is For You? Try A Subscription

About this episode

subscription service

open-end lease

electric cars

OEM

rental car

Tesla Model 3

Tesla Model

Toyota Prius

mass production

Tesla Model 3S

cap cost reduction

modern lease

level one, level two, and level three charging

electric vehicle registrations

DC fast charging

level three fast charging

Tesla Supercharger

level one charging

range anxiety

level two or level three charging

electric vehicles

title and registration

Polestar

Rivian

Fisker

EV registrations

make model trims

GMC Hummer EV

Chevrolet Silverado

Ford Got Ford

Ford F150 Lightning

inflation

retail franchise dealers

supply chain issues

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