In the near future, turning on the seat heater inside your car on a cold winter day could cost you. For that matter, so could extra horsepower and cruise control.
Major automakers like BMW, Mercedes and Volkswagen are planning to alter the way they offer customers extra features in an industry-wide shift toward on-demand services that analysts say could allow carmakers to generate tens of billions of euros in additional profits over the next several years. Automakers envision a future in which customers purchase driving apps, software updates, and even supplementary insurance, all from within their cars.
Carmakers’ financial divisions, which have traditionally drawn rich profits by offering loans to car buyers, are seen as playing a pivotal role in the new strategy since the processing of payments for on-demand features is, by itself, a potentially lucrative new business.
Banks belonging to Mercedes, BMW and Volkswagen alone earned profits of between €1.7 billion and €2.1 billion each.
The new market generated by this shift in the way automobile features are offered is potentially enormous. Automakers could earn an extra €155 billion by 2022, according to an estimate by the consulting firm Strategy&.
For automotive banks, the move toward processing payments is a bid for continued relevance in a rapidly changing market in which car-sharing is expected to flourish. Until now, carmakers’ financial divisions have been able to rely on their lucrative core business of offering loans and leases. Around three-quarters of all new car sales are paid for with credit, and most of those deals go through manufacturers’ financial institutions.
In 2016, the German association of automotive industry banks, known as the BDA, said its members raked in €113 billion ($123 billion), a record year for credit and leasing agreements. The banks belonging to Mercedes, BMW and Volkswagen alone earned profits of between €1.7 billion and €2.1 billion each.
But experts doubt whether the growth from credit and leasing contracts will continue given the rise of car sharing, which, over the long term, is expected to reduce direct car ownership.
"The branch-based financing of cars will lose importance in the future," said Hans-Martin Kraus, a partner at the consulting firm Capco. "Automotive banks are starting to develop new business models so that manufacturers' sales won't decrease even if they're selling fewer cars."
Jens Diehlmann, a partner at Ernst & Young, said that it would take at most two to three years for car companies to begin to offer on-demand features. But whether the turn to on-demand proves to be profitable, Mr. Diehlmann added, will depend on how easy it is for customers to order new features.
Automakers and their financial divisions have gained an increasing amount of digital know-how through their involvement in car-sharing programs and parking assistance applications. But in order for automotive banks to compete with firms such as PayPal, they would have to be able to process small transactions almost instantaneously - a service that PayPal mastered long ago.
The move toward on-demand services may not only generate additional sales for carmakers, but may also potentially allow the companies to cut manufacturing costs by allowing them to limit the number of engine and equipment combinations they produce. In short, car models will come with the same features already built in; it will be up to customers to determine how many of those features they want to “unlock” by paying a fee.
Jakob Blume is a reporter at Handelsblatt and Wirstschaftswoche, based in Dusseldorf. To contact the author: [email protected]