Don't buy a car, just rent it

 In July 2020, India’s car market leader Maruti Suzuki tied up with ORIX Auto Infrastructure Services, a subsidiary of ORIX Corporation of Japan, to launch a vehicle leasing service for the Indian market.

 In August 2018, Hyundai Motor India made an undisclosed investment in self-drive car-rental startup Revv. Earlier that year, Mahindra & Mahindra invested around ₹176 crore in Zoomcar.

 Tata Motors recently unveiled a subscription plan for the Nexon EV; MG Motor India and Volkswagen are among some other players looking to explore leasing models in the country.

Get the drift?

With the sales of passenger vehicles set to decline in the range of 22%-25% in FY21 due to lockdown measures put in place to contain the spread of the Coronavirus, and a sharp drop in affordability among customers as a result of the economic slowdown, car makers have been looking at ways to reduce the cost of ownership of vehicles for prospective consumers. Going by market trends, subscription-based vehicle “ownership” models are fast gaining traction among urban customers.

Of course, vehicle leasing or subscription-based access to old and used vehicles isn’t a new idea—it is quite common in the commercial segment. It is just that the Covid-19 pandemic has accelerated the adoption of this model in the personal mobility segment. “Leasing has been mostly successful in the corporate world where there are tax benefits, depreciation benefits, and so on,” says Shailesh Chandra, president, passenger vehicle business unit, Tata Motors. “I think subscription will gain traction [among individual owners] as the industry works on creating awareness and a stronger value proposition around the subscription offers.”

Chandra has a point. Vehicle leasing services, immensely popular in the U.S. or Europe, have been largely confined to the corporate sector in India. Maruti, for instance, had previously ventured into the space without much success.

But that long-awaited shift is visible already, say players in the segment. Car rental industry players say they are expecting the segment to reach ₹1 lakh crore by 2022. Now take the most visible brand in the segment—Zoomcar. It says it has seen a 400% rise in demand in the last couple of months and expects this to settle at 200%-300% over the next few months. For its part, used car retailing platform Spinny logged a 20% growth in demand over the last few months of the lockdown and gradual opening up, compared to the corresponding period in 2019.

Greg Moran, CEO and co-founder of Zoomcar, says the firm expects “an exponential spike in demand for car subscriptions”. “Considering the current recession, car subscriptions can prove to be a better option than ridehailing and also as a more affordable and quicker way of acquiring a car, delivering a safe personal mobility option,” he adds.

That said, at the moment, the market for shared mobility—which includes cab-hailing, leasing, rentals, and self-drive—remains small in India. In fact, estimates by Hyundai and Revv at the time they announced the investment showed the number of shared cars in India (organised segment) was about 15,000 (in 2018). At that time they had projected this market would grow to be about 50,000 cars in 2020 and to 150,000 by 2022.

The point to note here is that the organised segment of this market is a small 8%-10% of the overall number of leased/subscribed vehicles. The bigger chunk of the market is hogged by local and regional players that have been catering largely to a set of commercial clients such as hotels, airlines, and tour operators.

“Both the leasing companies and the customers are in somewhat of an experimental phase,” R.C. Bhargava, chairman, Maruti Suzuki, tells Fortune India. “Over time, if this works well, many car users will find that the leasing system is more suitable for them. For example, people who are transferred frequently, who are in a particular city only for two or three years. It doesn’t make sense to buy cars every time and then move them from one place to another. For some sections of customers it will be more economical to use a leased car.”

What makes a Tata Motors or a Maruti so hopeful? “People are now looking for shorter-term mobility options as opposed to the long-term expense of owning a car. We have seen a steady rise in demand for cars for personal work and emergency use cases. We also see more demand for in-city trips compared to outstation ones,” Morgan says.

So apart from personal safety, affordability would be a key driver of growth. Just imagine: There is no maintenance cost, road tax, or registration charges to shell out. Now consider your expense if you were to avail of Maruti’s subscription service. The monthly subscription starts at ₹14,463 (all taxes included) for, say, a Swift LXi in Delhi on a 48-month lease. At the end of the subscription period, customers can upgrade the vehicle, extend, or even buy the car at market price.

Tata Motors’ Chandra feels that while the signs of change are visible, any big shift will take time. “While you get a lot of enquiries, the conversion still remains low because people don’t understand. Many a time people come with the thought of subscription but end up buying a car.”

At present, there are two leasing models in vogue—finance leases and operating leases. The former transfers the ownership of the car to the user when the lease tenure ends. This is a preferred mode for salaried customers as it gives them a tax benefit of up to 30% as the total rent outgo can be offset as expense. Operating lease or corporate leasing requires the user to either return the car to the lessor or purchase it at the market value at the end of the lease tenure.

While players are upbeat, experts say a lot needs to be done on the policy side to lift the business in a substantial way. “India has traditionally lagged the western world when it comes to leasing models, or aspects around car-sharing, and split-asset ownership. I am not very optimistic about some of these other revenue models kicking off in India unless there are measures taken on the taxation side that would help end-users. For example, could there be tax benefits that could be provided to the salaried class to offset asset purchase of vehicles against their income tax?” suggests Vinay Raghunath, partner, consulting, and automotive and mobility sector leader, India, EY.

Meanwhile, for the fence-sitters the option of buying a pre-owned car always exists. Sales of used cars have increased steadily over the past few years, and are currently estimated to be 1.3 times the sales of new cars. Last year, close to 4 million used cars were sold with the segment clocking around 16% growth overall. Indeed, even during the Covid-19 crisis months, CRISIL Research estimates the used car market to have witnessed a lower decline vis-à-vis the new car market. “I feel there will be a lot of traction in the used car market for the next few quarters,” says Raghunath. Ultimately, the onus to make used cars the most desired option lies with brands and the value proposition they offer.

(This story originally appeared in Fortune India's February 2021 issue).