Maruti Suzuki could offer used cars on subscription basis

TusharK · 11th January 2021, 10:22

Maruti Suzuki Subscribe currently offers 10 models. Earlier this month, the carmaker introduced the WagonR, Ignis and S-Cross to the subscription model. Now, reports suggest that the company is considering offering used cars under its subscription scheme.

Maruti Suzuki has a well established pre-owned car business. Offering used cars under Maruti Suzuki Subscribe would certainly help scale up the business by offering customers the option to lease instead of purchase the cars outright.

At present, Maruti Suzuki Subscribe is available in 8 cities - Delhi, Gurgaon, Pune, Mumbai, Hyderabad, Bangalore, Ahmedabad and Chennai. With an expansive network of pre-owned car dealerships across India, the subscription model could be expanded to over 2,000 cities.

Source: Autocar

andafunda · 11th January 2021, 10:48

Any asset subscription business is in effect a lending business where net yield expectation guides the price of the subscription.

So, in effect,
(i) how much more am I making from running this business as compared to the cost of capital
(ii) How much Return on Equity / Return on Assets will I get as compared to other financial and business investment avenues

The big issues with an asset subscription business in India are:

1) Uncertain asset useful life expectancy - Unlike in developed markets with good road / parking infrastructure, driving ability / style and regulation-mandated maintenance standards, car life in India can vary significantly from case-to-case. Companies can mitigate this with mandated service requirements, but still doesn't solve the problem. I am assuming companies only account for a 5-7 year useful life for the asset. This results in higher per year amortization of cost, and therefore higher breakeven subscription prices.

2) High cost of capital - Cost of capital for most lenders (apart from banks) ranges from 8-15%. This has to be built on top of the breakeven subscription prices.

3) Premium required to cover risk - Given the low reliability around KYC docs, risk of theft / mis-use, disregard for credit scores even among the educated class, and resultant high cost of underwriting / operations, there is an expectation of significant premium (4-5% minimum) over the base cost of capital to cover the risk of the lending product.

4) High lock-in requirements: Given the massive issues called out above and lack of scale in the market, companies often require 1-2yr minimum lock-in on the subscriptions, thereby defeating the purpose of the product itself.

There are other issues like deposits, quality / type of cars available, etc.

All this prevents any car subscription business to take off meaningfully (leases work because of tax benefits).

SmartCat · 11th January 2021, 11:23

Used car subscription service makes more sense than new car subscription for both customers and the company offering the service. The car would have lost 30% to 60% of its value already, and hence the subscription cost would see equivalent fall.

However, for the scheme to be attractive to customers, the company should offer lower and lower monthly subscription charges with time. Eg: 3 year old Swift Zxi

- For first 6 months, Rs. 15,000 per month charges
- For next 6 months, Rs. 12,000 per month charges
- For next 6 months, Rs. 10,000 per month charges

Because:

- For the first 6 months, the car will lose Rs. 40,000 of its value thanks to depreciation
- During the next 6 months, the car will lose further Rs. 30,000 value
- During the next 6 months, the car will only Rs. 25,000 more

This lower depreciation cost should be passed on to the customer taking the subscription service. In the business model adopted by all car subscription companies, the customer cost remains the same - but the provider's depreciation cost keeps falling with time. It is a one-sided deal. That's why the current business model adopted by all car subscription companies is unattractive to customers.

Nikhildrao · 11th January 2021, 14:49

It's a very sly but obvious move by MS. I have a hunch that the prices will be unreasonable given the resale values of MS is very strong(paradoxical,i know) . Usually the lease prices is calculated by dividing the depreciation cost of the car over 3-4 years by assuming the residual value of the car over the period of the lease, hence a car with strong resale value / less depreciation should have very cheap lease prices. I however believe that MS will price the used vehicles very close to the brand new models and this way they'll push buyers to accept the new car instead of getting used (again this is a hunch)

11th January 2021, 10:22	#1
TusharK Senior - BHPian Join Date: Jul 2017 Location: Pune Posts: 6,266 Thanked: 55,816 Times	Maruti Suzuki could offer used cars on subscription basis Maruti Suzuki Subscribe currently offers 10 models. Earlier this month, the carmaker introduced the WagonR, Ignis and S-Cross to the subscription model. Now, reports suggest that the company is considering offering used cars under its subscription scheme. Maruti Suzuki has a well established pre-owned car business. Offering used cars under Maruti Suzuki Subscribe would certainly help scale up the business by offering customers the option to lease instead of purchase the cars outright. At present, Maruti Suzuki Subscribe is available in 8 cities - Delhi, Gurgaon, Pune, Mumbai, Hyderabad, Bangalore, Ahmedabad and Chennai. With an expansive network of pre-owned car dealerships across India, the subscription model could be expanded to over 2,000 cities. Source: Autocar
	(1) Thanks

11th January 2021, 10:48	#2
andafunda BHPian Join Date: Feb 2015 Location: Mumbai Posts: 218 Thanked: 1,302 Times	Re: Maruti Suzuki could offer used cars on subscription basis Any asset subscription business is in effect a lending business where net yield expectation guides the price of the subscription. So, in effect, (i) how much more am I making from running this business as compared to the cost of capital (ii) How much Return on Equity / Return on Assets will I get as compared to other financial and business investment avenues The big issues with an asset subscription business in India are: 1) Uncertain asset useful life expectancy - Unlike in developed markets with good road / parking infrastructure, driving ability / style and regulation-mandated maintenance standards, car life in India can vary significantly from case-to-case. Companies can mitigate this with mandated service requirements, but still doesn't solve the problem. I am assuming companies only account for a 5-7 year useful life for the asset. This results in higher per year amortization of cost, and therefore higher breakeven subscription prices. 2) High cost of capital - Cost of capital for most lenders (apart from banks) ranges from 8-15%. This has to be built on top of the breakeven subscription prices. 3) Premium required to cover risk - Given the low reliability around KYC docs, risk of theft / mis-use, disregard for credit scores even among the educated class, and resultant high cost of underwriting / operations, there is an expectation of significant premium (4-5% minimum) over the base cost of capital to cover the risk of the lending product. 4) High lock-in requirements: Given the massive issues called out above and lack of scale in the market, companies often require 1-2yr minimum lock-in on the subscriptions, thereby defeating the purpose of the product itself. There are other issues like deposits, quality / type of cars available, etc. All this prevents any car subscription business to take off meaningfully (leases work because of tax benefits). Last edited by andafunda : 11th January 2021 at 10:50.
	(2) Thanks

11th January 2021, 11:23	#3
SmartCat Team-BHP Support Join Date: Jun 2007 Location: Bangalore Posts: 6,427 Thanked: 42,946 Times View My Garage	Re: Maruti Suzuki could offer used cars on subscription basis Used car subscription service makes more sense than new car subscription for both customers and the company offering the service. The car would have lost 30% to 60% of its value already, and hence the subscription cost would see equivalent fall. However, for the scheme to be attractive to customers, the company should offer lower and lower monthly subscription charges with time. Eg: 3 year old Swift Zxi - For first 6 months, Rs. 15,000 per month charges - For next 6 months, Rs. 12,000 per month charges - For next 6 months, Rs. 10,000 per month charges Because: - For the first 6 months, the car will lose Rs. 40,000 of its value thanks to depreciation - During the next 6 months, the car will lose further Rs. 30,000 value - During the next 6 months, the car will only Rs. 25,000 more This lower depreciation cost should be passed on to the customer taking the subscription service. In the business model adopted by all car subscription companies, the customer cost remains the same - but the provider's depreciation cost keeps falling with time. It is a one-sided deal. That's why the current business model adopted by all car subscription companies is unattractive to customers. Last edited by SmartCat : 11th January 2021 at 13:46.
	(6) Thanks

11th January 2021, 14:49	#4
Nikhildrao BANNED Join Date: May 2020 Location: Bangalore Posts: 190 Thanked: 828 Times	Re: Maruti Suzuki could offer used cars on subscription basis It's a very sly but obvious move by MS. I have a hunch that the prices will be unreasonable given the resale values of MS is very strong(paradoxical,i know) . Usually the lease prices is calculated by dividing the depreciation cost of the car over 3-4 years by assuming the residual value of the car over the period of the lease, hence a car with strong resale value / less depreciation should have very cheap lease prices. I however believe that MS will price the used vehicles very close to the brand new models and this way they'll push buyers to accept the new car instead of getting used (again this is a hunch)
	(1) Thanks