States Pose Roadblocks for Motor Vehicle Subscription Services

Although motor vehicle subscription services - similar to auto leases but with no long-term commitment, the ability to change vehicles periodically and insurance and maintenance bundled in - have only been around for a few years, they’ve been embraced by some automakers, insurers and consumers. But the services face potential roadblocks from state lawmakers and regulators that could keep “subscribing” for a car from becoming as commonplace as “buying” or “leasing” one.

Vehicle subscription services have existed since at least 2014, when Cox Automotive, the Atlanta-based auto auction, financial services and media company that owns Autotrader and Kelley Blue Book, launched Flexdrive, allowing consumers in select cities to obtain a recent model vehicle on a weekly basis via an app. In the years since then, auto manufacturers, dealerships and other providers have started their own subscription services, and there’s now a multitude to choose from, including Care by Volvo, Porsche Passport, Hertz My Car, and Canvas, initiated by Ford but recently acquired by competitor Fair.

Some automakers got off to a rough start with their subscription services, but others appear to be pretty enthusiastic about them. Porsche recently expanded the service it piloted in Atlanta two years ago to four new cities: Las Vegas, Phoenix, San Diego and Toronto. And despite the fact that the $2,100-per-month lower tier of that service, Porsche Passport, is about 20 percent more expensive than leasing a Porsche for three years, 180 people have signed up for it, 80 percent of whom had never owned a Porsche before, according to the Insurance Journal.

“If you engage 80 percent new people that have not engaged with your brand before, that’s certainly worth a lot,” said Klaus Zellmer, president and CEO of Porsche Cars North America.

Automakers like Porsche view subscription services as a way of appealing to a younger demographic used to hailing rides from Uber and streaming movies on Netflix - at a time when U.S. auto sales have plateaued. Passport subscribers, for instance, aren’t locked into a three-year lease, and they’re able to switch car models whenever they want, so they can drive a Panamera sedan during the week and a 911 sports car on the weekend. As Zellmer put it, according to CB Insights: “younger people ‘do not want to engage with a commitment for three years. They want to change their phones; they want to change their TV channels. It’s all about subscriptions.’”

Several insurance companies have also jumped into the market, teaming up with subscription service providers to manage their insurance needs. As of early last year, AAA had partnered with third-party subscription service Gig Car Share; Assurant had partnered with BMW and third-party subscription services Flexdrive, Fair and Carma; Chub ESIS had partnered with Cadillac and General Motors; Hamilton had partnered with Porsche; and Liberty Mutual had partnered with Ford, Volvo and third-party service Turo, according to CB Insights.

A major selling point for insurer MetLife, which joined with Hyundai last year to provide a three-year lease program that included insurance and maintenance, was that it didn’t have to foot the bill for marketing to potential customers for a change.

“There is a lot of marketing and advertising in the insurance industry — it’s one of the most marketed industries across the board,” Kevin Chean, vice president and head of distribution for MetLife Auto & Home, told Auto Finance News. “This program is offered through Hyundai so we’re not offering marketing to promote this program, Hyundai is leveraging their existing marketing program to sell cars and get consumers in the door.”

In addition, because MetLife was able to offer the programs’ subscribers - a low-risk population of Hyundai customers who qualified for a lease - a fixed three-year rate, the usual underwriting process wasn’t required for each of them, cutting down on labor and paperwork costs.

Auto dealers haven’t been as receptive to subscription services. They’re concerned that they’ll be left out of the new business stream being created by the services and end up having to compete with automakers.

Matthew Haiken, chairman of Volvo’s Retail Advisory Board and a principal at two New Jersey Volvo dealerships, told Automotive News last year that some automakers were only paying dealers $250 to $500 to deliver subscription vehicles, which often require more work than standard deliveries.

“What happens down the road if this takes off and you try to cut our margin, or you try to cut us out completely?” he told Volvo executive management. “We need to be able to protect our margins based on the expense structure that we have in the dealership.”

Dealer concerns contributed to Indiana lawmakers’ decision last year to impose a moratorium on vehicle subscription programs in the state until May 1, 2019 [HB 1195 (2018)].

Language that would have allowed automakers to offer subscription programs only through their dealer networks was also added to a broader dealer franchise bill introduced last year in California, AB 2107 (2017). The provision was later stripped out of the bill after the Alliance of Automobile Manufacturers, which represents a dozen automakers, including Volvo, and the California New Car Dealers Association, which represents 1,300 franchised new car dealers in the state, agreed to talk the matter over further, Brian Maas, president of the California dealer association, told Automotive News. He also said new legislation addressing subscription programs could come as soon as 2019.

So far this year only four states - Indiana, Massachusetts, New Jersey and North Carolina - have introduced bills dealing specifically with vehicle subscriptions, although two of those states enacted measures, according to LexisNexis State Net’s legislative tracking system. Indiana passed HB 1237, extending its ban on vehicle subscription programs to May 1, 2020. And North Carolina enacted SB 557, reducing the alternate highway tax on vehicle subscriptions.

Legislation is still pending in Massachusetts (HB 262 and SB 179) that would require vehicle subscriptions to be “offered through, or in partnership with” auto dealers. There are also several active bills in New Jersey (AB 5461 and AB 3847/AB 4634/AB 4819/SB 2252/SB 2382) that would provide for special license plates to identify subscription vehicles and establish a plug-in electric vehicle rebate program in part to foster “advanced mobility solutions, including vehicle subscription services, respectively.

And more legislation may be on the way. As Larry Dominique, CEO of French automaker PSA’s North American division told Automotive News last year, “The sense that I’m getting from the legal team is we can expect to see more legislative action on this over the next year or two” in a larger number of states.

At the moment, however, the bigger threat to vehicle subscriptions appears to be California regulators. The state’s Department of Motor Vehicles has launched an investigation of Volvo’s Care program. As NBC News reported, the California New Car Dealers Association says the automaker is using the program to cut franchised dealers out of its sales process, in violation of state franchise laws. The dealer group points out that the Volvo booth at the 2018 Los Angeles Auto Show actually had electronic banners proclaiming “Don’t Buy Our Cars,” and “Subscribe, Don’t Buy.”

“Franchise laws exist to protect dealers from this type of behavior,” said Maas, the group’s president.

The group also argues that Volvo is violating California consumer protection laws by rolling vehicle use, insurance and maintenance into a single payment, a central element not only of Volvo Care but of all vehicle subscription services.

In response to the news of the California DMV’s investigation, Volvo issued a statement saying it was “committed to developing Care by Volvo in collaboration with our retailers to offer the flexibility of subscription side-by-side with traditional lease and financing.” NBC News also reported that the company was taking steps to improve delivery of its subscription vehicles.

It isn’t clear whether those actions will satisfy either California auto dealers or regulators. The future of vehicle subscription services could be riding on the DMV’s report on Care, which is due by mid-February.

“A lot of us thought that subscription programs were going to be the way to buy a car,” Joe Phillippi, president of AutoTrends Consulting, told NBC News.

But he also said if the California DMV finds that Volvo is violating the state’s laws, other providers “are going to think twice” about the subscription business model.

-- By KOREY CLARK

Handful of States Address Motor Vehicle Subscription Services

At least four states - Indiana, Massachusetts, North Carolina and New Jersey - have introduced legislation this year dealing with motor vehicle subscription services, according to LexisNexis State Net’s legislative tracking system. Indiana and North Carolina have both enacted such measures. Bills dealing with the issue are still pending in Massachusetts, North Carolina and New Jersey.