- March 14, 2023 Energy
Can EV Subscriptions Accelerate Broader Adoption?
A decade since Tesla launched its first mass market electric vehicle (EV) model in 2012, the average EV in the United States is still $12,000 more expensive than passenger vehicles overall. Although the lifetime cost of an EV will be offset by low maintenance and fuel costs, the expensive price tags of EVs today make the decision to switch from gasoline cars difficult.
Some automakers seem to recognize that overcoming the cost barriers to adoption might require new business models to get consumers to bite on EVs. South Korea’s Hyundai is one such company, which has been the first to pilot an EV-only subscription program in the United States to win consumers. The subscription model is of course all the rage these days, but it has mainly worked well for services, not hardware. Even Apple has had setbacks in rolling out its iPhone subscription.
Skepticism over whether EV subscriptions could work is warranted. It will certainly not be a panacea that moves the needle on mass adoption, and for automakers this might simply be conceived as a placeholder until EVs reach price parity with gas-powered vehicles. But the subscription model might attract a niche segment of so-called “EV-curious” customers—those who drive for fewer than ten months of the year and don’t plan on holding onto a car for more than 5-6 years.
Higher Monthly Payments in Exchange for No Upfront Cost
The EV subscription model tries to improve on the renting and leasing models (see Figure 1). The main benefits are that it’s more flexible than leasing and it’s an “all-in” monthly fee with no down payment. That is, other than an activation fee, the monthly subscription includes insurance and maintenance and can be renewed month-to-month with no commitment.
Figure 1. Subscription Aims To Be Cheaper and More Flexible Than Alternatives
But is it that much cheaper to subscribe? Take Hyundai’s pilot program. It charges an activation fee of $300 and a monthly fee of $900 for its flagship IONIQ 5 EV, which covers 1,000 miles of driving per month. Assuming a 10% sales tax and $0.04/mile for home charging, the total comes out to roughly $1,000/month.
In comparison, the average cost for financing the same EV, including maintenance and operating costs, is estimated to be $9,730, or $811/month, according to the American Automobile Association (AAA). Leasing a similar model would require a down payment of $4,000 and a monthly payment of $540 for 36 months, excluding any taxes, fees, maintenance, and insurance. Down payment aside, this translates to at least $840/month (see Figure 2).
Figure 2. Monthly Cost of Subscription, Ownership, and Leasing Models (in $)Note: These estimates do not include down payments and are based on assumptions of driving 1,000 miles/month, charging cost of $0.04/mile, and a 10% sales tax on monthly payments. Other applicable leasing fees and taxes are not included. Since only the subscription model allows cancellation at any time, subscribing for fewer than ten months in a given year leads to the lowest annual payment.
Source: Hyundai Motor America; AAA.
As such, the subscription model, at least for the IONIQ 5, would only be cheaper than buying or leasing if one cancels the subscription before the tenth month, implying the consumer has little desire to actually own a car.
Why Bet on Subscriptions
That appears to be at the heart of the bet on the subscription model: broader attitudinal changes toward car ownership among a younger generation of Americans. Fewer young consumers view a car-centric lifestyle as necessary or desirable, unlike their boomer predecessors, for whom owning a car was both necessary and quintessentially American. That shift in views could shape a different set of consumer behaviors on transport.
What’s more, automakers are betting that for younger consumers, already accustomed to subscribing to various services as digital natives, a car subscription won’t be a huge leap. A subscription model can also help automakers diversify and increase revenue streams and even allow EVs, particularly those from Hyundai, to qualify for a $7,500 commercial clean vehicles credit without meeting local content requirements.
Yet younger consumers are also the ones facing the greatest financial constraints, and it’s not clear the nominal monthly cost differential will be enough to win them over to subscription. Even in South Korea, whose dense metros are more conducive to the subscription model without the need of car ownership, Hyundai’s subscription program has seen slow uptake.
Ultimately, it is difficult to get around the fact that subscription for hardware is much more challenging than subscription for software that can be regularly updated over the air like your iOS. It requires transfer of physical assets, more complicated inventory management, and dealerships that embrace the subscription model.
The complications can already be seen in Hyundai’s pilot program, which is currently available only in eight dealerships across six states with just 11 vehicles available for subscription. That’s better than Volvo’s subscription program, which hasn’t even bothered to make its inventory available. It appears we’re still a long way from meaningfully testing the commercial viability of the subscription model.
Hae Jeong Cho is a research associate at MacroPolo. You can find her work on energy, transportation, and other topics here.
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