26 Oct 18

Overcoming obstacles: car2go, a Chinese success story

Daimler has released the S1 2018 results of its car2go free floating sharing platform. The first 6 months of this year has seen the global number of users raise 10% to 3.3 million, which is a 25% YoY increase. The pool of 14.000 shared cars have travelled 90 million kilometres in 6 months which translates into 35 kilometres per day or – roughly – about 10 trips on daily basis.

The global success is confirmed in the Chinese city of Chongqing, according to TomTom Traffic Index, the 4th most congested city in the world (after Mexico City, Bangkok & Jakarta). With 255,000 registered users, Chongqing is now part of the global car2go top three.

Promised Land

The Chinese car sharing fleet, only 14,000 units big in 2015, is now close to 50,000 units and estimated to grow to well over 100K units by 2020. The growth is driven by a combination of factors.

Restrictions on license plates is clearly an argument that draws the pre-millennials to car sharing. These people have a driver license, money and a strong desire to own a vehicle, but are limited by the auction or lottery systems in place in the major cities. In Beijing for instance, the chances of obtaining a license plate in the lottery is less than 0.1%. In other cities with auction systems, license plates are extravagantly expensive.

People who can’t afford a car or are not willing to spend a big part of their disposable incomes to buy one, take public transport, taxi or Didi. Notwithstanding important investments in trains and buses, the capacity growth of the first-line solutions is not following the growth of the cities; the “mobility gap” is becoming even bigger as the younger population demonstrates a higher mobility need than the previous generations.

The sharing industry is popular in China and goes well beyond the mobility industry. The trend has entered sectors such as corporate real estate (shared working spaces, such as WeWork), education and healthcare. It would be correct to say that “sharing” has become, for most middle class Chinese people, equivalent to “owning”.

Car Sharing market

Nevertheless, concluding that car2go’s success is an easy win, does not reflect reality. The complexity of starting up a successful free floating sharing business can be declined as follows:

  • Governmental requirements. Next to the necessary permits to operate, car sharing organisations are coping with the same issues that their users are dealing with: restrictions on license plates, lack of parking spots and quota for car sharing vehicles (e.g. Shanghai, where the “Y” plate quota are regulated by the city).
  • In a tough regulatory environment, suppliers have a tendency to dilute their initial business model to overcome administrative hurdles. As a result, the value proposition too often ends up to be different from what the user wants and needs.
  • Car sharing businesses are rarely profitable. Next to high initial CAPEX investments (vehicle purchase), the units need to be insured, maintained and eventually disposed of. Volume leverage (discounts, bonuses) are not common in China’s unconsolidated supply chain and an immature remarketing network creates insecurity about the reselling value of the vehicles. In addition, the trip rates in China need to be low in order to be competitive
  • Finally, there’s the human factor. Not all users take well care of the vehicles and many costs cannot be recovered by the insurance. Examples are: lost keys or documents, unrecovered traffic fines, stolen cars, bounced payments. With these events come high operational costs to manage refurbishments, chasing penalties and other violations. A high insurance claim ratio will then again raise the insurance premiums.

The Daimler way

Daimler seems to have done a lot of things right. They have proven to be sustainable and the company’s modesty, by launching and developing in one city first, is the right approach.

In order to be a successful CSO (car sharing organisation), it’s key to know who the customer is. In China’s case, these are educated 20-to-35 year olds, tech savvy, not interested in owning a vehicle. Targeting the customer happens online and is done by linking car sharing to social events and online promotions.

A good car sharing model is less about transport than it is about connecting the right places in the city. Linking a business park with a shopping centre is a good example: this is where the user’s mobility needs are. The importance of selecting the right drop-off locations for free floating vehicles is essential.

Pricing and service need to go hand-in-hand. Car2go, for example offers a competitive running price of 0.99 RMB/km (USD 1.14 / EURO 0.13) and a full-day rental of RMB 100. In this pricing is included parking, fuel, insurance, maintenance and cleaning.

Operations need to be efficient as it leverages the profit margin. A CSO needs to learn from its mistakes and improve relentlessly. Having piloted in one city, Daimler has understood this message and benefits now from enough experience and knowledge to expand services across other cities.

Digitisation is essential, not only for the booking or tracking of the vehicles, but also to analyse user and usage data. Analysis of behaviour can feedback to product development and operational excellence and defines, eventually, the entire business model.

Tough, but profitable

Although China is still young when it comes to the automotive supply chain, the combination of an increasing mobility need and a one-billion-client potential, will eventually benefit the pioneers, such as Daimler. A continuing support from a customer base that loves sharing and a government that supports intelligent mobility are bound to make car-sharing a profitable business in China.

Authored by: Yves Helven