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Car rental industry fights to avoid Kodak fate from autonomous driving

Car rental companies have been struggling against two disruptive waves over the last five years, first from ride hailing apps such as Uber and Lyft and then the autonomous revolution that is still admittedly in its infancy. These two threats are converging into one, as the likes of Uber recruit autonomous driving to their cause to slash costs and increase flexibility further. This has left the big car rental firms like Hertz and Avis having to break free quickly from their traditional conservatism if they are to survive and avoid autonomous driving ushering in their “Kodak” or “Blockbuster” or moment. They have relatively little time to reinvent themselves for a new age of the automobile that is also a great challenge to manufacturers themselves.

At best autonomous driving is a double-edged sword for car rental. The positive aspect is that self-driving is likely to boost rental as a model as an alternative to ownership, and will also produce fleets of autonomous vehicles that will need managing and maintaining. At the same time, car hire firms have well established infrastructure and presence on the ground, with the big two Avis and Hertz being present at 10,000 or more locations worldwide – primarily airports, train stations and city centers. They could harness all this to become the essential middle layer between OEMs or even new service providers and consumers.

But this is also a negative, since this middle layer is ripe for absorption by other more innovative providers, including companies emerging from app hailing or ride sharing and manufacturers themselves. To counter this threat, car hire companies have moved quickly, firstly to improve their logistics for efficiency and cost reduction and secondly to bolster their historically poor customer services, which they have been able to get away with in the past given a more captive market and limited competition at major locations.

On the customer experience front they are trying to circumvent the bureaucracy and paperwork associated with car pick up which can result in queues at airports, with users aggravated further by attempts to impose all those hidden charges such as costs for additional drivers and often exorbitant payment to waive the excess otherwise levied for say the first $1000 of any accident repair costs.

On the efficiency front, hire firms, especially smaller ones, find it difficult to ensure the right car is in the right place when needed, incurring costs of fuel and driver time shuttling them empty between locations. They have been deploying advanced algorithms based on solutions to the “travelling sales problem” to optimize distribution of their vehicles, matching location to hiring schedules.

But on their own, these measures, while necessary, would merely postpone the inevitable crash in their business. To avert it they must move up the value chain and avoid becoming trapped as providers of management services that do little more than oil the wheels of autonomous driving. They would be squeezed out through being encumbered by their current high cost base with expensive offices, large parking spaces, diverse vehicle fleets, along with high costs for both maintenance and insurance that they can no longer pass directly over to customers. Manufacturers would muscle in on their territory anyway as their business model shifts from D2C (Direct to Consumer) to D2B (Direct to Business).

Of course, car hire companies themselves have been aware of these threats for at least five years and have made moves to pre-empt them. One of the first actions has also proved one of the most successful so far, highlighting early mover advantage, even if it was US-centric, being the acquisition by Avis Budget Group of ride-sharing company Zipcar for $500 million in 2013. One beneficial side effect for marketing was that this helped Avis reposition itself as a “mobility solutions” provider and start getting away from the car hiring label which had assumed negative if not exactly toxic connotations.

While initially nothing to do with connected car or autonomous driving, this helped Avis four years later strike a significant deal with Alphabet’s Waymo, sister to Google, over maintenance of the latter’s 600 self-driving Chrysler Pacifica minivans being deployed in the Phoenix, US, area. This is pretty low-tech, involving Avis workers cleaning the vans’ interiors, and performing other basic maintenance functions. But it brings Avis into the ecosystem with potential to expand its presence in self-driving by exploiting the Zipcar app.

The head of Waymo’s self-driving unit, John Krafcik, cited the Zipcar connection as a clear factor in the decision to collaborate with Avis. Zipcar already has 1 million tech-savvy members experimenting with different models of car ownership, making them prime targets for early adopters of “mobility services” Waymo will itself develop.

Such moves alone though merely give Avis a place at the table eating crumbs and more important are its actions building up its own fleet of connected cars. On this front a significant move in Europe came in April 2018 when Avis struck a deal with Groupe PSA to add 11,000 connected cars under PSA’s Peugeot, Citroën and DS brands to its connected car rental fleet in the continent by the end of the year. This has started already with 6,000 vehicles operating across its Avis and Budget brands in Austria, Belgium, the Czech Republic, France, Germany, Italy, Luxembourg, the Netherlands, Portugal, Spain, Switzerland and the UK, as well as Maggiore brand in Italy.

We are not yet talking about self-driving here, but connected cars move Avis up the value chain, and also generate better information extracted automatically in near real time which can help with those manual tasks previously performed by field personnel. This can reduce costs and head count, as well as enabling some pre-emptive maintenance – avoiding small problems turning into very large repair bills. There are also possibilities of bringing in vehicle monitoring with scope for offering discounts in return for safer and more considerate driving. Hire vehicles are notorious for being thrashed and treated with less care than drivers would apply to their own vehicles, so in-car monitoring has potential for mitigating costs associated with rental models in general.

Avis arch rival Hertz has not been idle either, for example though its relationship with Apple disclosed in June 2016 whereby the latter tested a small fleet of Lexus RX450h SUVs for autonomous driving tests from Hertz’s fleet management group. Hertz’s stock price shot up nearly 15 percent on the news, as investors speculated about a larger partnership between the two companies emerging, as well as being relieved the firm was dealing itself into the game after several years of declining fortunes.

Yet there has been little sign of follow up and we think Apple’s use of Hertz vehicles for testing was just tactical. The connected car is a huge prize since it will become a major focal point for personalized services and Apple has big ideas to become a major player through integration of core features such as ride sharing in iOS products.

Amazon is also edging in, looking to employ cars as an extension to its online retailing services, working with Toyota to develop an electric autonomous shuttle that can be used to deliver people but also packages they have ordered. For Amazon it is all about efficiency of the last mile for delivery at this stage, but it is notable it is working with manufacturers rather than intermediaries. This deal also highlighted manufacturers themselves are seeking to build mobility ecosystems that transform them from producers and retailers to movers of all things from A to B. Such shuttles could even become mobile shops in Amazon’s hands, roaming around an estate or campus, while doubling as taxis or for short term hire.

On the whole, then the signals are somewhat ominous for traditional car rental firms, even though on the surface they ought to be well placed – since the new industry model revolves around Transport as a Service (TaaS), which is really what they have always provided.

They are hampered by all that legacy baggage and associated costs interwoven with their business model and will find it hard to make the transition to TaaS as it will become in the future, not reliant on the same real estate or inventory. They are trying to migrate through partnerships with the newer players, such as Hertz’s deals with both Uber and Lyft to rent traditional vehicles to ride-share drivers. Again, this is just fiddling round the edges while their traditional business model burns and only drastic actions will lead to survival.

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