Car Sharing Zips Into the Fast Lane

Zipcar has an early lead, but car-renters and -makers are gaining

By Susan J. Aluise, Aviation, Auto & Transportation Writer

Most Americans view owning a car as a necessity. But as the success of car-sharing service Zipcar (NASDAQ:ZIP) illustrates, consumers increasingly are looking to nontraditional ways of getting their wheels. And that paradigm shift not only will fuel the growth of car-sharing services, it will change the ways automakers like Ford (NYSE:F), General Motors (NYSE:GM), Toyota (NYSE:TM) and Fiat’s (PINK:FIATY) Chrysler attract buyers.

While car sharing has been around for decades in Europe, its history in North America dates back to just the mid-1990s. The most successful program in the U.S. to date has been Zipcar, which boasts a fleet of more than 9,000 vehicles used by 673,000 members.

It works like this: After a driver enrolls as a Zipcar member, he or she gets an access card that contains a wireless radio frequency ID (RFID) chip. When the member makes a reservation for a specific car at a specific location at a given time, the card will open that car, and the member will be able to get in and drive off. The member is charged an hourly rental rate for the car, which varies based on the model. The reservation includes all insurance, gas and breakdown assistance.

Traditional car-rental firms like Hertz (NYSE:HTZ), Avis Budget Group (NASDAQ:CAR) and privately held Enterprise are beginning to see the value proposition of getting into the self-service hourly rental market.

Hertz on Demand issues members a key fob with an embedded RFID chip. Once the member has reserved the car online, he or she can swipe the key fob across the windshield, which will verify the access ID and unlock the vehicle. At the end of the reservation, the member replaces the keys inside the vehicle and presses a button inside the car, which tells the vehicle’s computer the rental is over.

Enterprise’s WeCar and U Haul’s (NASDAQ:UHAL) UcarShare have membership programs that operate in a similar manner as Hertz on Demand and Zipcar. Avis currently is offering its Avis on Location car-sharing program to commercial accounts.

The fierce competition shaping up in this market is easy to understand given recent industry forecasts. The market research firm Frost & Sullivan predicts car-sharing programs will grow from an estimated 1.3 million members today to 4.4 million in four years. Revenue will rise to $3 billion in 2016, up from $700 million today.

The idea of being able to use (and pay for) a vehicle only when you need it is becoming an increasingly attractive prospect — particularly among younger drivers. According to a recent Zipcar-sponsored survey, 18- to 34-year-olds are embracing the idea of car sharing. A full 55% of those surveyed have made an effort to drive less and now prefer vehicle access as opposed to ownership.

That’s good news for the future of car-sharing firms, but not so good for automakers and dealerships that could find the task of selling cars to a younger audience more challenging. That’s one reason why manufacturers like Ford and GM are beginning to partner with car-sharing companies. An even bigger reason: Younger buyers are far more likely to purchase a vehicle that they have already driven.

Despite the fact that March vehicle sales in the U.S. soared, car companies are hedging their bets. Ford has teamed with Zipcar to offer its vehicles near college campuses. The motive is understandable: build brand loyalty with future car buyers.

Last month, GM decided to go a different way: It’s partnering with Google-backed (NASDAQ:GOOG) RelayRides to roll out a peer-to-peer (P2P) car-sharing service nationwide. P2P car sharing is a different model because private vehicle owners rent out their vehicles during times when they’re not being used. GM helps renters gain access to the vehicles through its OnStar service.

Bottom Line: Zipcar and its traditional car-rental competitors are on the ground floor of an opportunity that could generate some serious profit a few years from now as a younger demographic seeks a different way to get into the driver’s seat. ZIP has a great head start, but don’t underestimate Hertz’s ability to keep up. The success of the U-Haul and Enterprise programs will depend on the companies’ commitment to an hourly, self-service model.

Getting a younger audience to love their cars enough to buy them is the primary value proposition for automakers. It’s not a bad move, but Ford’s play is stronger than GM’s. The P2P model puts potential buyers in a car that’s owned and maintained by another private user — GM has no real control over the customer experience.

The better play would be to help dealerships expand loaner-car programs into car sharing. That way, when the member is ready to buy, the dealer can get the sale.

Whatever the model, it’s clear that car sharing isn’t going the way of the Edsel anytime soon — and investors won’t want to get left on the side of the road.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

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