Quote:
Originally Posted by Coi
You seriously wouldn't be surprised if a car company could make every single car fully loaded and have it cost them less money? Surely if this was the case one of them would have discovered this secret to success excepting a subscription model.
Looking at examples, for the last few years Porsche has the highest margins of any major automotive brand with the most customizability and no trim levels. Every model has literally millions of possible configurations. They make most of their profit from SUVs that are only slightly more expensive than those from other German luxury brands. If shipping, logistics, and supply chain mattered more than material and parts costs then they should be loosing tons of money. Clearly that's not the case. Maybe Porsche also saves money by not installing costly equipment on every vehicle. I personally dislike their pricing model too, but it clearly works.
Genesis has only a few trim levels and almost no a la carte options on any of their models. Being part of Hyundai, they're also extremely vertically and horizontally integrated even doing their own shipping and in some cases their own raw materials. Their pricing is nearly in line with Audi and BMW now and even with new cars currently having barely any manufacturer incentives Genesis is barely turning a profit. We don't need insider to data to see that there's more to profitability in the automotive industry than sourcing, transportation, distribution, and production line simplicity.
BMW made 433,810 vehicles in 2021. They're already operating at a scale where things like LTL and parcel are not even considered. Nearly every part they make is produced in the tens of thousands, hundreds of thousands, or even millions. The following numbers are examples, but if they go from ordering 100,000 adaptive cruise radars to 400,000 adaptive cruise radars they're not going to suddenly see a dramatic decrease in cost simply from volume. Increases in efficiency for a company of that size that come from improvements in engineering, technology, and logistics rather than scale.
A basic principle of an economies of scale graph is that it doesn't just keep going down forever. Eventually you reach constant returns where the price levels out. After that it's diseconomies of scale where supply is overwhelmed and the cost per unit starts to go up again. This is true for everything. We've seen countless times in the last couple years that big supply chains can clearly get overwhelmed at which point it makes sense to cut features and reprioritize. There's no way every single part BMW manufacturers or orders is still in economies of scale in terms of manufacturing and installation.
You also have to consider that outside of enthusiasts the idea of paying $5000 for a different color car is insane. I am personally quite willing to compromise on color so I don't really get it either. Even if individual colors are hugely profitable it doesn't make sense for them to spend money advertising something that barely anyone is going to get. Also my local dealership has a huge wall display for BMW individual so it's not that much of a secret.
I really don't see how it could be justified that BMW equipping cars with every feature then blocking them behind a subscription could possibly reduce prices for consumers. I also can't think of any industry at all where the most profitable company only sells a single variant of their product, so for that to be true for something as complex and expensive as cars seems farfetched. This is clearly a cash grab and not some amazing achievement in efficiency that no other automaker in the history of mass production has ever thought of. I think this unbecoming and anti-consumer behavior from a so-called luxury brand should be called out, not defended.
On a side note, I really don't want to come across as rude or anything because I'm enjoying this discussion! You bring up a lot of points I didn't fully consider.
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Correct I wouldn't be surprised, only because I've seen it before in other industries. But again I'm not saying it WILL be cheaper, just saying I wouldn't be surprised. I think you're getting hung up on the "cheaper" part, so let's also add to that statement I wouldn't be surprised if it was similar cost, or only a slight increase in cost. Where I would be surprised is if it was a significant cost increase.
In terms of other car companies having already offered something like this if it was actually lower cost - the novelty here isn't adding every option to every car - the novelty here is subscription based services which justify offering every option on every car. Otherwise there's no point if you're going to be offering customers pricing tiers based on various packages (like what most companies do today). You have to consider the output side as well. In regards to Porsche - I have to disagree with them only being "slightly" more expensive
I cross shopped a Cayenne with my X5 - and similarly equipped, the Porsche was over $20k more. That doesn't fit my definition of "slight" lol. And I'd argue my loaded X5 has a much nicer interior with nicer quality materials than the comparable Cayenne (but that's a discussion for another time). Perhaps in their base, bare-bones models they don't cost significantly more than the other Germans, but a base X5 will have more standard equipment than a base Cayenne. If there was only a "slight" difference in price, you wouldn't see BMW selling 3 times as many X5s as Porsche sells Cayennes.
Also keep in mind - BMW is the top automaker in the world when it comes to supply chain based on Gartners top 25 best supply chain companies. BMW is the only automaker on that top 25 list. So if anyone figures something like this out first, it would probably be BMW - so perhaps this is them figuring it out first?
You see this often in supply chain... the business comes with the novelty and the supply chain is asked to cash the check which the business wrote. The problem is if supply chain determines there's a significant cost increase to offering something, it then puts the ball back in the business's court to offer up a counter break-even analysis. So when I say insider data - I'm talking about those discussions BMW's having. I can envision it - supply chain at BMW coming back with various scenarios - fully optimized supply chain with optimal sourcing, transportation, distribution - taking advantage of a steady stream of product - and a sub-optimal supply chain where the cost rises because they continue operating based on their current model, but add more product to it.
The other thing I think is important to consider is not just the added demand, but that the forecast of individual skus is now tied to the forecast of their main product at a 1:1 basis. Rather than have a separate forecast for each category of part - which comes with its own set of forecast biases and errors - you're now tied to the main product which is the car itself. So it's not just that adding more product means you can better utilize your transportation and distribution network - you can better utilize it because your flow of product is now much more predictable with less error. This also has positive impacts on inventory planning. You're eliminating layers of forecasting which simplifies your entire planning process.
As for the volume they do - I don't think you can make a broad generalization to say because they sell 400k cars they're already operating at an efficient scale for all parts. There's a few issues here:
First - truck utilization is measured in two ways - volume (cubic inches or centimeters), or weight (lbs or kg) - based on whether they believe the truck will "cube out" or "weigh out". This determination is based on the attributes of what's being shipped - if it's just one part then we can say, is it a large part or a heavy part? If it's a large part then we can say it'll cube out before it weighs out for example. But without knowing the attributes of all parts being shipped, and in what volumes they're being shipped, we can't make the blanket statement that they're probably already maximizing usage of their distribution/transportation network.
Second - with multiple vendors shipping to multiple production plants around the world, likely with multiple touchpoints across the upstream network, it's a complicated web, so your volumes may not be as concentrated and as simple as saying, "we already sell so many cars, we're already maximizing use of all our transportation methods". I'm sure BMW has a state of the art TMS system which helps them enhance their network, but TMS systems can only go so far.
I do agree this is a cash-grab from BMW - but I don't believe they would have approved this decision if it blew up their supply chain costs, especially for a company with a world-class supply chain like BMW. And I say that because I've seen these internal struggles play out. Contrary to what us consumers believe - high volume companies don't like to increase their pricing - because that puts them at a competitive disadvantage (typically - you'd have to get into price elasticity of demand for various industries). They typically increase their pricing out of necessity, not because of a self-inflicted decision. Companies also don't love decreasing their pricing (promotional pricing is separate). Ideally they prefer to keep their pricing as static as possible, adjusted for inflation. And you see this in the automotive industry - car pricing adjusted for inflation has stayed relatively stable over the decades, barring some exceptions. So the vast majority of the margin improvements happen due to internal efficiency gains.
In this case - I think BMW is directly targeting, and trying to convert, customers who are on the fence about certain products. This enables them to "try it out" for a month rather than pay full price for it. They're banking on that conversion rate generating additional revenue.
From my own perspective? I typically order my cars nearly fully loaded anyway, but I do see application where I only access heated seats/steering wheel in the winter months. I'd have to do my own break-even analysis to determine how many seasons of doing that could I do before it costs the same as just paying full price for the option outright, but I see some potential there if I don't keep my car longer than say, 5 years for example. Another - radar based cruise control - I don't have a daily commute since I work remote, but it's a godsend for long road trips. So perhaps I only purchase a monthly subscription for a month where I know I'm going on a trip. That's just me trying to see how I can benefit from the system. I'm always looking for ways it benefits me.