UK hydrogen car developer Riversimple plans to turn the standard motor industry business model on its head. Founder Hugo Spowers explains:

Riversimple is building a hydrogen car with a fuel consumption equivalent to 300mpg. The UK firm has made the design process open source and foresees production taking place in small plants building about 5,000 vehicles a year each. But if that isn’t a big enough challenge to conventional auto industry practice, Riversimple also plans to turn the standard motor industry business model on its head. Founder Hugo Spowers explains.

The business model we propose is based on leasing rather than selling or, more strictly, on sale of service rather than product. Cars are a commodity and the auto industry relies on sale of product, which rewards the maximisation of resource and energy throughput. In contrast, the sale of service model rewards the minimisation of resource throughput, and is therefore a good example of a self-regulating system that is both more efficient and more effective.

Conventional leasing is wasteful

Sale of service is not to be confused with leasing as currently practised in the automotive industry, which is merely an alternative form of contract with a customer, designed to shift more product. By contrast, if the manufacturer is selling a fully-bundled transport service, it has an interest in the car being as simple, cheap, low maintenance and reliable as possible; in the consumer keeping it as long as possible and it being as secure and fuel efficient as possible (as the company owns the asset and also pays all the fuel bills incurred).
All these are the opposite of current manufacturers’ interests, but this new model aligns the previously opposed interests of consumer and manufacturer.

Make more money from fewer cars

Conventional cars have an economic life of only four years. But the total cost of providing that service is much lower for one vehicle that lasts 20 years than five vehicles that last four years – even if they are more expensive to build and one allows for interest.
A sale of service manufacturer can take a greater margin and yet offer a more expensive product to the consumer at a lower price; capture the same quantity of revenue streams with 80% less production capacity, access the revenue streams that the secondhand market offers.

No corrosion; no need to sell

Conventional cars corrode and have a large number of mechanical components that rub against each other, need lubricants that need replacing and still wear out. Furthermore, there is little residual value at end of life.
A composite-bodied fuel cell car is made of inert materials, so there is no structural degradation other than wear and tear, and there are no moving components in the car other than the electric motors and the secondary braking system. The motors have no rubbing contact and no lubricants, apart from the main bearings which are also the wheel bearings, and the brakes will never require replacement, because the motors do most of the braking and the vehicle is so much lighter anyway. This is a much more promising candidate for leasing than the incumbent technology.

How sale of service works

There are some necessary conditions, further benefits and barriers that arise from the sale-of-service model and are closely linked:

  • Retention of asset – Fundamental to this model working is that the manufacturer retains ownership of the asset and its maintenance liability if the self-regulating drivers are to remain intact.
  • Residual value – The vehicle will have higher residual value to the manufacturer than anyone else if it is designed to be recycled – as indeed it must be – so it does not make sense to sell it.
  • Market penetration – Elimination of the capital cost of the vehicle will aid penetration of the market, especially with new technology that is relatively expensive.
  • Working capital – One downside of a product with a built-in long-term revenue stream is that the cost of manufacturing precedes the income by a considerable margin. Consequently, there is an enormous working capital requirement, which grows more quickly than the revenue stream in the early growth phase; as a new technology, it is likely to receive an especially lukewarm reception from the financial world.
  • Cost of capital – The conventional argument against leasing is that it is always more expensive but if sale-of-service is embedded upstream as far as design, the product that emerges will be fundamentally different – it would be strategically daft to design such a car if one was then to proceed to sell it.
  • End of life liability – The concept of waste, the most profound and novel invention of the industrial age, is merely evidence of a loop yet to be closed. End of life liabilities are one of the European motor industry’s three most fundamental concerns, along with margins and block exemption, and the easiest way to reduce them is to reduce the level of production necessary to service a given share of the market.
  • Suppliers need to follow the same model
  • Fuel cells, electric motors, even structural materials and interior trim could be supplied to the manufacturer on the same basis as the car is supplied to the consumer. The supplier retains the asset and is paid by regular monthly instalments
  • Subsystem and component suppliers are influenced in the same way as the car manufacturer, rewarded for longevity, efficiency and reliability. When they were purchased by the manufacturer, suppliers have a direct interest in reducing product life.
  • End-of-life liabilities can be reduced and handled more effectively, as they are handed back to suppliers who would thus have a direct interest in designing for true recycling.
  • Capital costs become less of an issue
  • By including the supply chain, the huge working capital requirement for production of vehicles with a payback in excess of a decade is reduced dramatically. The working capital requirement is distributed around the value network within which the car manufacturer is embedded; the working capital must still be found of course, but the scale is reduced for each partner in the final product and is net of each partner’s margin.

No need to wait to innovate

However great society’s need for such technologies, components and materials, we cannot expect the private sector to develop them as long as the product continues to be sold. However, unlike many changes in business practice, we don’t have to wait for the rest of industry, or even direct competitors, to adopt this model, as doing so unilaterally turns a potential problem into a source of competitive advantage immediately.