It has never been more clear that transformational change to one of the world’s largest industries is just around the corner. Car ownership is supposed to change — and when it does, it is predicted to be one of the most monumental displacements of wealth the world economy has ever seen.
But there are a lot of conflicting opinions and information out there. Industry experts and headlines are telling us that Tesla will rule the world, car manufacturers are becoming mobility companies and Uber and Lyft mean the end of traditional car ownership as we know it. They’re also saying that car dealerships will die at the hands of online car-buying sites such as Beepi, Carvana, Vroom and Shift. On the contrary, headlines are also touting that vehicle sales are at all-time highs, trucks are the leading category of new car sales and millennials are buying cars more than ever.
There’s also the looming question of autonomous driving technology. Uber and Lyft want self-driving cars to replace their drivers ASAP, and companies like Apple and GM are spending aggressively to position themselves for success in a theoretical, autonomous mobility landscape. But even Google, which has been developing this technology since 2009, is unsure if fully autonomous cars can become viable within the next 30 years.
What is unequivocal is that there’s a lot of noise around the future of transportation. Like anyone who lives in Silicon Valley, I believe change is coming and that current car ownership models are ripe for disruption. But with personal car sales at an all-time high, the question is when — and how? The assumed agents of change are the likes of Tesla, Uber, Google, Apple or Ford, but lost in all of these predictions is the linchpin for the entire auto industry. That’s the unsexy, yet enormous world of auto finance — the huge market that makes it all work.
Financing props up the entire auto industry.
To put it in perspective, auto loan balances in the U.S. total more than $1.06 trillion right now. That number doesn’t even include the enormous leasing market. The largest auto lenders in the U.S. are also household names: banks like Ally, Wells Fargo, Chase and Capital One, and finance arms of car manufacturers like Toyota, GM and Ford. Auto loans, as an asset class, trail only mortgages and student loan balances.
It’s clearly a massive market, but why does that matter? It matters because U.S. car sales are inextricably linked to a robust auto finance market. Indeed, 86 percent of new car sales in the U.S. are financed. Without individual financing products, car sales don’t happen. Financing props up the entire auto industry. In fact, the U.S. is far more reliant on auto finance than other countries. In China, where current new car sales outpace the U.S., only 26 percent of new car sales are financed.
New types of cars like the Tesla 3 or the Chevy Bolt will continue to emerge, and their features will be heralded as ushering in the future of transportation. For the most part, however, these innovative vehicles are going to be consumed in the traditional manner: They will be personally financed.
That can’t be the future of car ownership. With the rise of companies like Uber and Lyft, it’s clear that we will need to see advances in new ownership models to support tomorrow’s transportation landscape. In fact, Uber recently received a $1 billion credit facility led by Goldman Sachs to fund new car leases. Uber (and Wall Street) are also recognizing the need for more flexibility with this deal — especially at a time when Americans are making larger monthly payments than ever on their cars and taking out record-size auto loans.
Other flexible vehicle access products like Ford’s Credit Link (shared vehicle leasing program) and GM’s Maven (on-demand car rentals) give us a glimpse into what the future of car ownership may look like. These types of emerging products will only be successful with a robust technology infrastructure — a stark departure from the differentiators in the auto finance market today.
If we see a shift away from personal vehicle ownership and households no longer own, on average, 2.06 cars, then this will require an entirely new auto finance infrastructure. Ultimately, Google’s self-driving cars may become ubiquitous — but we’ll have to displace a lot of big names in today’s $1 trillion auto finance market to get there.