Episode 045: OEMs Are Gettin' AaaS-y

Hey everyone, Josh here from the Fleet Success Show. I wanted to just take a second and make sure you know about the first of its kind Fleet Success Summit. It's happening right here in Phoenix, Arizona on April 20th and 21st. This is a— it's a two-day event. It'll be unlike anything you've ever seen before in the world of fleet. We're bringing in 12 speakers to the stage to share the best in business, leadership, culture, and technology, not just from fleet, but other industries as well. All to help you drive success in your fleet. Go out, grab your tickets, register to attend at fleetsuccesssummit.com. And if you enter the code PODCAST at checkout, you'll get a 15% discount. We really hope to see you there. This is going to be an amazing 2 days. Go sign up now. fleetsuccesssummit.com. Welcome to the Fleet Success Show, a podcast dedicated to talking about the fundamentals, standards, and best practices that empower today's fleets to achieve fleet success. Let's get into the show. Hey, welcome back for another episode of the Fleet Success Show. I'm your host, Josh Turley, and joining me today, Steve Salzgiver.

I'm here.

You are here.

Yeah, I'm here. Yeah.

So we're excusing Jeff. He's off enjoying some warm coastal waters somewhere on a much deserved vacation. So we'll welcome him back in a in a little bit, but for right now, Steve and I have a super fun, awesome topic that hopefully doesn't get us blocked by the content filters. But it's about how OEMs are, you know, they're kind of taking the SaaS model. You know, we call that being ASSI because they're Automotive as a Service instead of SASE, which is Software as a Service. Eat your heart out, content filters. But it is, we're seeing more of this kind of shift to where like you're having to rent features on your vehicles, you know, and I think automotive was one of the first industries that went to more of a subscription base when they offered leasing. Yeah, but now we're hearing stories or plans from GM and Toyota and Steve, you've heard more about this, so correct me if I'm wrong, but you know, where they're basically allowing users to turn on and turn off features and kind of pay for it as they go. Instead of all up front. Now, it might not be instead of all up front, it might be in addition to all up front, which is why people are a little bit up in arms. But let's assume that it's like everything else and it's instead of paying for it up front, you pay as you go.

Yeah, essentially you buy a car that's really fully equipped, right? Right. But you don't— you buy it bare bones and you don't turn on some of the, some of the options.

Now, I'll tell you where this makes sense from the— it's And I actually help them from a manufacturing standpoint is that they manufacture all their cars the same way.

Yeah.

Every bell and whistle is already installed. It's already turned in.

Like, we don't have to do any customization.

No more customization. It's all there. And then the end users, they configure what they want. You know, it all becomes controlled by software switches that, okay, well, we're just going to turn that off and we control that. So from their side, it might actually make sense from an OEM perspective as a cost measure. To streamline efficiencies and things like that. Maybe you get better pricing on, you know, we can't sell heated seats right now because of the chip shortage, but, you know, like maybe we get better pricing on heated seat components and wires and controls and things like that.

Well, that's true. I mean, the Six Sigma alone, just duplicating the same process would have—

it would have automatic efficiencies just based on that. So a little bit of background why companies would even consider doing this. It goes back to you know, like why we made the switch to SaaS, you know, a little bit behind that. There's a book called Consumption Economics, super dry, boring book. If you're in economics, it's a lot of fun, but it essentially talked about the shift in consumer behavior. When we talk about automotive leasing, we saw a huge shift like this in the technology world, but this shift from where you like, you don't buy software anymore, where you buy the software up front for a big fee, and then you pay like a yearly maintenance. There was a shift with SaaS where instead of buying it all up front, you would just pay a lower price up front, but you'd pay more year over year. And so it kind of shifted it from this capital expenditure to more of an operational expenditure. And we kind of saw that same thing with automotive when you'd go from buying a vehicle to leasing a vehicle. It shifts from CapEx to OpEx. But the idea is that you're shifting the risk from the buyer, you know, because a buyer could go out and buy a vehicle, and— or, you know, in this case we talk about servers and technology. Let's say that I went out and bought a server, and if I never used that server, the risk is all on me. You know, if I go spend $10,000-$15,000 on a brand new server and then we don't use it, or we underutilize it— that's always the worst, is when you just have a lot of headroom in the server and you're not taxing it at all. It means that you spent more than you needed to spend. And so in technology, we went down this whole path, like when Amazon Web Services came out and Azure, where they started renting servers, where you could rent server time, you could rent server space, and basically just each month you would say, hey, I need, you know, 2 or 3 of these servers, and I only needed to have 2 processors and this much memory and this much hard drive space. And they would basically tally it up and say, okay, well, that's going to be $12. And then each month you would just rent what you needed. Maybe the next month you needed 6 processors and 10 times the memory. Well, you could turn it up, and then the next after that you could turn it back down again. So you're constantly able to adjust based on your consumption. And so that's really where this term consumption economics came in, was that you would only pay for what you use as you use it. Therefore driving more value and leaving less unrealized value on the table. And automotive kind of did that with leasing. You know, you still had to basically— you're buying the vehicle over 3 years and then turning it back in.

And they are doing it with mobility as a service.

Mobility as a service, right? Uber kind of went down this road, right? You're not paying for the whole vehicle, you're only paying for, you know, that portion of the mileage that you're using that vehicle. And so that really is kind of the consumption economic model. We're seeing it a lot more in life, and so it kind of makes sense that automotive, automotive OEMs would figure out how do we create a consumption-based economic model. And so that's why we're seeing where GM and Toyota are trying to do this, like, well, what if we could charge month by month for heated seats? And instead of, you know, charging you $600, now we're gonna charge you $10 a month. You know, maybe you only use it 5 months out of the year, and so you, you know, in 1 year you'll spend what you would have spent on the $500 seats in the beginning.

And they'll have an annual renewal, and you'll have You know, it's up to you to renew it or not.

Oh, trust me, they will not lose money if they go down this road. Right? Like that's, there's no way they're going to make a decision where they lose money. So let's get that out of the way.

You know, the article I read, and I was talking to you about that, Toyota already tried it with CarPlay and it, uh, it failed miserably for them.

Why did it fail for them?

I, you know, the reason I think it failed is because people already had it for free.

Right.

And then now they had to buy it.

Buyer's condition.

Yes. And so now I think you're going to, they're going to have to really look at that seriously, you know, 'Cause right now we all have all this for free. Now, if you've never owned a car with adaptive cruise control, CarPlay, heated seats, things of that nature, it's probably not a big deal to you. But if you've already owned that, it's very frustrating that you don't get that now. You gotta pay for it extra. So that'll be, you know, they'll have to come up with some model that when you do buy it, it doesn't increase the amount of the car on the base end.

And that's it, right? And that's how it worked with SaaS is that You know, like let's say that you had a $100,000 piece of software. What they did with SaaS is, and like Adobe and Microsoft and all the big companies went through this transition where they didn't charge you $100,000 in year 1, they only charged you like $30,000, or even some of them were even cooler, they went down to like $15,000. You know, so you're basically paying 1/6 of your upfront purchase price. Well, that for them is a huge revenue hit in year 1, but by year 6 they've made that all up. And automobiles are gonna have to figure that leap out the same way that SaaS companies did. We call it the 3-year gap. Like, that's the— it's the year from hell that you go through as a SaaS company. And automotive companies, if they pivot, they're gonna go through the same thing where year 1 and 2, they're gonna have a huge revenue hit. Yeah, you know, if they do it the right way, which is we're gonna lower the cost to purchase a vehicle, bring that all the way down, and then that's gonna be the incentive to, oh, Well, if it doesn't cost me as much upfront, but then I purchase or pay for the features as I use them, now we're shifting into more of a consumption economic model.

You know, I can see where that'd be beneficial if you've got an F-150, for example, and it's just a plainly a work truck.

Yeah.

And you don't need all the bells and whistles on it because all it's doing is hauling dirt or whatever you're doing with it. That might be a good application to buy it bare bones and not activate any other options. Yeah. But the other side of that is if you've ever owned a Lincoln, a Cadillac, a BMW, a Lexus, they come fully loaded with everything on 'em.

Right.

You know, including they change the oil for you almost through the life of the vehicle. So now they gotta figure out that, to bridge that gap from the bottom end to the top end. 'Cause if you've, if you're on the top end, this is not gonna be attractive to you.

So, and this is one thing that if, you know, we were talking about where companies were able to do this, Let's talk about servers for a second. The reason that technology companies and SaaS companies were able to make this switch to a SaaS subscription type platform is because of a technology we call virtualization. We didn't actually have to buy any more servers. So when I go to Amazon and I say I need these 2 servers, Amazon's not going out and buying 2 servers for me. They're virtualizing. They're creating a virtual server for me and basically carving out a little bit of space on their real hard servers for me to use. And they can carve it up infinitely. but then give out, you know, multiple people on the same physical hardware. You can't do that with an automobile. I can't virtualize leather. I can't virtualize, you know, having heated seats installed already, right? And so that's one of the challenges that, you know, we talk about a high-end car versus a really stripped-down car. There are some things that you're not going to be able to get away from, like you just can't turn on a switch. But anything that you could turn on electronically or over the air, you know, would be a candidate that you might be able to say, hey, we stripped out all of the add-on features, the electronic add-on features, heated seats, navigation. You know, we talked about SiriusXM, CarPlay, Android Auto, things that I might not need. But if I decided later on, like maybe I took it, it was originally a public works vehicle, but now it's, you know, over in the police department as a detective vehicle. And now we need some of those features turned on. Well, over the air, I turn on a couple things and now I'm paying for that monthly instead of having to take it back into the dealer or buy an entirely new vehicle for that detective.

You know, I could see another application too. If you, I mean, public works, they typically try to buy, right now they're trying to buy a vehicle moderately equipped so they can get the resale on the back end.

Yeah.

But you could buy a bare bones vehicle without any of that on and then the consumer that buys it used from you.

After you.

Has the opportunity to put all that back on, right?

Right.

So there is some application, I think, at some point.

Yeah.

You know, where, um, so I think you just have to decide. I mean, they're basically not going to have a low-end and a high-end vehicle. They're going to have one vehicle, right? Because essentially it's got all the options on it, right?

And then it's just as a matter of, is this available to you or not, you know? And then you control it all through the touchscreen. It was the coolest thing. I was watching a video with, uh, if you've ever seen Dude Perfect. Yeah, right. Like, these guys are— that's a really cool story. You should go out and look at them. But They were doing a video racing Teslas, right? Because that's what cool kids do these days. Because, you know, cool kids drive Teslas, unlike me. But they have— so this gal had a Tesla Model Y and she's like, well, you know, they just came out with Plaid mode for my Model Y. So she goes on to her little touchscreen and orders Plaid mode from inside the vehicle. And then it just comes over as an over-the-air update. All the hardware, the batteries and the motors are already there. They're ready to go. They've just been detuned. And so I could almost see that too, like, well, maybe I'm not sure if I need the V8, but like, let's get, you know, Ford's got the EcoBoost, so let's get the 3.5-liter EcoBoost, but let's turn off— maybe it has the PowerBoost, you know, hybrid engine inside there, but we're not sure if we're going to use that or if we like it, so maybe we'll turn it on for some applications, but then we're going to turn it off for other applications.

I just got this vision, if you're going to go drag racing on the weekend, you just Download the software, then cancel the subscription, right?

Right, like, hey, I'm gonna use this for 3 days and then maybe I've gotta go do a towing thing. You know, we talked about, yeah, the university up in Utah that, you know, they had all these F-150s and they were like, well, we never tow, we don't need V8s, we don't need 4x4, let's go down to a V6 Tacoma, right? But they had to make a total model change to do that. Yeah, what if instead you could say, you know, today I'm driving a V6 and I need the towing capacity, tomorrow is just going to be commuting around town. Let's go ahead and de-rate and we'll shut off 2 cylinders of the engine. Maybe that costs me $10 less a month. There's less wear and tear. I mean, certainly the gas mileage generates better gas mileage, a little less power, but it's more— it fits the application. There's some interesting tidbits about this, right? Like, on the surface, it's totally a money grab by the OEMs. Everybody's got to make money, I get it, but it still feels weird. But there is some interesting applications when we look at and this is what I love about this category, right? We talk about fleet success and what we're talking about at the Fleet Success Summit is taking lessons that we've learned in totally different industries, like in this case, virtualization and consumption economics, and then applying them to an industry that hasn't ever seen something like this. And how could that work? And where are these cool, crazy ideas going to come from next? So I like that about this.

I think it has a lot of application in fleet. It's an interesting application, but it also could create a lot of red herrings in fleet too. I mean if you're the— oh yeah, you're the fleet manager and the police want CarPlay but you don't wanna give that to the parks department that's 90% out of their car once they park it, right?

Well then you gotta manage it and now all of a sudden you're gonna monthly bill from Ford instead of just paying for it up front and then doing a monthly cap expenditure, you know, for depreciation.

Well then you got to go through all the hassle of trying to turn it off. If you ever try to get rid of Sirius Radio, you'll know that hassle.

Right! And then it never goes away and then you accidentally go into it and they're like, "Oh do you wanna turn on your subscription again?" No, no, no, no, no. I didn't mean to do that. But that's the, you know, as a fleet manager, I could see this becoming a huge administrative headache.

Yeah.

You know, just, oh, we got to keep track of who's got what turned on and where and what modules are on this one and what can we de-rate and turn down over here. It's really funny, speaking of SaaS, sometimes you get into like it's on autopay, right? Where it's just constantly going and you never realize all the things that you're paying for. And we do this at home, right? With Netflix and Amazon Prime and all that. All of a sudden you get like your credit card has a fraud charge on it and you cancel it. You ever tried setting up all those subscriptions again? You realize, oh man, there's all these ones that I've been paying for and I had no idea.

Yeah.

Sometimes it's good just to cancel the credit card to stop that kind of stuff. But this would be the same thing.

I saw there's an app you can get for your phone called Truebill.

Yeah.

That actually taps into your thing and it'll show you what you're paying for twice. I was paying for two Hulu accounts.

I didn't know it. Two Hulu accounts? Yeah.

So.

You just imagine somebody's got like, Wait, we have Ford, we have CarPlay on that Ford? Why do we have CarPlay on there? Some driver got curious and pressed a button and turned it on. Now all of a sudden I'm paying $15 a month. It's like dealing with kids and cell phones.

Well, that in itself— What do you mean you sent $1,000? That's an interesting thing.

Right?

'Cause you'd have to have some pretty good security to make sure the driver didn't turn on all these apps, right?

Well, so you've got driver security you have to worry about.

Yeah.

What happens if you don't have over-the-air service?

Right.

Right, now what? You know, like if you've, I know one of the things we talked about was keyless entry. And what if you've got keyless entry as a service and now all of a sudden you're, you know, you're expecting your keyless entry to work, but you're not in a service zone. Does it default to being on or does it turn everything off? And now you're stuck because you have no physical key. Like, what do you do next? That's a good point. So there's a lot of— there's little nuances and ramifications from decisions like this. But we thought it'd be a fun topic for you guys to think about. We'd love to hear if you guys are hearing from your OEMs or from your providers that they're looking at this type of subscription service and how you think it's going to impact you. I'd love to hear your comments if you email us at podcast@rtafleet.com. Well, I think that's going to do it for us today. As always, reminder about the Fleet Success Summit coming up April 20th, 21st out here in— right next to Phoenix Airport, Phoenix, Arizona. Fleetsuccesssummit.com. Go out, tell your friends, you know, come out and see the show. You know, we're going to have— we've got 13 awesome speakers lined up. It's going to be awesome, jam-packed sessions talking about all things leadership, business, culture, and how they apply to fleet in ways that we haven't ever applied them before. If you register now, go out and use the— enter the code PODCAST for about a 15% discount on your registration. So make sure you go out, register. Use the word podcast and you'll get a nice little 15% discount on that registration price. Again, the dates, April 20th to 21st, fleetsuccesssummit.com. And that'll do it for us today.

And if you're like me and you go to— you've been going to the same venues every year and you've gotten bored from those, this is going to be unique.

Totally different.

Yeah, totally different.

So a lot different than GFX, I'll tell you that.

Yeah, exactly.

A lot different than, you know, it'll be a little different than NAFHA, different than Afla, any of those. It's, you know, it's going to be unique. One stage.

Absolutely. Yeah. You may want to try this. Use your budget money-wise this year.

That's right. So we'll see you there. Thanks for joining us on this episode of the Fleet Success Show. If you liked our show, we'd appreciate your 5-star review. Be sure to subscribe anywhere you listen to podcasts and come hang out with us anywhere on social media @fleetsuccess. See you next time.