To get a sense of where Kevin McLaughlin’s sympathies lie, one need look no further than the magazine selection in his Toronto company’s lobby: Green Living, Vegetarian Times, Momentum (“for self-propelled people”) and Viva, a women’s health title.
Yup, the president of AutoShare, one of the pioneers of car sharing in North America, is as green as Kermit the Frog. He ventured into the industry with a mission to reduce car pollution, promote environmental consciousness and provide low-cost mobility to the masses.
In McLaughlin’s 12 years with AutoShare, however, the business has thrown him several curves. To wit: “We thought it’d be great for low-income people and immigrants, but they haven’t taken it up,” says McLaughlin, a slim, bespectacled man with a toothy grin and earnest manner. “Thirty dollars for four hours is still a luxury for them.”
The eco-pitch also didn’t stick. “It took us years to figure out that the green part is not the reason people were joining. People were joining because car sharing was convenient and saved them money.”
Most unpleasant of all, he’s found the car-sharing industry’s communitarian ethos melting away in the face of aggressive, well-funded and shrewd entrants — most notably Zipcar Inc., a Boston-area company that now controls three-quarters of North American market share.
While co-ops remain a major force in car sharing, both Zipcar and AutoShare look to profit from this still new concept. In essence, car sharing is short-term car rental — for as little as 30 minutes — aimed at urbanites who generally get around on transit or under their own locomotion, but occasionally need a vehicle for a meeting or a trip to Ikea.
Once they’ve paid a small membership fee, customers can book a car online or over the phone, with gas, insurance and roadside assistance included. It’s a fully self-serve transaction: Walk to one of the parking “pods” dotted around downtown, unlock your car with a smart card or a key from a lockbox, and off you go.
The model has proven appealing: Seven years ago, AutoShare had about 1,000 members. Today, some 10,000 Torontonians use its roughly 220 vehicles. That dramatic growth, mirrored by other operators’ experiences in major cities, is expected to continue. Research firm Frost & Sullivan projects that revenues of North American car-sharing operations will soar from $253 million (U.S.) in 2009 to $3.3 billion (U.S.) in 2016, and membership will grow tenfold as high gas prices, hefty vehicle ownership and insurance costs, parking hassles, a sluggish economy and guilt about fouling the atmosphere spur households to ditch their cars — or at least their second cars.
But along with growth, the industry is about to experience a dramatic realignment. Car-rental agencies and auto manufacturers are ramping up their incursions into car sharing, and new entrants are experimenting with more efficient business models. To prepare for the coming fight, Zipcar has announced its plan to go public. McLaughlin and other trailblazers have conflicted feelings about their larger rival: They acknowledge it’s greatly raised awareness of car sharing, but view it as an unwelcome interloper into the markets they developed. Beneath the resentment lies a fear that, as often happens, a rapid industry evolution may sweep away the pioneers. AutoShare could be among the casualties. But, then, so could Zipcar.
Kevin McLaughlin — a former aspiring environmental reporter and director of a nature non-profit, a man who volunteers at bird rescues and only briefly owned a car — is a distant relative of auto-industry pioneer Sam McLaughlin, whose McLaughlin Motor Car Co. was subsumed into General Motors Canada.
It’s a nice irony, but the 43-year-old entrepreneur is no hippie: He graduated from Queen’s University in business, hoping to become a real estate tycoon — until he took a trip to Asia and had an epiphany when he saw plastic bottles despoiling an idyllic island. He co-founded the non-profit group Evergreen in Toronto to foster urban green spaces, and then moved to Vancouver to open a branch there. But by the mid-1990s, he was tired of “begging for money.”
McLaughlin read about car-sharing ventures in Europe, where pilot projects date back to the 1960s. Inspired, in 1997 he helped found the non-profit Co-operative Auto Network in Vancouver, an organization that has since expanded to serve nearby communities. Seeing an unexplored business opportunity, he returned to Toronto and partnered with Liz Reynolds, a former co-op housing advocate, to launch AutoShare. They based it on the example of for-profit Communauto in Quebec, the first car-sharing operation in North America.
AutoShare had 16 members and three cars when it launched in October, 1998. “It was so mission-driven in the early days,” recalls McLaughlin, seated in his bare-bones office in a downtown Toronto loft building, where he and his 14 staffers moved last fall. The first members were true believers who treated their $500 insurance deposit-cum-membership “like giving us a donation or buying a share in a windmill,” he says.
Those fees were AutoShare’s primary source of capital, the biggest chunk of which went toward leasing cars. No bank would lend to such an untested venture, so board members signed the leases personally.
During the taxing early years of the company’s life, the two partners’ relationship grew toxic. One morning in April, 2002, McLaughlin arrived to be confronted by Reynolds, accompanied by a security guard and businessman Dan White. The pair announced that Reynolds was taking over.
In the ensuing legal battle, Reynolds and McLaughlin appeared before several judges — including Justice James Farley, who was also presiding over the Air Canada bankruptcy and couldn’t hide his incredulity at AutoShare’s teapot tempest. Eventually, an auction was held, McLaughlin won and, with begged-and-borrowed money, bought out Reynolds. The struggle had cost him $40,000 in legal fees. “The first thing any entrepreneur should be taught in business school is, have an exit agreement,” says McLaughlin ruefully. (Reynolds and White launched a short-lived rival, Dashcar, in 2003. She is no longer in the industry.)
Growing the company proved more difficult than McLaughlin expected. “This is an immensely, ridiculously capital-intensive business to start as a small operator,” says McLaughlin.
AutoShare pays about $1,000 a month for every car it has on the road, to cover the lease, insurance, parking, maintenance and gas. The original business plan had AutoShare breaking even with 200 cars after three years, but while the company did start breaking even, the fleet goal kept getting pushed out. McLaughlin was particularly disappointed that, for all their green tub-thumping, governments gave AutoShare little help. “I would go to the City [of Toronto]every year for five years, but they didn’t see us as credible,” he says. Meanwhile, American car-share companies received millions of dollars in public support.
McLaughlin tried to raise venture capital, but couldn’t deliver a big enough business plan to attract interest. Meanwhile, he kept tweaking the operating model. AutoShare started off charging $2 to $3 an hour because that’s what the co-ops charged, but it soon had to raise rates to survive. The company was thinking too small, too narrow, and McLaughlin believes this tunnel vision cost AutoShare the opportunity to raise funding that it could have used to expand beyond Toronto.
Still, by 2005, AutoShare was profitable, and later that year, Zipcar sent out feelers about a partnership. McLaughlin squired around CEO Scott Griffith and his entourage, showing them his operation, the choice neighbourhoods harbouring eco-conscious, condo-dwelling hipsters and the parking lots that rented space to shared cars.
Since Zipcar was an ally in the car-sharing cause, McLaughlin was amenable to coming under its umbrella. Zipcar’s purchase offer of $450,000 and 220,000 shares, however, was so low as to be insulting, he says. “They lowballed me, and two months later, they launched here.”
Zipcar, now in its pre-IPO quiet period, refused to comment on financial specifics, other than to say, “As the market leader, Zipcar keeps in touch with other players in the market.”
Zipcar didn’t lack a grand vision. Since its launch in 2000, the firm has raised a reported $50 million (U.S.) in venture funding, enabling it to require minimal upfront membership fees. When research showed that Americans weren't big on sharing, the company dropped the word from its promotional material in favour of a convenience sell: “wheels when you want them.” The firm grew fast, spending up to $4 million (U.S.) to launch in each new market and snapping up rivals like Flexcar, the second-largest American player.
Once Zipcar entered Toronto, it scaled up quickly: It had 100 cars within a month, and close to 300 after two years, besting AutoShare’s fleet. “Toronto seems to be off the charts relative to anything we’ve seen before,” Griffith said of the growth six months after the launch. Zipcar’s Toronto general manager, Michael Lende, recalls that, initially, when he’d walk into a room to talk about his operation, “people didn’t know what car sharing was. Some 18 months after we came, I’d walk in and they’d report the definition to me.”
Having his company treated as irrelevant and his market as practically virgin terrain was merely irritating to McLaughlin compared to the pain of the Great Parking Land Rush that followed. Offering numerous convenient locations — be they private and municipal lots or just a few spaces rented from a restaurant, a gas station or the like — is a key competitive advantage in this business. When, shortly after Zipcar’s arrival, McLaughlin told a reporter that AutoShare was paying $75 a month per spot to park its cars at a Loblaws on the east side of downtown, Zipcar offered more.
The same pattern repeated elsewhere. As a result, AutoShare’s average parking cost jumped from $80 a spot to $200. “Now, there’s a new category at every parking company called ‘car-sharing,’ that Zipcar created, that’s fixed and extremely expensive,” says McLaughlin. (By way of response to the parking imbroglio, Zipcar PR head John Williams says, “Our goal is to make our cars broadly available to as many members and potential members as possible, and parking spots are obviously important.”)
McLaughlin admits that Zipcar’s intensive marketing grew the market for both companies. But as AutoShare tried to keep up — lowering prices, adding cars and tripling its annual marketing budget — it dropped into the red.
And the bad blood has continued, at least on McLaughlin’s side. The two firms recently teamed up to lobby the city for permission to park their cars on the streets. “The minute something gets signed, they come out with a press release saying, ‘Zipcar has got Toronto’s first on-street parking spot,’ ” fumes McLaughlin. “So, okay, now I have to put out a press release saying AutoShare did that too? It would have had better impact to do it together.” Lende’s take on the rivalry: “We have a very healthy competitive situation, and consumers benefit by having more choice.”
But if Zipcar is aggressive, it’s also smart. The company has long focused on university students, offering cars to people as young as 21 (most rental-car agencies don’t rent to drivers under 25). Not only do students tend to lack vehicles but, after graduation, they gravitate to coastal cities where the company also has outlets. Zipcar now has pods at more than 150 campuses in North America. Most of these are exclusive deals, with the institutions guaranteeing the company a minimum monthly revenue.
As well, the Zipcar fleet tends to be trendier than that of its rivals, including models such as Volkswagen Beetles and Golfs. It’s also newer: Most of its vehicles are less than three years old, while other car-shares generally spread their car investments over six years.
To streamline the rental process, Zipcar has plowed money into technology, offering keyless car entry (instead of keys in lockboxes), a sophisticated online booking system and mobile phone reservations. Its investment in choice parking has paid off with greater customer convenience. “I can usually get a car within a 10-minute walk, max, of my home or office,” says Lesley Grant, a Toronto television executive who signed up with Zipcar after checking out both companies. “The cars are kept in excellent condition and there are a number of models available.”
Four years after its arrival, Zipcar dominates the Toronto market, with about 350 cars — 64-per-cent more than AutoShare. Today, Zipcar has more than 400,000 worldwide members in more than 50 cities — Vancouver being the only Canadian operation besides Toronto — and $130 million (U.S.) in revenues (2009).
But Zipcar’s rivals like to point out that the company has yet to turn a profit — it lost $5 million (U.S.) in the quarter ending March 31. It’s also fighting a class-action suit over additional fees that are alleged to be unlawfully high. In an SEC filing related to the IPO that it is making in a low market, Zipcar acknowledges that it plans to use the funding to cover debts and pay back venture funders (notably Goldman Sachs).
The intensification of competition is not over yet. Hertz, Enterprise Rent-A-Car and U-Haul have all launched car-sharing operations in the past few years. Hertz has been particularly aggressive on the college front. “In the markets where Connect by Hertz operates, [car share]prices tend to be lower,” notes Nima Samadi, an analyst with research company IBISWorld.
Enterprise has fewer locations than Hertz, but once it ramps up, Samadi believes it could become a huge force because it already has many city-centre outlets. Rental-car agencies — a $24-billion (U.S.) industry — can leverage their existing infrastructures in a way that’s impossible for car-sharing outfits. And with a multinational presence, the big companies can globalize a business that to date has been largely local.
Car makers are also intrigued, seeing car sharing as a way to tap future buyers, test new technologies and paint themselves green. In 2000, Ford Motor Co.’s chairman told a British newspaper, “If you live in a city, you don’t need to own a car.” (The quote is now posted on many car-sharing websites.) While Ford has yet to introduce car sharing, Daimler AG started Car2Go in Austin, Texas, last year, and several other automakers have launched pilot projects or subsidiaries overseas.
Meanwhile, car-sharing’s customer profile is changing, with business and government increasingly signing up. Zipcar’s Lende says a number of companies, large and small, have set up corporate accounts with his firm, drawn by the significant savings over cab fares and the convenience of having cars nearby. Condo developers are also looking to partnerships with car-shares to help them reduce parking spaces and even to get LEED points.
Now that all North American cities with subway systems have at least one car-share operation, the industry’s focus is shifting to smaller centres that are much harder to crack. Frost & Sullivan analyst David Zhao estimates that a car-sharing business requires density of 1,000 people per square kilometre and car usage rates of 45 per cent for weekdays and 60 per cent for weekends. Canada’s sparse population has made for-profit car sharing a challenge outside the three biggest cities. Only Ottawa’s Vrtucar and CarShareHFX in Halifax operate as businesses. The dozen or so other outfits around the country are non-profits and co-ops.
Smaller cities and suburban markets may have to wait for new car-sharing models to evolve, such as so-called peer-to-peer car sharing, where individuals enroll their cars in a pool from which others can rent when they’re available (think Napster for transportation). Because the operator does not own the cars, the upfront investment is minimal. McLaughlin calls it “the software solution,” because the key element is the online system for managing vehicle inventory. The concept is young and has many uncertainties: Who deals with roadside breakdowns? How do you handle insurance? But if the idea gains traction with consumers, Zhao believes “it will change the whole picture of urban transportation.”
McLaughlin, however, sees peer-to-peer as a transitional solution with a built-in flaw. “If you own enough car to share, why own the car at all?” Instead, he sees companies like his that already have the customer-support infrastructure one day renting vehicles from individuals — on weekends, say, when some owners don’t use their cars much but AutoShare experiences high demand. It’s just one of many innovations integrating car sharing, carpooling and public transit that he believes will emerge to solve the growing problems of congestion, pollution and high transportation costs. Urban transportation visionaries predict a general shift away from car ownership to using cars as a service.
But the legal framework, especially in Canada, is lagging market innovation. McLaughlin points out that the same Ontario bill that made it illegal to send text messages while driving also finally lifted the legal cloud hanging over carpooling. But some methods for sharing rides — such as airport shuttle buses — remain illegal in Toronto. And don’t get McLaughlin started on the subject of parking. “We’re building condos with parking for the car culture from the 1950s,” he says with a shake of his head. Toronto, however, recently approved the first condominium in the city that proposes to eliminate parking except for a few spots for shared cars. (City regulations set out minimum ratios of units to parking spots, yet many developers end up with unsold spaces.)
While environmental consciousness has taken a back seat to convenience and savings in car sharing’s promotion, the green credo remains strong. Car-shares mainly use small, fuel-efficient cars, and are expected to lead the transition to electric vehicles, with one in five new shared cars being electric by 2016 in Frost & Sullivan’s forecast.
Still, as the industry motors toward mainstream success, it faces a paradox. Most car-share operations cite research showing that vehicle sharing reduces driving — though the numbers vary wildly, each shared car is being credited with replacing anywhere from six to 30 private cars. Yet if shared cars become as ubiquitous and convenient as AutoShare envisions — “ a shared vehicle within a five-minute walk of anywhere in the city; at every [subway] station; and at the end of your street” — would we really drive less? We’d need fewer cars, but lots of people without vehicle access today would be able to take to the road.
Tensions, meanwhile, are emerging as an industry that began as a community effort adjusts to an increasingly profit-driven marketplace. McLaughlin is one of the founders of an international association that is closed to anyone “who might steal our ideas and use them against us,” he says, but there’s debate whether it should welcome the likes of Zipcar and Hertz.
And there is McLaughlin’s own conflicted situation. He says that the non-profits are wary of the for-profit operators selling out to those enemies, but adds, “Everyone’s got a price.” Even if you’re as crunchy as granola, he argues that it may be sensible to use sale proceeds to pursue your goals more effectively.
At the same time, he refuses to see Zipcar as simply a more successful, better-funded and arguably better-run version of AutoShare. Zipcar’s service happens to bring green benefits, says McLaughlin, but he insists it’s an organization that “could just as easily be selling McDonald’s hamburgers.” Yet, like AutoShare, Zipcar was the brainchild of green acolytes. Its founder, Robin Chase, remains a fervent advocate of car reduction who now guides one of the peer-to-peer start-ups, GoLoco.
McLaughlin seems saddened by the shift to a harsher market climate. “When I started in this business, it was a movement,” he says wistfully. “Initially, everyone helped everyone.”
It’s a fundamental dilemma at the heart of green business — wanting to do good but also wanting to do well. The environmentalist in McLaughlin may feel virtue is on his side, but the entrepreneur in him can’t hide a touch of envy, even respect, for Zipcar’s success. He points out that AutoShare now generates annual revenue of $5 million and has been in the black for the past four years. Asked what’s more important to him, that the company be profitable or socially constructive, he laughs: “The beauty is that I don’t have to choose.”
But he doesn’t take the question lightly. “Until I pay off all my debts, I need for this to be profitable,” he says. “For me, what’s important is to be sustainable.”
For a green businessman, that’s a well-chosen word.
This story first appeared in the September, 2010 issue of Your Business magazine.
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