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STRATEGY

Upstarts: Car Sharing
 

Sure, owning a car in the city is a hassle. But is car sharing the answer? Two American start-ups are betting that it is.
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Sure, owning a car in the city is a hassle. But is car sharing the answer?

As much as Americans love their cars, they'll also quickly admit that owning one can be a real pain. And the cost and headaches are even worse for drivers who live in big cities, where insurance is pricey and parking is at a premium.

American city drivers can take some comfort in knowing that car ownership is even more onerous in European cities, where parking is that much tighter and gas is almost three times as costly. Which is why several European neighborhoods during the late 1980s began creating car-sharing organizations (CSOs) to reduce individual vehicle ownership.

How does car sharing work? Think time-share -- but with cars instead of villas. Members reserve vehicles over the phone or on the Internet. They pay membership fees as well as usage charges -- both for miles driven and driving time. Two things differentiate car sharing from car rentals. First, rental-car companies keep vehicles in centralized lots, whereas CSOs park them in various spots throughout an area, typically near public-transit stops. Second, CSOs price themselves for frequent, short-term vehicle use, not occasional long-term use. In most cases, using a CSO's vehicle for an entire weekend costs more than a car rental would.

The practice of pooling vehicle use began as more of an environmental movement than a business scheme. As an industry, car sharing has shown little promise. According to Susan Shaheen, a transportation scholar at the University of California, CSOs have struggled with profitability, and few have achieved it. (A Swiss company called Mobility CarSharing Switzerland is one of the notable exceptions.) Why the rough road? Primarily, it's the high overhead -- cars, insurance, parking spots, and staff. As a result, says Shaheen, launching a CSO has -- until recently -- been synonymous with bathing in red ink.

So what makes a rash of new American start-ups any different? Technology, for starters. Wireless communications in particular promise to make car sharing more convenient. Today CSO members must return cars to their original parking areas. But imagine a system in which car sharers could track vehicles electronically, view the CSO's entire fleet on portable devices, and even reserve the nearest vehicle. In that world, the founders believe, car sharing would be a lot more convenient and be done more frequently than it is now, making profits far easier to come by.

But if the urban landscape is so fertile for car sharing, why haven't the big-name car-rental companies started plowing? Well, one of them has. Last May, Hertz opened a "shared-car" program in San Francisco, in which, for less than $400 a month, a "subscriber" can make use of a fleet of Ford Escorts parked at a rapid-transit station. While other major rental agencies have yet to launch pilot programs, they're certainly watching the field closely. Transportation consultant C. Kenneth Orski says the big guys won't hesitate to enter the market if it proves lucrative.

First off the line
When David Brook tapped his retirement savings to start CarSharing Portland Inc. (CSP), his first decision was whether to go for nonprofit status. The idea appealed to him because at the time there was almost no precedent for operating a CSO as a business. A nonprofit venture had other advantages as well: tax-advantaged status and the public perception of a reduced profit motive -- something to ponder in an ecoconscious city like Portland, Oreg. Brook also wondered whether nonprofit status would give him access to foundation grants.

In the end, Brook chose to make CSP the first for-profit car-sharing business in America. Brook imagined that if CSP were a nonprofit, its board members might stymie its attempts to make expedient decisions, on the grounds that, say, increasing the size of the car fleet would be contrary to the organization's environmental mission.

Brook's agonizing about the nonprofit issue is just one of the differences between CSP and other car-sharing start-ups, which have openly declared their desire to expand into other cities. CSP, by contrast, is in no hurry. It's not that Brook doesn't recognize the opportunities in other cities. It's that he's self-financed and says he has his hands full making Portland profitable.

Plus, entering a new city isn't as simple as putting up a shingle. "We know what works here, but we don't know other cities," says Brook. A fledgling CSO must know which neighborhoods would be most receptive to car sharing, which parking spots would be most convenient, which city officials could help with parking spots or funding, and which marketing methods could best introduce a new concept to a community. Brook says he underestimated how difficult such local logistics would be. In its first year, CSP tried to serve more neighborhoods by spacing out its cars around the city. Initially, each car was as much as 20 blocks away from its closest neighbor. That spacing frustrated members, who were prohibitively far away from an alternative car if the one closest to them was already reserved.

Last year CSP had a loss of $50,000 on revenues of $200,000. Nearly a third of the expenses were for leasing cars -- $250 to $350 a month for each of 23 vehicles (mostly Saturns and Plymouth Neons). Brook chose leasing over buying to preserve cash, but he'll begin buying this year. Beyond that, he remains confident he can make CSP profitable by increasing revenues. He's formed a partnership with a local Enterprise rental agency for mutual referrals. He's also begun offering corporate memberships to local businesses so they can save on travel reimbursement.

Rapid transit
"We are going to transform urban transportation," says Robin Chase, CEO of Zipcar, a Boston start-up that's been running since last June. Zipcar's cofounder, Antje Danielson, proposed the idea to Chase in September 1999. Danielson had encountered car sharing on a trip to Germany. As residents of the bustling city of Cambridge, across the river from Boston, the pair immediately recognized the potential for car sharing in their area.

Like many European cities, Boston has precious little parking but a solid mass-transit system. Chase believed the Boston area was ideal for creating a network of vehicles in proximity to frequently used transit stops. She also believed that the area's population -- replete with students, liberals, and high-tech workers -- would embrace the new environmentally friendly concept.

Chase, 42, has an M.B.A. from the MIT Sloan School of Management, and her financial training showed in the way she planned Zipcar's launch. Aware of the car-sharing movement's history of unprofitability, she completed a business plan that calculated to the penny how Zipcar would make money. She concluded, for example, that a Zipcar location could break even if it had 70 cars averaging six hours of daily use. Zipcar has already reached the six-hour average on its fleet of 27 Volkswagens. Chase believes Boston will break even -- which is to say, reach 70 cars -- by this spring.

Chase's business education is also evident in two of her early decisions: to pursue millions in outside funding before year two and to invest up front in the technology that would help the company grow. So far, she's raised $1.3 million, of which $300,000 has gone to build a Web-based system for reserving and tracking the vehicles. Chase thinks the system gives her a "9-to-12-month technology lead" on her U.S. CSO counterparts, none of which has an up-and-running Web system yet.

Despite the company's big Web-site investment, Zipcar customers still have to fill out paper logs so that the company can track their vehicle usage. In that regard, Zipcar is no different from other CSOs. But Chase hopes that won't be the case for long. In the works, she says, is a system that will wirelessly transmit vehicle-usage information from a car's clock and odometer to Zipcar's billing system.

Zipcar customers pay a $75 annual fee, a $25 application fee, and a $300 security deposit. The company then sends users monthly bills for mileage (at 40¢ a mile) and usage time, at hourly rates of from $4.50 to $7, depending on the car type and location. Zipcar's prices are easily the highest among the industry's start-ups, which is partly attributable to the company's pricey Boston locale. Nonetheless, other start-ups admit that Zipcar's success has prompted them to reconsider their rates. "Most of us have priced it to get folks to join, and we've done it too low," confesses Kevin McLaughlin, cofounder of AutoShare, in Toronto, and keeper of www.carsharing.net, a site devoted to the nascent industry.

Since its opening, Zipcar has added roughly 25 members a week. Most customers hear about the service through local press or word of mouth. As a result, marketing expenses have been minimal. The biggest costs have been cars, insurance, and staff. Zipcar has 10 full-timers in its Boston headquarters but plans to open in each new city with only 5 people. Chase believes that such a quintet -- consisting of a regional director, an office manager, and one person each for marketing, customer service, and parking-spot acquisition -- can manage a 70-vehicle fleet in any city.

Chase is looking to raise an additional $5 million to help the company expand beyond Boston. Destination #2? Washington, D.C., to open this spring, with New York City on deck as a possible next target. But recruiting and securing parking in new markets may be tough. For one thing, city officials may prefer to deal with either established car-rental companies or regional nonprofits. Last year, for example, nonprofit car-sharing groups that debuted in Chicago and San Francisco secured more than $500,000 each in government funding.

If the car-rental giants decide to enter the CSO space, Zipcar's head start would provide some competitive advantages, Chase believes. "We'll have the long-term relationships with members," she notes, and expertise in managing a dispersed fleet of hourly drivers -- something that the rental agencies don't have. If the Hertzes of the world do invade the market, what's her best-case scenario? That the big guys would rather buy than build.

Ilan Mochari is a reporter at Inc.


Country club

It's easy for city dwellers to see the benefits of car sharing. But what if you live in the country?

Neighbors Bob Otwell and Sharon Flesher cofounded CarSharing Traverse Inc. a year ago in Traverse City, Mich., a rural community (population, 15,000) surrounded by rolling hills and cherry orchards. Otwell and Flesher have made it their mission to rid their community of extraneous vehicles.

Both of them had made the same observation: in Traverse City, walking is often an option. The town covers about eight square miles; the downtown area is concentrated in a tight six-block-long area. But since many residents own cars (for the occasional downstate drive to bigger cities or the airport), they tend to use them for shorter trips, too.

In major cities, where owning a car can cost a fortune, car-sharing businesses try to appeal to customers' wallets. In Traverse City, where parking is plentiful and insurance is relatively cheap, Otwell and Flesher are appealing to customers on an ideological level: Simplify your life. Keep our town clean.

So far CarSharing Traverse has 22 members who share three cars. The founders hope one day to put vehicles within a five-minute walk of any resident, which they figure would require about 15 cars. However, since the business is recording a small loss on first-year sales of $10,000, the cofounders have yet to quit their day jobs. --I.M.


Q&A

Will car sharing stall?

As first movers, the current crop of car-sharing start-ups have a huge jump on securing parking spots and member relationships in their given communities. But will that be enough when they're facing potential competition from billion-dollar rental companies? C. Kenneth Orski, transportation consultant and founder of Urban Mobility Corp., in Washington, D.C., has been reporting on trends in U.S. transportation since 1991 in his newsletter, Innovation Briefs. Inc. asked Orski for his take on car sharing.

Inc.: Can car sharing work in America?

Orski: Yes, on a limited scale. It won't be a mass phenomenon. It certainly works in communities where there are dedicated environmentalists. In places where car sharing would be based more on economics than ideology, places like Manhattan and San Francisco, I could see it bloom or at least be a sound economic proposition. But the question is, Could you actually run a car-share there? Where would you store those vehicles, and how much would you pay to store them?

Inc.: Why is all the start-up action happening now, as opposed to five years ago?

Orski: I wouldn't attribute the start-up action to changing economics. The relative cost of owning a vehicle is not higher -- it could even be lower -- than it was then. Correspondingly, the relative cost of offering customers shared vehicles is no cheaper today than it was five years ago. I think the car-sharing concept spread to America simply through word of mouth. As the concept grew in Europe, then in Canada, more American travelers and transportation experts wondered if it could work here.

Inc.: Are the car-rental giants and automakers paying attention?

Orski: The rental people are watching it much more carefully than carmakers are. I suspect that if the rental agencies see car sharing taking off, they'll move in and establish neighborhood-based rental outlets. They're watching -- quite carefully.


Please e-mail your comments to editors@inc.com.

Last updated: Feb 1, 2001




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