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Lynk and Co 1 Solves The Wrong Problem

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October 27th, 2016

On 20 October Lynk and Co introduced its 1 SUV, with the help of which the company hopes to establish a presence in the US car market. The joint venture between Volvo AB and Zhejiang Geely Holding Group Co Ltd intends to target the coveted urban millennial demographic with a technology-focused, affordably-priced line of vehicles, starting with the Lynk and Co 1 SUV. The company’s self-defined goal is to become the smartphone of cars, with a direct-to-consumer sales model with a limited number of configurations available, online purchase options, including a subscription model, as well as constant internet and smartphone connectivity. Lynk and Co is built around a number of innovative ideas, but with significant shortcomings that will likely prove to be the brand’s undoing.

Target market

Lynk and Co is starting with an SUV, a safe choice given that SUVs have been and are expected to remain the key sales driver in the global and US car markets. In the US, sales of SUVs totalled almost six million units in 2015, and by 2020 annual sales are expected to reach nearly 7.7 million units. Under this scenario, sales of SUVs will account for 41% of light vehicle sales by 2020, constituting a seven percentage point increase in market penetration over 2015.

The main audience for the Lynk and Co 1 is the urban millennial, especially those who currently do not own cars. The company’s marketing strategy suggests that the main reason urban millennials own fewer cars is that they are far more interested in communication technology and online experiences and the car culture of old is no longer appealing. Our latest research paints a different picture: motorisation levels in urban centres in the US are far more dependent on income levels than any other factor. Looking at data from 350 cities across the US, we see the highest levels of car ownership in rich cities like Los Angeles with 1.9 cars per household, and San Francisco and Miami with 1.7, while less wealthy urban areas like Saginaw (Michigan), Jackson (Mississippi) and New Orleans (Louisiana) average about 0.7 cars per household.

High education debt load exacerbates budgetary constraints for millennial consumers in urban areas. In 2015, outstanding balances on education lending in the US reached almost US$1.4 trillion, higher than outstanding balances on both auto and card lending. Education debt is held overwhelmingly by Lynk and Co’s main target audience. This audience is likely to prioritise technology and innovation aimed at minimising the costs of vehicle ownership, over connectivity features.

Shaky fundamentals

The focus on connectivity exacerbates budgetary constraints facing the target audience. Communication technology is still evolving rapidly, increasing the probability that in-car systems will become outdated before the end of the lifespan of the vehicle. With connectivity and related technology as the centrepiece of the vehicle’s value proposition, the resale value plummets rapidly as newer technologies emerge. The current business model does little to address this issue.

Less is more

Incorporating an increasing number of connectivity features into cars has been the central theme for car makers as they are targeting increasingly tech-savvy consumers. But a counter trend has been developing: growing demand for out-of-the-box enthusiast cars with no or limited in-car entertainment options. The trend has been evident in the US used car market for years: rapidly rising prices for air-cooled Porsche 911s, W116, W123, W126 Mercedes diesels, BMW’s E30-series M3s, manual transmission-equipped Lexus IS300s and so on. In the new car market the trend has been behind the popularity of models like the Ford Focus RS. In the premium segment of the market Mercedes-Benz has seen strong demand for the AMG Black Series and 2016 saw the release of BMW’s M4 GTS, and the Mercedes G350D Professional, which take both model lines closer to their origins in terms of use case by minimising the use of connected technology, instead focusing on performance, and while the cost of these particular models will keep sales low, there is significant pent-up demand for simplicity in the modern car market.

Urban millennials are already surrounded by communication technology and have an increasingly utilitarian view of cars. Volvo has had success with this concept with its 240 series, many of which are still on the road today. Applying the same concept to a modern SUV cross-over design: a simple, efficient, reliable, long-lasting vehicle, with cross-over-like passenger and cargo capacity, combined with internet-age innovations like direct-to-consumer and subscription sales models, has far more potential to disrupt the car market than a marketing-heavy smartphone on wheels.

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Mykola Golovko

With a degree in Economics Mykola Golovko is the senior Toys and Games analyst at Euromonitor International. Having previously worked in a similar capacity within consumer electronics, Mykola is driving the analysis of the rising influence of technology on the global toys and games market.