Last week Hertz struck an extensive partnership with Tesla. At least until Elon got on the Twitters and did what he does best. Either way, it looks like it’s going to happen. And it’s going to be big. Hertz agreed to buy 100K Teslas for $4.5B. They also signed a deal with Uber to make many of those Teslas available to rent for Uber drivers. And lastly, they struck a deal with Carvana to offload all the old Ford Tauruses inside their fleet.
This is brilliant for many reasons, and not only because we predicted it in the book “Embracing Irrationality.” As the seven of you who read the book will remember, we posited that rental car companies would become obsolete if they didn’t adapt their business models before autonomous cars do it for them.
Our recommendation was to remove the constants, or core beliefs, that plague the car rental industry. The biggest false constant is the belief that rental companies must own and rent a fleet of vehicles to make money. I believe rental companies need to embrace a larger, more irrational vision. Instead of sticking to the status quo (i.e., going bankrupt), what if they reinvisioned their companies based on what they actually do best? What do they do best? It’s not renting cars. It’s managing fleets of cars. In the case of Hertz, a fleet of 400,000+ to be exact. The fact that these companies can service, reposition, clean and deliver these cars to exactly where consumers want them (even your driveway), all in working order and without french fries in the seats is no small feat. But that capability means so much more in a world full of autonomous cars. Even though autonomous cars drive themselves, they are still going to need to be serviced, cleaned and managed. Wait, who is the best at that? Rental car companies. Why couldn’t a company like Hertz become the operating system for massive fleets of autonomous cars? Last week they took three big steps in that direction.
1. I’ll Take 100,000 Teslas, Please
Buying 100,000 Teslas sounds like something Jeff Bezos would do as part of a midlife crisis. But Hertz went all in and did just that. This may go down as the single biggest move ever made by a company who was bankrupt just four months ago. But what it signals is that their new CEO, Mark Fields, is taking the company in a new direction. What better way to telegraph change than forming an alliance with the most innovative company in the world? Spoiler: there isn’t one. And he sprung for Tom Brady. But why is this interesting? Tesla is the hands down favorite to be the first large scale autonomous car company. And they are focused on continuously upgrading the software in their vehicles to the point where they will eventually flip a switch and those cars will drive themselves. When that happens, who will own the largest fleet of autonomous cars in the world? Not Tesla. Hertz. Think about it. After a year of this partnership, no company will have a better understanding of how to manage a fleet of Teslas than Hertz. Not even Tesla. And the second they flip the switch and make those cars autonomous, Hertz is miles ahead.
2. Uber Me Bro
What if Travis Kalanik and Elon Musk got married and Mark Fields was the officiant? Well, what happened last week was absolutely nothing like that but it’s an interesting thought. More interesting is what Hertz actually did with Uber. Hertz and Uber are partnering to make 50,000 Teslas available to Uber drivers to rent. So if you need a car to drive for Uber, you can now rent a Tesla from Hertz for $334 a week. I like this for many reasons. First, Hertz gets an immediate new revenue stream from Uber drivers, which is nice when you just came out of bankruptcy and spent $4 billion. Second, because they are such a differentiated product, Uber drivers will likely be able to charge more for each ride when they pick you up in a Tesla. I for one would pay more to be picked up in a Model 3 than a Kia. Which means if I’m an Uber driver, I’m definitely considering a Tesla in my immediate future. And the only place I can rent one easily is…Hertz.
3. Anyone Want A Used Neon Yellow Corvette?
You know the one I’m talking about. The one they offer you at the rental counter as an upgrade to your Corolla? Well, at some point, Hertz has to offload that car. And their new partnership with Carvana makes that a lot easier. Hertz and other rental companies typically hold their cars for two years and then sell them to refresh their fleet. But it takes a lot of time and people to manage the process. By partnering with Carvana they can offload those cars faster, with little to no staff. While they may take a hit on margins, having to give Carvana a cut, faster sales with fewer people means they can remain as profitable. But more importantly, this move pushes Hertz closer towards the irrational vision we talked about earlier. Selling cars isn’t their future. Managing fleets is. As those fleets become more electric (read: fewer parts to break) and more autonomous, they will be on the road longer. Which means selling cars becomes less important than managing a fleet of them.
Overall, these were three irrationally brilliant moves and they show that Hertz is starting to think in a different way. And I think it’s going to pay off.