The growing pervasiveness of connectivity is putting traditional vehicle manufacturers at risk of being disrupted and marginalised unless they act fast to defend their businesses.
The big question facing the industry is, who will get to redefine cars? Will it be the traditional manufacturers, or new entrants who have spotted what they believe to be an exciting growth opportunity?
OEMs: get connected, or step aside
One thing that is very clear is that if traditional automotive OEMs want to remain at the vanguard of their industry, then they don’t have the luxury of time on their side.
Indeed, vehicle connectivity is already expanding rapidly. In 2015, 35% of new cars sold will be connected; by 2020, that rises to 98%, and to 100% by 2025.
This trend poses several challenges for the OEMs.
Research from Accenture suggests that even though vehicle connectivity is much desired by customers, they’re not necessarily willing to pay more for it. In the meantime, they expect their connected devices, such as tablets, to work seamlessly within their vehicles
Responding to those rising expectations means OEMs will have to provide increasingly sophisticated options. These must match or exceed those offered by manufacturers of handheld devices.
But crucially, vehicle manufacturers cannot continue to do this from just their in-house resources as they’re doing now. They’re up against technology companies, which are driven by rapid development and release cycles with new features and services coming out in months, rather than years.
The need for connectivity-based ecosystems
Attempting ‘a go it alone’ strategy could see vehicle manufacturers shunted into the slow lane as vehicles become increasingly defined by the convergence of powerful connected ecosystems. These will be made up of many different types of partnerships involving OEMs, technology giants, telecommunications companies, start-ups and after-market service providers.
Automotive OEMs should work within these ecosystems to efficiently deliver superior solutions. These include vehicle-related functionality bundles associated with services, such as assistance, remote access and navigation. It’s an opportunity for automotive OEMs to leverage their strategic strength in deep vehicle integration.
At the same time, they need to integrate non-vehicle-related services hosted on handheld devices. Both functionalities mostly rely on different connectivity modes.
The first will revolve around fully embedded solutions, whilst the other will mainly operate via handheld intelligence and connectivity. But both must seamlessly integrate into the vehicle’s HMI (Human Machine Interface) and optimise the use of large embedded head units, push/touch controllers, and vehicle audio systems for both input and output.
Ensuring that automotive OEMs retain a significant slice of the profits from vehicle manufacturing will require considerable investment in connectivity technologies.
Fortunately, there happens to be big potential in this area for new revenues. Accenture estimates that the total business value of connected car services will reach €100bn (US$109bn) by 2020, rising to €500bn by 2025. Each individual fully connected car, assuming heavy usage, could deliver a further €5,000 in value over its lifetime.
For vehicle manufacturers to avoid losing control over this new ecosystem will require working out how to exploit the potential of connectivity and other related technologies. That process starts by identifying and assessing the sources of value.
The strategic importance of the head unit
The most prominent piece of hardware is the head unit, which is crucial to vehicle connectivity and commands a price premium. But thanks to competitive pressures from handheld devices, prices will decline. At the moment, premium pricing strategies tend to involve loading up the head unit with additional features.
The problem with this approach is that increasingly smart handheld devices are turning head units into ‘dumb’ screens merely to display their content.
To offset this trend, OEMs need to steadily lower the price point to make it easier for customers to access additional connectivity features. This may well diminish the value of the head unit over time, but it will create an opening for new sources of value.
As OEMs offer more services, and customer acceptance and usage of them grows, significant revenue opportunities will emerge. Another plus is that, given these services will be sold directly to purchasers, vehicle manufacturers will be able to gain significant additional insights into customer usage behaviour as well as create direct marketing opportunities.
As connectivity becomes integral to vehicle functionality it will create a whole host of new business models and revenue streams. Providing business partners with fee-based access to customer data will be a compelling opportunity to create new revenue streams.
For example, ‘pay-how-you-drive’ insurance products will rely heavily on access to data from the OEM’s installed telematics, enabling pricing based on driver behaviour.
In turn, a deeper understanding of driving behaviour can lead to better product development and even new marketing opportunities, which can either complement or replace dedicated market research.
Also, aggregated data could be offered to external vendors where driving behaviour and mobility are relevant. For instance, an analysis of traffic flows could help retailers find the best locations for their stores.
OEMs conceptually understand the use of vehicle-generated data to cross-sell complimentary products and services, especially those with an after-sales element.
And there’s already been a move in that direction: many of the latest connected car models anticipate maintenance needs and inform the driver’s preferred garage to schedule a service appointment, which generates significant after sales revenue.
Build sales solutions around data opt-in
The challenge is that many of these business models require customers to opt-in to allow their data to be used. However, OEMs have yet to provide strong enough incentives to get customers to do this.
An innovative solution could be to sell vehicle options, which rely on connectivity, but are stand-alone features. This could be connected autopilot functionality, for example.
This type of solution should be kept separate from the general connectivity package, to avoid being mistaken as just another free feature that comes with the head unit. Value should be highlighted and positioned to ensure such solutions can be priced independently.
So far, vehicle manufacturers have – in the main – shown reluctance to make full use of connectivity to update or upgrade vehicles once they’re out of the factory. Accenture expects that unwillingness to steadily ebb away as functionality-based opportunities gain wider acceptance across the industry.
OEMs could capitalise on this trend by deploying a mixture of free and chargeable upgrades designed to bring new functionality to the vehicle.
Given the different skill sets and technologies involved in delivering all these services, it would be a mistake for OEMs to try to maximise the revenue potential of these opportunities on their own.
OEMs need to ensure their dominance of the vehicle platform and retain direct access to customer data to support new data-driven business models. Such an approach will help fend off the tech giants looking to use their handheld devices and apps as a Trojan horse to gaining customer mobility data.
If OEMs are going to maximise the value of connected car solutions, they need to rethink their operating models to incorporate business, IT and open connection into the entire connectivity ecosystem.
In turn, a connectivity-driven approach should engender greater flexibility, allowing OEMs to respond quickly to rapidly evolving market trends. This would enable them to test new ideas to ascertain their market potential, and to partner with other organisations with a view to developing new offerings. This change should be led by a small dedicated unit with a strategic focus and given access to competences across the organisation. It needs to combine cross-functional skills, which are integrated across the major geographies.
This shifts vehicle connectivity to the centre of corporate strategy and leads to a focus on delivering products and services relevant to local markets.
Executing on this strategy will require new skills, particularly in software development, so as to create connected car services and to manage customer relationships.
This needs to be backed up by lean and highly efficient processes dedicated to open innovation so as to keep up with increasingly shorter product cycles and customer demand for frequent innovations.
And lastly, from the technology angle, it’s essential to have an open technology architecture with standardised APIs so a seamless integration of third party services and apps can take place. This supports the big data, analytics and cloud technologies, which are crucial ingredients for creating data-driven services.
Embrace connectivity to succeed
There’s no doubt that connectivity is a game-changer for the automotive industry. The challenge now is how OEMs can effectively use this development to defend their leading position in the automotive value chain.
This dovetails with the need for OEMs to recognise that connectivity is much more than just a simple option, but has very fundamental strategic implications.
Turning connectivity into a compelling business proposition requires rethinking operating models and developing a new mind-set and culture across the entire organisation.
The jury is still out on who the eventual victors will be in terms of leading the car industry, whether it be the traditional automotive OEMs or the technology giants.
But there is a growing urgency to act: the car industry is up against very well resourced and ambitious tech giants, which view the ‘connected car’ as a natural extension of their ‘connected life’ market strategies.
This article is part of an exclusive Automotive World report on connected cars. Follow this link to download a copy of ‘Special report: Connected cars‘
