The complex web of technologies, industries, and behaviors that has developed around driving, car ownership, road building and car assembly is deeply embedded in all economies. While the automotive sector is mature, it is not obsolete. There is still scope for more technological and business model innovation.
As Machina Research’s new strategy report “Carmakers’ Strategies for the Connected Car” shows, the advent of the connected car is part of that innovation, and in that sense it is a component of the OEM’s survival strategies. It is remarkable how small has been the impact of the Internet on the car industry to date. Whereas other big sectors such as telecoms, entertainment, retail and tourism have been thoroughly disrupted, the car industry’s products and business models would be recognizable to a time traveler from the 1950s.
But the Internet is now beginning to disrupt the value chains that link the car industry to its ancillary services and suppliers. Services which were once provided by the OEMs and their tied dealers are increasingly being provided by dedicated horizontal or specialist players; Openbay, and the car finance specialist Zuto. com are examples of this.
OEMs should be careful what they wish for
OEMs plan to add connectivity to vehicles in order to increase their revenues and reduce their costs. But, it is entirely possible that others players will benefit more than they will. This is what has happened in other sectors when the Internet disrupted them. The chief beneficiaries might be “Over the Top” (OTT) service providers like Moj.io, OS players like Apple and Google, and new internet-based automotive parts and service providers.
It is likely, too, that some OEMs will be winners and others will be losers. The advent of connectivity is likely to accelerate the trend toward consolidation, as those players who cannot sustain the level of investment needed to engage with the software and platforms required for connected services either fall by the wayside or become builders of commodity hardware products. The latter is what happened to most PC manufacturers, and is now happening to most smartphone manufacturers.
In both industries one company – Apple – stands out as the glaring exception to this trend. Perhaps the Apple of the automotive world will also be Apple, though we think this is unlikely. So OEMs need to steer a tricky course. They argue that they are the valued lifestyle brand with which their customers most identify, but they also know that they cannot afford to insist that the latter stop using their preferred smartphones when they get into their vehicles.
Naturally, they wish to avoid a future in which they are relegated to manufacturers of increasingly commoditized hardware, with software and services provided by a third party. The acquisition of Nokia’s mapping and navigation services business Here by three German OEMs in August 2015 is an indication that the car makers do not intend to just lie down and become doormats for the IT industry.
Their freedom to maneuver depends in part on their strategy for embedded connectivity. Machina Research believes that an increasing proportion of passenger vehicles will feature a built-in vehicle platform with its own embedded connectivity; over 80% of new vehicles will have factory-fitted connections by 2024, by which time there will be almost 624 million vehicles on the roads with such a connection.
However, OEMs mostly do not propose to connect all of their models at once, but to roll out embedded vehicle platforms through their ranges, from the top down. Where there is no embedded connectivity, projection mode is attractive as a quick fix to provide connected services. Conversely, where there is an embedded platform the OEM can consider pursuing a different strategy for infotainment and navigation services. It can also emphasize the superiority of built-in connectivity over a brought-in tablet or smartphone, and itself offer smartphone applications that include telematics services like remote heating control and door locking.
Where there is embedded connectivity and a built-in platform the OEM has the option of trying to retain control of the UI and the ecosystem. BMW’s Connected Drive is probably the clearest illustration of this. It specifies the look and feel of the system and maintains its own app store, which is used to provide system configuration and add-ons beyond the most basic features.
Some OEMs have aligned themselves with the Connected Car Consortium and its MirrorLink standard, a lineal descendant of Nokia’s Terminal Mode project to develop an open projection mode protocol not tied to any specific smartphone OS or ecosystem. In practice, though, MirrorLink seems to work only with Android devices, and most OEMs have chosen to implement it alongside Android Auto and/or Apple’s CarPlay in their vehicles. Almost no OEMs have put all their eggs in the MirrorLink basket.
There can be little doubt that the major consumer technology platforms (mainly Apple and Google) will become an increasingly important part of the connected car service value chain. Automotive OEMs have been accustomed to being the center of their own universe, with their peer competitors the ones to watch. Their relationship with IT, software and electronics companies to date has been primarily one of buyer-supplier in which they have had most of the power. This will not be the case with either Apple or Google, whose dominance in the customers’ connected lives and devices means that they will be able to set their own terms.
We think it is unlikely that either Apple or Google will become major car makers. By the metrics by which they measure themselves building and selling cars is not a good business. They may make small forays into this area in order to increase their understanding of how the market works, but we do not think that many people will be driving an Apple or a Google car (or being driven by one) in five or even 10 years’ time.
Instead, Apple and Google will aim to become the main prism through which customers experience connected car services, and thereby to insert themselves into the value chain for car related services such as insurance comparison, after-market parts and services, advertising and promotions, infotainment and navigation services.
OEMs will resist this more or less successfully, depending in part on the strength of their relationship with their customers and their ability to engage with the world of software and platforms. But they can ignore it at their peril.