Carmakers: be careful what you wish for

Jeremy Green headshot (Machina Research)

An article by Jeremy Green, Principal Analyst at Machina Research.

“Be careful what you wish for” is a familiar trope in folk tales and fiction; a protagonist asks for something, and then has cause to regret the granted request. It’s a moral that the automotive manufacturers would do well to bear in mind as they develop their strategies for connected car services, according to Machina Research’s new Strategy Report “Carmakers’ strategies for the connected car“.

Automotive telematics is not exactly a new idea. For some years now the major carmakers have gingerly embraced connectivity as an enabler for new, value-added services. They’ve introduced such services gradually, starting at the top of their ranges and carefully working their way down to mid-price models. The intention has been to add new services like infotainment, navigation and remote control of some internal car functions like heating and door locks, either for the direct revenues that they will generate from customers or for the indirect revenues that will come from increased market share. Other looked-for benefits have included reduced costs through optimized production and design processes, over-the-air software upgrades and patches, and savings on in-warranty maintenance.
We have illustrated this landscape of opportunities in Figure 1 below.

Chart: The landscape of connected car opportunities for automotive manufacturers
Figure 1: The landscape of connected car opportunities for automotive manufacturers

Carmakers have also hoped that connectivity would help them to get closer to their customers, who buy through indirect distribution and then increasingly take their purchases elsewhere for after-sales and service. In 2015 the global aftersales market will be worth USD718bn, but only half of this market belongs to the car manufacturers and their tied dealers. In Germany this share is already as low as 35%, and the trend is for it to fall by 5% annually. Moreover, the OEMs lose 80% of customers within three years of the end of the warranty period.

All of these opportunities are of course real, and the carmakers have taken some significant steps towards realising them. But they also need to recognize that connectivity has the potential to disrupt the car industry as it exists today, bringing threats as well as opportunities.

Connectivity enables and encourages new entrants from outside the industry. Tesla, a striking innovator in terms of product and business model, is the most obvious example but there are also persistent rumours that Google and Apple will enter the market directly.

Connected car services can also level the playing field between premium and mid-range models. Instead of the ‘look and feel’ of the infotainment system becoming a differentiator for the OEM, all cars can have the same look and feel, and the same applications and content. This applies between brands and models; even the most basic car can have the same UI and the same services as a premium vehicle. Tata Motors’ decision to offer its entry-level Tata Nano with a built-in Android based infotainment system illustrates this perfectly; the Nano is explicitly aimed at Indians who until now have relied on a scooter to transport themselves and their family. The Mahindra XUV500 SUV, a premium model in the Indian market, will also be shipped with an Android-based infotainment system.

Connectivity facilitates cars-as-a-service. Several of the major carmakers are treating this as another opportunity to enter a new market, but there is evidence to suggest that car sharing services dampen demand for car purchasers. While it’s not hard to see why the automotive brands are following each other into this space, it looks a little like turkeys seeking to bring about an early Christmas.

Connectivity allows new entrants into the after-sales and services markets, already under pressure from new third party entrants, some of them more web-savvy like Openbay and Autozone. Moreover, the big OS players like Apple and Google want to control those hoped-for new revenues. Google in particular is not developing Android Auto as an act of benevolence towards drivers, but as a way of becoming an intermediary between drivers and auto-related markets – and dis-establishing the automotive manufacturer from this role.

This – rather than the prospect of Google actually manufacturing its own brand of cars – may be the real nightmare scenario for the carmakers. If this is how the advent of connectivity plays out, then additional revenues from value added services will be under the control of the OS player, not the carmaker. This will apply to driver-oriented applications, context-driven advertising and promotions, and to any future marketplaces for aftermarket products and services that emerge. Google already provides its own auto insurance comparison site, since 2012 in the UK and in the US since January 2015.

Some carmakers have the brand strength, software development skills and ecosystem development abilities, and sufficiently deep pockets, to keep their distance from the lure of Apple iOS and Android Auto. Most don’t, and they need to be thinking about how they – and their connected car services – are going to work alongside the OS players’ ecosystems.

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