OEMs need to move fast in heating automotive connectivity market

06 October 2016 Consultancy.uk

Connected cars are on the horizon, providing users with a range of additional functionalities and entertainment features, while creating a host of new revenue streams for a range of vendors, from OEMs to third parties. The kinds of connectivity available is relatively broad, however, and a new report highlights that one solution, the OBE interfacing dongle, is likely to rapidly penetrate the market. Given the ‘lock-in’ effect of the solution, OEMs and third parties will need to move fast to capture market share.

The connected car has been projected to grow to €122 billion in value by 2021, with the number of vehicles leveraging some form of connectivity solution projected to hit $100 million by 2020. Questions about the best and most effective way to bring connectivity to cars, however, has recently come under scrutiny from Roland Berger in a new report titled ‘Connected car App based dongle solution as shortcut to connectivity’.

Overview of connectivity solutions

Car connectivity comes in a number of formats, each of which provides different levels of function to different market segments at varying costs. Some connectivity systems, such as solely app based solutions just using a smartphone, can cost less than €5 but are not integrated with the car itself and provide a limited range of services (like GPS tracking and micro-billing). More sophisticated, cigarette lighter based solutions, also using apps, provide slightly more functionality, adding speed control, accident recognition and braking behaviour, and come in at less than €30.

More sophisticated solutions use the car’s OBE diagnostic port. This port allows applications to interface with the on-board diagnostic system of a vehicle, through which additional information and statues can be accessed, allowing for broader functionality. One such solution is the app based dongle, which is a (relatively) fixed install. The solution costs between €10 - €150 and provides for a range of uses, and is targeted at both B2C and B2B customers. A similar, but less versatile solution is the blackbox.

The most sophisticated solution, but also by far the most expensive, are propriety solutions. These cost vary between €2,000 and €3,000, but provide a broad range of features above that of the dongle and blackbox, including entertainment and personalised services.

Selected use case scenarios

According to Roland Berger’s analysis, OEMs are at risk of losing their market position in connectivity due to the proposition at very low costs, offered by OBE dongle solutions. Major reasons for concern for OEMs are that: the dongle solution is compatible with OBE ports from car models as far back as 1996, they are technically feasible and data is available for different players supported by current legislation, they are solutions brand independent and are compatible across brands, they are relatively cheap, they connect to users’ mobile phones thereby providing familiarity, and they are enabled in all relevant use cases for B2C and B2B customers.

"A dongle is simply plugged in to the standardised vehicle diagnosis port (OBD II). Nearly 94 percent of cars in Germany already have such a port. Some automakers are charging thousands of euros for their integrated connectivity features, plus annual usage fees on top," says Jan-Philipp Hasenberg, Partner at Roland Berger. “That is much, much more than today’s car owners are willing to pay,” he adds.

Penetration of built-in/retrofit connectivity solutionsThe consultancy firm projects that, given the relative low cost and ease of use, particularly with respect to OEM full service packages, dongle devices are likely to pick up significantly in terms of market penetration over the next decade, growing at CAGR 19.6% to a total ~30% market share by 2020. This means that dongles are likely to be fitted and retrofitted into 100 million cars by 2021 while propriety fitted systems will feature in 82 million cars.

Lock-in effect of connectivity solutions

According to the firm, the market for OBE dongles is currently wide open, however, once users select dongles produced by a particular brand, it is unlikely that they will thereafter switch brands and are therefore ‘locked-in’ – in so far as cars only feature one OBE port and that fitting a dongle and the wider services ecosystem around dongles, means that there will be little, if any, incentive for users to change provider.

OEMs risk is, according to the firm, losing connectivity market share to cross-border activity from large technology players, such as Google, which, for instance, is able to leverage the considerable market penetration of its Android operating system to offer users with an easy dongle related solution through which it may be able to quickly take over the market.

5 steps for OEMs

Given the potential for third parties to quickly penetrate the connectivity car market with third party solutions, and thereby block OEM solutions and appetite for more expensive proprietary fitted connectivity solutions, the firm suggests a number of steps they can take to protect market share. One option is to enter into partnerships with third party providers to create additional value propositions to customers. Another option is to create their own app based dongle solution and fit it as part of the basic service related to new cars – thereby blocking the OBE port and decreasing the likelihood of a third party provider gaining market share. An additional route is to capture current non-fitted fleets with dongles through the repair shop network. Further means are to leverage vehicle data in order to create propositions aside from those that can be provided by third party operators.

As Grosse Kleimann, Partner at Roland Berger, explains, "In the medium-term perspective we can expect to see more and more market share going to whichever providers are able to persuade the most customers to buy their connectivity solutions. Once a provider achieves critical mass, that creates a lock-in effect and the system becomes the market standard. But at this point in time, no one knows precisely which industry these providers are going to come from."

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