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."

Profile

More news on

×

Four ways digitalisation is transforming car brands and dealers

16 April 2019 Consultancy.uk

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”