Demand for connectivity is changing the structure of traditional automotive supplier relationships. The need for new digital technologies is causing automakers to seek out new partnerships and collaborations with technical solution providers. Automakers and digital solution providers face the double challenge of improving the customer’s driving experience, as they secure a share of connectivity’s growing revenue potential.
Connectivity is more than in-car entertainment services and internet connection; it also has a strong focus on expanding functions of current infotainment and safety systems. Some of these features are promulgated by government regulations. For example, eCall will be mandatory for new vehicles in the EU from 2018.
A rapidly evolving sector covering software development, data management, telecommunication, user-interface systems attracts players of all sizes, looking to add technical knowledge and accelerate the creation of new technologies. Fast-increasing demand for connectivity solutions requires top-level software skills from OEMs and has led to a wave of rapid acquisitions. Some automakers have leaned toward small companies and start-ups for these solutions rather than traditional suppliers to enhance their connectivity and mobility leadership. For example, Renault-Nissan acquired French software development company, Sylpheo, to bridge a perceived gap in connectivity technologies. Audi subsidised a small Irish company, Cubic Telecom, a provider of in-car connectivity solutions. BMW, Audi, and Mercedes-Benz jointly invested in Here, a supplier of mapping systems for navigation to prevent it from being acquired by a competitor.
Another good example of integrating a new player into automotive industry is Unreal Engine Enterprise, a company developing video games and technologies for visualization and simulation projects. They are now working on projects with Jaguar, BMW, McLaren Automotive and Toyota’s Australian unit.
Multinational suppliers, such as Bosch, Samsung, Intel, and Valeo, estimate the revenue-generating potential of the connected services in billions of euros and expect to have a substantial share of this business. A three-way partnership between BMW, Intel, and Mobileye, developing automated driving technology, demonstrates the shift in the traditional automaker-supplier relationships that is leading to a changing revenue model, in which an increasing number of players will participate.
New competitors entering the automotive market, such as Apple and Google, are accelerating the technology development cycle, placing greater pressure on traditional players.
Challenges and risks
Changes in the automotive industry and consumer preferences create new revenue opportunities and, at the same time, present challenges for automakers. OEMs, which do not adapt to these changes, risk losing a share of profitability to new entrants. However, significant investments and potential new partnerships in a highly competitive market require a delicate balance and clear strategy designed to be responsive to new technologies. We believe that there is still no industry consensus regarding the future of connectivity, currently impeding the development of efficient strategies.
The hot topic of autonomous cars has caught consumer attention. However, the challenges, such as the limitations of sensor capability and developing software, which reacts to the environment as a human would, still exist. As a result of the complexity of technological challenges, more collaborations and partnerships are needed on a global scale.
The sensitivity of data privacy and data security is another deep concern for consumers. Automakers have to invest in the correct infrastructure and data security systems to ensure data privacy and protect consumers from the threat of hacking of their personal and vehicle-related data.
Need for clear strategies
Automakers already offer various portfolios of connected services, including advanced navigation systems, safety, and infotainment services, to make driving more pleasurable and respond to what customers want. Nevertheless, DAT’s current surveys show that customer awareness of the benefits of connected services is low. Increasing awareness is an important step for automakers, suppliers, and emerging connectivity players to secure new revenues and to improve the profitability of these features. It is especially important in used car markets as used car buyers tend to be more price sensitive than new car buyers. Remarketing strategies must focus on building demand by helping customers understand the value of connected services.
Some connectivity features are evolving in the buyer’s mind to be part of the expected vehicle package. Many buyers increasingly consider items, such as navigation and smartphone integration, as standard features. The absence of basic connectivity features may lengthen the time it takes to remarket a vehicle. This tendency suggests that buyers see connectivity as desirable. However, their propensity to spend their money on such features is yet unclear, requiring OEMs to actively market connected services in a much more focused way.
Since electronics have short life cycles, achieving and maintaining leadership in delivering connectivity solutions requires flexible system-level solutions. Adjusting vehicle product lifecycle to the connectivity cycle is a key continuing challenge.
In this environment, companies must determine how to adapt their connectivity initiatives to fit their brand image and go-to-market strategies. The only thing that is certain at this point is that there will be continuous connectivity advancement requiring the auto industry to develop agile platforms able to absorb new technologies.