Trend Analysis: Connected Car 2015

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1 Consulting APP Cloud Trend Analysis: Connected Car 2015 The most important trends and challenges in vehicle telematics A study conducted by MBtech Consulting GmbH

2 Preface Management summary 3 Objective and design of study 4 Customer demand for services 5 Market development 6 Service providers: two worlds 7 Technologies 8 Overall conditions 9 Recommended actions 10 Contact 11 Ladies and Gentlemen: The mobile Internet is one of the most important trends in our society today. Media and Internet connectivity based on mobile devices such as smart phones and tablets reflects the growing demand, sparked by the Internet generation, for access to information anywhere around the globe at any time. Cars, by contrast, are an expression of individuality and a means of physical transportation. Bringing the mobile Internet into cars combines the two forms of mobility. What possibilities will this connected car open up for users and providers of vehicles and Internet-based services? What factors stand in the way of development of the connected car, and what are the possible drivers? Will these developments lead to new business models that can be put into place profitably? All of these questions form the basis for our latest trend analysis. Its goal is to create transparency, taking stock of the current situation in the development of the connected vehicle, outlining potential scenarios for 2015, and pointing to areas where action is needed. Our studies have confirmed that there is a definite trend towards connectivity in cars. Significant increases are expected in the volume of mobility-related information exchanged, the use of commercial B2B services and in-car infotainment. Creating a link between the car, its own original data, and its surroundings via the Internet will give rise to new applications and business models. The mobile Internet is about to hit the road! Yours sincerely, Ralf Bechmann Director MBtech Consulting GmbH 2

3 Management summary Starting point Automotive manufacturers all over the world are currently developing, presenting, producing, and marketing new vehicle features that enable the exchange of information with the Internet via specific interfaces, bringing the Internet into the automotive world. The marriage of cars and the Internet opens up a host of new possibilities for the entire automotive industry, providers of Internet services, and their customers. This trend analysis focuses on the trends involved in the use of these features, and on the challenges, opportunities, and risks this development entails. Market development Drivers Overall conditions Demand from customers Use of data and services Technology Realization & challenges Service providers Two worlds Key findings The volume of data exchanged and value-added services accessed via in-car Internet will rise significantly by the year 2015 there is growing demand for mobility-related information, commercial B2B services, and in-car infotainment Automotive manufacturers are launching in-car connectivity on their markets, starting with the luxury and high-end vehicle classes Connectivity in the vehicle is becoming more important in vehicles with alternative drive forms and city cars By 2015, there will probably be a great number of applications available for use in vehicles, offering intelligently combined data in user-friendly packages Automotive OEM will be responsible for providing original vehicle data and system security within vehicles Manufacturer-independent providers of services will undermine OEMs position of superiority Attractive, versatile aftermarket solutions from third-party providers will become established on the market in the medium term One key factor in ensuring and promoting acceptance of in-car connectivity will be to open up the system while maintaining the vehicle s system security 2 3

4 Objective and design of study Goals and questions This trend analysis aims to create transparency, taking stock of the current situation in the development of the connected vehicle, outlining potential scenarios for 2015, and pointing to areas where action is needed. With these objectives in mind, four questions build the core of this study: What requirements will customers have in 2015 with regard to in-car services? How will the markets develop, and how will service providers work together? How will car connectivity be realized from a technical standpoint? What overall conditions do providers need to bear in mind during this process? Study design and expert profile Executives and experts from the fields of strategy (including product strategy), development, marketing. and sales were asked about their views in a series of 20 interviews conducted between June and August The participants represent the perspectives of various groups: Automotive manufacturers and suppliers Telecom carriers, software and service providers Industry associations and research institutions Legislators The surveys were taken during personal, structured interviews. Participants were given the opportunity to make both qualitative and quantitative statements. Vehicle connectivity provided by a third-party system (smart phone) Visualization and operation Use of Internet services Vehicle connectivity provided by vehicle s own transmitter/ receiver unit Defining the connected car The connected car enables the exchange of information between the car and its surroundings via the Internet. The vehicle s connection to the Internet is provided either by a transmitter/receiver unit built into the vehicle itself, or via third-party systems such as smart phones. This transforms the vehicle into a hub of communications enabling in-car use of data and services via appropriate operating and display concepts. 4

5 Customer demand for services Demand for in-car services is primarily characterized by three factors: Relation to mobility Individualization Vehicle brand identity 95% of respondents consider the growing demand for mobility-related information to be the major factor driving the development of the connected car. Services such as enhanced navigation or traffic information are seen as highly relevant in terms of use of these functions with the quality and timeliness of the content being a major success factor. There is above-average willingness to pay for these services. This also reflects the high potential for new telematics functions in the B2B sector. Vehicle individualization is an important factor for younger drivers in particular. Young customers enthusiastic about technology want a car to function as an extension of their virtual environment, taking features such as an individual user profile, personalized services, and social media with them. Demand for services None High Vehicle manufacturers are pushing services and offers that fit the brand onto the market. Automotive OEM are pursuing car connectivity for the state-of-the-art image it conveys, with the ultimate goal of achieving strategic differentiation between themselves and the competition and earning customers loyalty. The services available range from safety enhancements through information on the vehicles surroundings to convenience services and even improved connection to individualized, customer-specific service points. One possible convenience service is infotainment, a feature that respondents view as being very important to customers. Freedom to use the Internet, by contrast, is less important, with most respondents considering it largely a basic function. In both cases, willingness to pay is no higher than with smart phones or the levels usually seen for media functions. Consumer information becomes interesting when services related to a specific location or to mobility itself are offered, such as when users drive by a certain point of interest or are offered a service with direct benefits in a certain location. On the whole, demand for vehicle connectivity is high. The technology will initially be used for OEMs strategic positioning on the market. Profitable business models are expected after that, spurred by new applications offered by various providers. Mobility-related information Commercial use/b2b Infotainment Vehicle information Internet Social media Connected living Consumer information Importance to customers Willingness to pay Core statements Demand for mobility-related information is high Data quality and timeliness are crucial success factors Willingness to pay is greatest in the B2B sector 2 5

6 Market development Development stages The path to the connected car will feature two major developments on the market. The first stage will encompass technological integration and infrastructure development. Then, building on that, we will see considerable self-driven activity emerge among various market players, such as software developers, telecommunications carriers, and platform providers, all of whom will introduce new in-car applications for various groups of users. Automotive OEM will have to decide whether to open up their own systems to these applications or continue to favor their own, proprietary applications. In line with this trend, the connected car will become established on the market over several stages or spurts of activity. Automotive manufacturers as drivers of development Luxury and high-end vehicles marketed by premium brands and trendy city cars, especially those associated with alternative drive concepts, will be at the forefront of technology and innovation. Vehicle connectivity will become the standard in high-end vehicles by the year 2015, with about 80% of vehicles in this class having these features. These vehicles will be equipped with their own transmitter/receiver units. At the same time, city cars, about 33% of which will feature connectivity, will appeal in particular to young, urban buyer groups. Connectivity in this segment will be provided by users own smart phones. The challenge for OEM in terms of this target group is to provide attractive services at the speed and quality these users are accustomed to receiving from the Internet community. Core statements Data and aftermarket as drivers of development The segment of customers who are young, tech-savvy, but less willing to pay demands low-cost, flexible solutions. The market potential for aftermarket in-car connectivity solutions is certainly interesting, at 20% of existing vehicles by Because of the limited number of interfaces to retrieve data from the car available, though, the scope of functions provided in these aftermarket solutions will probably be limited to providing services that largely do without data from the vehicle itself. As the number of attractive vehicle-related services rises, automotive manufacturers will come under pressure to ensure customer loyalty and safeguard their revenue in the aftermarket segment so that they do not lose both to third-party providers. Since development of additional applications takes place outside of the automotive lifecycle and is driven by individual business models, the aftermarket, with its focus on applications, will gain tremendous momentum after Aftermarket features are generally installed directly at OEM dealerships or at locations operated by automotive accessory specialists. Respondents believe the rate of self-installation after purchasing components at electronics stores will be low due to the complexity of the vehicle technology involved Market penetration among new vehicles 2015, by segment Automotive OEM need to position themselves in the market for telematics services one that is largely unfamiliar to them Automotive OEM and third-party providers will compete for customers and revenue in the aftermarket segment Minicompact Subcompact Compact Midsized Midluxury Luxury

7 Service providers: two worlds Scenario 1 OEM in the lead Automotive manufacturers are in control of all services based on the connected vehicles marketed under their brands. Content and applications are hosted on servers operated by the automotive OEM with access provided only via manufacturerspecific portals. All services not developed directly by the manufacturers and their partners undergo a certification and review process within the OEM s organization. The automotive manufacturers main concern system security thus remains under their control. Automotive OEM however, can hardly keep up with the rapid pace of development on the Internet, short update cycles, and the many different user profiles and applications in use. Scenario 2 the dynamism of the Internet In the year 2015, a large number of applications are available to drivers on platforms operated by service providers. These applications are developed and provided either by independent programmers or by software developers. They represent an intelligent way to combine different pieces of information from the Web, thereby generating high added value for users in their cars. Overall technological conditions, such as HTML 5, cloud computing, and high bandwidth make it possible for connected cars to be individualized with all of the features required by the user. The cloud, which provides the data and makes them available on the various devices, brings the data into cars easily and smoothly. Responsibility and ensuring system security within the vehicle are, however, open issues. Service providers Development of services Provision of services on a platform Provision of services in the car Ensuring system security Provision of transmitter unit Provision of radio link 35% 8% 13% 14% 17% 13% 32% 34% 27% 7% 32% 34% 27% 7% 76% 5% 7% 8% 4% 53% 9% 16% 8% 12% 35% 1% 56% 5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% OEM Suppliers Telecom carriers Independent platform providers Software developers Other 2 7

8 Technologies 8 Technology maturity levels The technologies involved in realizing the connected car currently exist primarily in the automotive, software, and telecommunications sectors. The biggest area where action is needed lies in the development of value creation networks and closing competency gaps among individual players, along with development of a shared understanding of the entire value chain. The risk of accidents and related damage claims makes ensuring system security especially important. Another major challenge, especially for automotive OEM is the long product development cycles currently in effect, which are diametrically opposed to the short lifecycles found in the consumer goods and telecommunications industries. This means there is great need to realize flexible architectures in connection with far-reaching standardization of interfaces for easy, smooth data integration and maintenance. These factors enable efficient use of technologies in different types of vehicles over the vehicle s entire lifecycle. In terms of providing the radio link, on the other hand, the technology gap is the dominant concern. It is already evident today that even the transmission standards that will become available between now and 2015 will be unable to keep up with the estimated increases in data traffic. Ensuring system security Provision of services on a platform Development of services Provision of services in the car Provision of transmitter unit Provision of radio link None Skill building 2.06 Large Technology gaps Using features in the connected car For the new in-car services aimed at being used by the driver while driving, the focus is on maximum ease and convenience in using the input and output devices. Through widespread use of smart phones, tablets, and aftermarket navigation system solutions, touch screens have become established as the preferred interface. Like voice command functions, touch screens are highly user friendly and boast low driver distraction rates. Respondents also point out that they may offer ergonomic advantages for older users. On the whole, willingness to pay for input and output technologies is seen as low. These aspects are used together with existing system applications within the vehicle, so they are seen as part of the overall package or the specific special feature, such as a navigation system. When asked how willing customers are to pay for voice command features, respondents answers varied, with high willingness to pay being correlated with features that deliver significant enhancements in the performance of the systems available today. Touch screen/ touch pad Voice command Head-up display Controller Buttons None Core statements Importance to customers High Willingness to pay High demand for standardization and enhanced flexibility in system architectures Touch screens, touch pads, and voice command are the state-of-the-art input functions used to operate components

9 Overall conditions Driving factors behind vehicle connectivity A killer application (or killer app ) is a specific application whose value proves to be so high that it ensures that a technology spreads widely and becomes established within a certain market. The automatic Emergency Call system is one example of a killer app. 78% of respondents see emergency calling functions as a major factor driving the connectivity of vehicles. Whether the performance of E-Call systems will be sufficient for other services remains an open question, however. Development of safety standards About 80% of respondents assume that the standards with regard to traffic safety will tighten within the scope of the connected car. With regard to how binding new standards will be in the year 2015, experts are split, with some believing the issue will be regulated by law and a larger group considering it more likely that these features will be self-regulated. Legal regulations 0% Looser Unchanged One-quarter of respondents view hazard warning functions and vehicle diagnosis by the OEM as potential driving factors. Especially in the alternative drive technologies segment, direct access to the vehicle by the OEM for service and warranty purposes is particularly important. On the content side, the steadily rising volume of traffic means that mobility-related information such as the High Definition Traffic real-time traffic information feature and Floating Car Data telematics technology are highly important. Emergency Call OEM diagnosis Update services from OEM Hazard warning Parking search functions None % 58% Self-regulation 80% 20% Business models The value creation chain players who participated in the survey see the development and establishment of sustainable, attractive business models as having made some rudimentary progress. They assume that willingness to pay for services and applications is greater in the B2B segment than among private users. Business systems are also becoming established in certain niches, such as in the area of e-mobility and for innovative rental, car sharing and fleet models. Tighter Core statements Legal regulation of Emergency Call features is accelerating the introduction of the connected car Traffic safety standards will tighten as connectivity increases Sustainable business models will develop either through market-driven needs or along a path similar to that of the Internet On a broad basis, the revenue models in this segment will follow roughly the same pattern as on the Internet. Profitability will be achieved not through directly paid services (B2C), but indirectly, by leveraging benefits further along the value chain, together with other value creation partners (B2B). 2 9

10 Recommended actions All service providers Develop and establish cooperation strategies and collaborative models for potential partners Define safety and security concepts Define strategic portfolios of services, with highquality mobility services as the starting point Outline flexible architectures Define standards and interfaces Decouple the process from the innovation, product creation, and update cycles of all value creation partners Vehicle manufacturers Ensure elevated innovation level Achieve branding through USPs in the range of options offered for connected vehicles Ensure customer loyalty in the aftermarket segment Map out product value and platform strategy for different target groups Scale system between exclusive brand-specific services and generally open services Service and platform providers Develop strategic portfolios of services with potential to generate revenue Review possible sources of revenue with downstream service providers (OEM, aftermarket service providers, infrastructure operators, etc.) Develop core competencies for intelligent data networking Providers of services & platforms Telecom infrastructure providers All service providers Vehicle manufacturers Suppliers Telecom infrastructure providers Develop broad-coverage, high-performance infrastructures Build infrastructure to capture real-time data from vehicles, applications, and infrastructure elements Suppliers Develop innovations for the vehicle manufacturers Supply aftermarket solutions 10

11 Contact Ralf Bechmann Director Competence Center Automotive OEM Telephone: Martin Scherk Principal Passenger Cars and Vans Mobile: Dr. Roland Heimann Senior Consultant Passenger Cars and Vans Mobile: Ralf Schäfer Principal Business System Mobile: MBtech Consulting Profile: Who we are MBtech Consulting is a member of the MBtech Group. We are a consulting firm that operates internationally, in Germany, Austria, the United States, China and at other project sites worldwide. We combine lean consulting know-how and global practical experience into valuable specialized knowledge. What we stand for MBtech Consulting stands first and foremost for business strategies that deliver measurable results, are implementation-oriented, and achieve lasting impact strategies made possible by close dovetailing in terms of strategy and operations. All of our business strategies are based on the lean enterprise approach, which is used along the entire value chain, enabling longterm global competitiveness. Our clients benefit from leveraging the synergies created in the engineering environment of the MBtech Group. Our consulting teams are specifically composed to guarantee the ideal combination of consulting expertise and extensive mobility know-how. When it comes to processrelated research topics, we also work closely with leading academic and scientific partner institutions. What we offer There s no substitute for experience and professional expertise. That s why our consultants come from well-known corporate consulting firms or have already held management positions in the automotive industry. They know exactly what counts: feasible, effective concepts and concrete results. Disclaimer: MBtech Consulting GmbH has compiled the contents of this trend analysis with the greatest possible diligence, to the best of its knowledge and with the assistance of established scientific methods. All of the information which is not based on historical facts or quoted sources consists of statements or prognoses which, with regard to their correctness, are subject to influences which lie outside the control of MBtech Consulting GmbH. MBtech Consulting GmbH does not assume any responsibility for any damages which occur as a result of decisions which are made on the basis of the contents of this paper. 2 11

12 MBtech Consulting GmbH Posener Strasse Sindelfingen Germany Telephone Fax info@mbtech-group.com 05VF-M201108F01-EN