Technology is forcing change upon the automotive industry. Driverless cars and digital life are increasingly looking to disrupt an industry that has long resisted change on the scale that so many other sectors have seen. Consumers increasingly want to access media consumption and navigation inside the car in the same way that they do on their smartphones, making digital a key determinant of the consumer purchase decision.
The parallels with the smartphone business are clear. The car manufacturers that get it right will be able to charge a premium for their products, while those that fail to recognise and heed the warnings will have to endure diminishing market shares and margins.
The advent of the digital car
Digital ecosystems, led by Apple and Google, view the car as just another way to deliver their experiences to users. The problem is that if users define their digital experience in the car by Apple or Google, then the original equipment manufacturers (OEMs) will have lost the ability to differentiate their own offering. While this will not reduce them to commodities just yet, it will make their lives even harder than they already are in a highly competitive market. OEMs largely appear to be unprepared for this new threat, leaving them firmly in the crosshairs of the digital ecosystem companies.
The advent of the digital car will shake up the industry in a number of ways. An important dimension, which car makers have until now struggled to address is cementing customer lock through participation in an ecosystem. Through combining vehicle attributes with digital attributes, vehicle manufacturers now have the opportunity to increase customer loyalty when it comes to follow-on purchases. Currently, there are almost no barriers to swapping one vehicle manufacturer for another. This is in stark contrast to Apple, where having to rebuy all of the apps and content is a major barrier to switching to an Android device.
The challenges autotech faces
The rapid integration of technologies such as Android Auto and CarPlay into the car threatens to commoditise the functions of OEMs by taking over the user experience of these vehicles. To survive, OEMs must desist from providing these services by default in their infotainment systems and invest in their own ecosystem. These companies need to deliver the Digital Life services that the user enjoys on devices in a way that is optimised for the automobile. This is easier said than done, but unless it is achieved the automakers are almost certain to have no digital differentiation whatsoever.
Beyond the user experience, another dimension of technological disruption revolves around data. There are four Control Area Network (CAN) buses in an automobile that carry all the critical data that allow the car to function. These four buses meet in the infotainment unit, which means that if the user gives Google permission, it will be able to suck out every piece of data the car generates. One of the reasons that Android Auto is so dangerous to established players is that accumulating new data while users are driving will add to its already vast collection of information, enabling it to further target and tailor services to individuals.
The data from the infotainment unit are a key element that will allow a car maker to differentiate in the long term, meaning that anyone deploying Android Auto is likely to be giving that differentiation away to Google. The route to delivering rich, engaging services to users is to put these data together with data generated elsewhere in the ecosystem to offer rich and engaging services to their users. Where established tech companies have a head start is that their ecosystems allow them to seamlessly integrate the car unit with users’ experience on smartphones, laptops and tablets, as we have seen with Google’s recently unveiled Project Chirp/Google Home, designed to offer a common individual AI entity across all devices.
Enabling OTA updates
A key technical step for OEMs to take is to enable over-the-air (OTA) updates for their vehicles. There are all sorts of regulatory and process issues that need to be overcome to make this a reality, but we believe this is critical. Without OTA updates, software flaws will not be fixed, nor will they be able to continuously update and improve their offerings.
The consequences of this are most obvious when it comes to cybersecurity. The example of the Jeep Cherokee that was driven off the road by two hackers who attacked the auto’s core system through the infotainment unit serves as a great example of why this is so important. Physical recalls can cost millions of dollars in large numbers and take a long time compared to an OTA update, which is almost instantaneous and costs almost nothing, as shown by recent virtual recalls by Tesla.
The game is far from over
How should automakers set about building their own digital systems? Good software is almost never the cheapest one on offer. Writing software entails creating hugely detailed specifications against which suppliers bid, with more often than not, the lowest bid winning. To create a user experience in the car that can mimic the experience on a smartphone or tablet, automakers need to think about design, security, stability and reliability and less about the cost. We consider this will be a key element in creating a very positive user experience, for which users are prepared to pay.
The game is far from over when it comes to the coming battle for the digital car, but most automobile companies appear to be completely unprepared to compete. By way of example, US OEMs are already beginning to ship Android Auto and CarPlay in their vehicles. As it is now almost impossible to sell a handset in India without Google Play installed on it, the same may become true for an automobile. Once this happens, the war will be over and the automobile’s trajectory towards becoming a handset on wheels will be assured. This is why the auto makers have to act now, or risk losing what could very well become a very important piece of their ability to differentiate in the long term.
Dan Ridsdale, Global head of TMT at Edison Investment Research