Connected cars show strong market growth

carThe recent plateau in smartphone sales growth has highlighted the unbroken growth trajectory being experienced and anticipated in the automotive industry. While the smartphone industry saw a stunning surge over the past six years, the automotive industry has quietly emerged as a growth engine of its own driven by the proliferation of safety systems and electrification.

The recent Mobile World Congress event will never be confused with a car show in spite of Ford having had a dedicated booth for at least the third consecutive year along with on-show-floor vehicle representation from SEAT, FCA, Ford, Nissan, Volvo, Skoda, Audi and Jaguar Land Rover. But the elephant in the room at the event was the sudden relevance of connected cars as a source of reliable growth for carriers, semiconductor companies and other suppliers of hardware, software and services.

Coupling the prioritization of automotive electrification and safety with the proliferation of connectivity and the pursuit of autonomous vehicle technology has shifted automotive electronics to the forefront for financial analysts and the semiconductor and Tier 1 supplier companies they follow. The stodgy, seemingly mature automotive industry is suddenly hot.

Much is made of the months-long product life cycles in the smartphone industry vs. the years-long product life cycles of automobiles. In spite of these brief life cycles and the correlated rapid replacement of handsets to access new features, smartphone sales growth appears to have abated.

Automobiles, in contrast, continue to climb. That growth comes in spite of headwinds from emerging markets such as Russia and Brazil settling into severe recessions with car sales declining by 30 – 40 per cent year-on-year. There is little doubt that those economies will eventually turn around and sales will surge back with as much intensity as they experienced to the downside. The slack is being taken up by growth in recovering mature economies.

The key difference between smartphones and automobiles is that automobiles last longer – upwards of 10 years – while smartphones have a useful life of a few years at best. In spite of this gnat-like life cycle, smartphone sales growth has slowed – while car sales continue to grow overall and sales of increasingly sophisticated systems within those cars grow at an even faster pace.

Cars may not have stolen the spotlight at Mobile World Congress, but the reality recognized by mobile operators, handset makers, application developers and semiconductor makers was clear. Growth in the electronics industry and in the mobile industry is increasingly coming from the automotive sector.

That growth has attracted the likes of HTC, Huawei, Samsung and SK Telecom, all of which have ventured into the automotive segment in one way or another. In the process of entering the automotive market these companies are learning that victories in the car business are hard to come by and the money comes slowly.

The car makers themselves have seen the ebb and flow of interest in their industry. Waves of enthusiasm for car connectivity have come and gone before and the car makers have simply soldiered on, pumping iron and banking profits. This time, though, it is different.

At a cocktail party hosted by Advanced Telematics Solutions at MWC in Barcelona, there was some debate as to whether the hype around connected cars had hit its peak or could be expected to rise even further from its current frothy heights. My personal opinion, expressed at the event, is that connected car enthusiasm has not yet peaked.

While building electric and connected cars creates an undeniable supply-side opportunity, the demand side of the equation is less obvious. Car makers can make connected and electric cars, but consumers have been slow to take an interest.

Meanwhile, car makers want to know how much money they can make from these increasingly enhanced vehicles. In particular, some car makers see connectivity connecting them to revenue opportunities.

Here is where we are still caught in the phase of connected car mania with consultants like Accenture seeing fit to value the connected car market opportunity for car makers at stratospheric levels – ie. €500 billion by 2050 according to their latest press notices. As a connected car specialist I’d welcome nothing more than such a market opportunity staring me in the face, but the reality is something different.

chart

SOURCE: Accenture view of per vehicle connected car lifetime value by application.

Accenture puts figures €500 billion out to gain the attention of senior management at car companies and to convince marketers to open their wallets to allow Accenture to help them tap that rich vein. The fact that Accenture could make such a claim with a straight face and clever graphics is a clear indication that we are still deluding ourselves, as an industry, as to the nature and value of the connected car opportunity. Or maybe it is just a reflection of the level of Accenture’s lack of respect for the intelligence of senior auto maker leadership.

Marketers like to say “there’s a pony in there somewhere.” But that connected car “pony” won’t have a €500 billion valuation on its head. The average consumer neither knows what car connectivity is nor is interested in paying for it. It is for this reason that I believe we have not seen the peak of this particular “hype cycle” to use Gartner parlance.

Consumers are not “demanding” vehicle connectivity, though some researchers claim they are, and dealers by and large do not want to even talk about it. In fact, those organizations in the industry that have been the most enthusiastic about embracing connectivity have been rewarded with declining customer satisfaction and dependability scores from J.D. Power & Associates as the ratio of “things gone wrong” with their new cars have risen in direct proportion to the amount of “connectivity” on offer.

The message?  The connected car path is a painful one.  If your connected car brass ring is a piece of Accenture’s €500 billion pot of gold, to mix metaphors, you are likely to be sorely disappointed.  If you are connecting your cars to save lives and enhance the driving experience, you are more likely to find success.

No, Mobile World Congress was not an auto show just as the Geneva Motor Show, this week, is no wireless show. The Geneva Motor Show is a good sanity check – cleansing the palate of connected car confusion and leveling the balance around performance, handling and styling.

Harman and Rinspeed are on hand in Geneva, though, to highlight the increasing relevance of connectivity and its value to consumers.  But you won’t find Harman talking about €500 billion opportunities.  The focus in Harmans’ booth is on delivering an enhanced user experience to the customer.

What is true is that car companies are rapidly assuming the front rank for electronics and connectivity consumption. Financial analysts following semiconductor companies have seen the largest suppliers in that segment cast off their mobile assets as those components have slipped into profitless commodity status.

Semiconductor suppliers to the automotive industry, meanwhile, are licking their chops at the prospects for growth as car makers and new market entrants increasingly step up to the challenge of propagating driverless car technologies and avoiding crashes – under the watchful and eyes of regulators with their growing lists of mandated safety systems.

Safety and connectivity go hand in hand and connectivity is also getting a helping hand from governments. Car companies have a history of ambivalence toward connectivity, but it’s hard to see car companies avoiding connectivity as government mandates (European eCall and Russian ERA Glonass) and the need for software updates demand the inevitable embedded connections.

But car companies remain ambivalent as a result of security concerns, privacy issues and consumer indifference. In the end, everyone but the car companies is excited about vehicle connectivity.

Step by cautious step, car makers are coming around to recognize the inevitable. The how-can-we-make-money-at-this conversations are a step in the right direction. But the real first step is to recognize that connecting cars is the right thing to do for safety and for society. The money will only flow indirectly from the proper motivations. Those car companies that entered the connected car business expecting to find gold were and will continue to be disappointed.

This blog was originally posted on the Strategy Analytics blog with the title ‘Sales Growth You Can Count on’.

 Roger C. Lanctot

Roger LanctotAs Associate Director in the Global Automotive Practice at Strategy Analytics, Roger Lanctot (@rogermud) has a powerful voice in the definition of future trends in automotive safety, powertrain, and infotainment systems. Roger draws on 25 years’ experience in the technology industry as an analyst, journalist and consultant. Roger has conducted and participated in major industry studies, created new research products and services, and advised clients on strategy and competitive issues throughout his career. Some consider Roger the Kevin Bacon of the connected car industry as evidenced by his wide LinkedIn and Twitter following and his frequent speaking and blogging activities on critical industry issues impacting critical topics such as vehicle safety, fuel efficiency and traffic. Roger is a graduate of Dartmouth College.

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