Great expectations

Automakers and suppliers are driving the telematics market, but are the estimates realistic and will consumers be willing to pay?

TechBit
Name: John Barkley

Title: Director of advanced cross systems development, Visteon

Computer: Dell laptop

What he’s reading: Into the Wild by Jon Krakauer, The Battle of the Airfields by Norman Franks and Leading the Revolution by Gary Hamel

Advice to people joining the telematics revolution: “Understand the value-revenue stream as it relates to what consumers are really looking for over the life of the product.”

Perhaps you’ve seen the estimates and read the reports. Industry experts predict that telematics — combining in-vehicle devices, wireless connections and infotainment services — will boom this decade.

But some believe telematics is more hype than promise.

Here’s the conflict: Growth projections are all over the place. Dealers say they’ve been left out of the equation, and consumers aren’t flocking to dealerships asking for the expensive systems. In fact, only 3 percent of consumers now use telematics services, according to Forrester Research, a technology research business in Cambridge, Mass. And many of them are early-adopters — those who embrace new technology and love gadgets.

How the Sept. 11 terrorist attacks and likelihood of a U.S. recession will affect the whole picture is still an unknown. But before that, industry experts had predicted that the global telematics market will range from $10 billion to $100 billion by 2010.

“I don’t believe any of the numbers that I’ve seen so far,” says Thilo Koslowski, lead automotive analyst at consulting firm Gartner Inc. of Stamford, Conn. “Most of those forecasts are based on supplier data without actually looking at what consumers are thinking about it.”

Gartner says the auto industry has unrealistic expectations for selling telematics to consumers. That’s not to say automakers and suppliers should abandon their telematics strategies, but rather shift the focus from generating short-term revenue to building loyalty and market share.

Gartner last month released a survey of 10,000 consumers exploring what they really want in vehicles. Safety and security services ranked highest out of 19 categories. On-board e-mail was second from the bottom.

“What the industry’s trying to do — and I think that’s really wrong — (is) replicate what a consumer can get today on the Internet and then try to bring this down to the car,” Koslowski says. “And that just doesn’t fly because in a vehicle, a consumer has different needs for information than he would have in front of his computer. And the industry doesn’t seem to understaunderstand this.”

Full speed ahead

There seems to be no slowdown among automakers on telematics offerings and for good reason. They are poised to be the biggest beneficiaries of the telematics movement. Inspired, in part, by the success of Internet service providers such as America Online, General Motors launched OnStar in 1996 with the objective of raking in subscription revenues from customers. And GM hoped for conquest sales from other makes, such as Honda.

OnStar (onstar.com) already has 1.5 million subscribers and plans to offer the service on 36 of 54 GM models for the 2002 model year. OnStar’s strategy is to offer the first year of service for free. After that, subscriptions begin at $199 a year. But OnStar does not reveal its retention rate.

Other automakers — particularly luxury makes such as BMW and Mercedes — have deployed their own telematics offerings, and nearly every automaker has something in the pipeline. Analysts predict consumers soon will expect basic telematics systems to become standard equipment on lower end vehicles just as they expected once-luxury options such as airbags and antilock brakes to become standard. But that time is years away, they say.

Suppliers are claiming a stake, too.

Visteon Corp.’s John Barkley, director of advanced cross systems development, says Visteon puts a lot of stock in a McKinsey Quarterly study, published in spring, that predicts telematics will evolve into a $100 billion industry by 2010.

Visteon management likes the McKinsey study because it defines telematics to include not only such applications as navigation and traffic information but also collision avoidance, infotainment, head-up displays and lane tracking devices.

‘A lot of optimism

“First, it’s a very broad definition of telematics,” Barkley says. “McKinsey also takes into consideration the entire value stream from hardware to software to services. Plus, there’s a lot of optimism in how fast we think the market will grow.”

Barkley says Visteon sees increased demand from automakers and consumers for its applications, such as a route guidance system. Combined with Visteon’s voice system, it provides turn-by-turn directions. Its other hot telematics products include rear-seat entertainment systems and diagnostic systems.

Hardware has been the major driver of telematics sales, says Bruce Culver, a vice president at EDS. “You have telematics from mobile cell service to embedded chips in cars, refrigerators and homes,” Culver says. “The convergence of all these technologies for consumers — that’s what’s driving telematics growth.”

Early telematics used global positioning satellites with mobile telephones. OnStar has been the prime program. The system is wired at the factory.

Its hands-free appeal should keep it popular for the next few years as more than 40 states, along with federal officials, study legislation that bans hand-held cell phones in moving vehicles.

“The vehicle is recognized as a place where consumers stay connected,” says Don Butler, vice president of OnStar Virtual Advisor. “It’s a productive space for them. They use it in ways similar to how they use the Internet in the home.”

Cellular’s chunk

Forrester Research Inc. predicts U.S. telematics revenues will top $20 billion by 2006. Forrester sees three categories of telematics revenues emerging:

1. Hardware, which will account for $6 billion.

2. Service revenues, which will account for $4 billion.

3. Cellular charges, which will account for $10 billion.

But the study notes that telematics operators, despite huge investments, still don’t know whether they’ll ever make money. They have little evidence that consumers will pay $200 or more annually for telematics services, says analyst Dan Garretson. Forrester’s research focused on the supply side.

Another study, released nearly a year ago by UBS Warburg of Zurich, Switzerland, projects worldwide telematics revenues will soar to $47.2 billion by 2010, a tenfold increase from a global estimate of $4 billion in 2000. The U.S. market slice is expected to be about 50 percent.

“We expect telematics to emerge as a critical customer relationship management opportunity for OEMs and for the OEM’s brand to remain king within the vehicle,” says Warburg analyst Saul Rubin. “However, we believe most of the value created from telematics will be distributed among content providers, wireless companies and component suppliers, rather than the OEMs.”

Karenann Terrell, who directs the e-Connect Platform at the Chrysler group (Chrysler.com) in Auburn Hills, Mich., shares the belief that telematics as a customer relationship management tool — a means to monitor the product and the buyer — offers much potential.

“It’s also good for the OEM in what information is available over that com link that we had never seen before except in a service-based experience,” she says. “That information flows back to the OEM, who can use it to better design vehicles and improve quality.

“There are all kinds of folks who want it to better serve the consumer. For instance, is the train on time as my car gets close to the station? But what about the people making tele-matics devices? I reserve judgment on that.”

Profit potential

The real profit potential of telematics in vehicles and its consumer benefits aren’t even on the radar screen, industry watchers say. The potential impact on the public good in safety matters — or emergencies such as the Sept. 11 attacks — has not been realized.

Sun Microsystems, an $18.25 billion hardware-software-systems maker in Palo Alto, Calif., is one of those industry watchdogs.

Sun has formed partnerships with major automakers such as GM, Ford Motor Co., BMW and DaimlerChrysler over the last seven years to develop technology applications, including futuristic telematics, on vehicles.

“If all the car does is what you can do on your cell phone, why buy the car?” Jim DeStefano, Sun’s strategic marketing manager asks. The consumer viewpoint, he says, is: “Why should I pay that much money to lock my doors and beep my horn? Give me some personal services that are specific to me as an individual.”

DeStefano says the auto industry appears misguided in focusing on luxury cars to provide a traditional technology trickle down to build a profitable telematics business.

“Do consumers really want a different looking service and bills in each of the two to three different car manufacturers they have in their garages?” he ponders.

Personalized packages

Koslowski, the Gartner analyst, says substantial revenue from telematics services can only be realized if the industry begins to develop location-specific, personalized telematics packages that concentrate on customer preferences and learn from the customer’s behavior.

“But that’s going to take some time because consumers have to learn how they can integrate those services in their daily lives, what really the value is behind these services,” he says. “And they are not there yet. It’s a combination of not knowing exactly what these services can do for them, and it’s not seeing a value in these services.”

Daron Gifford of Deloitte Consulting in Detroit, doubts consumers will grab all of the tech gadgetry on their own dimes.

“OnStar offers on-board vehicle technical diagnostics,” Gifford says. “This will have to have a unique value for customers to take advantage of it. It must do more than tell the owner that the oil needs changing or tire pressure is low. This could result in an information overload for the owner.”

Consumers have yet to decide what they want in the telematics space, says Gifford. And automotive telematics suppliers must address how they will differentiate themselves from cellular service providers such as AT&T and Verizon — their partners and competitors. Verizon provides wireless service for OnStar and AT&T for Chrysler.

Dealers in the cold

Despite the sunny outlook from the manufacturing and analyst end, dealers feel left in the cold. They have yet to see the “What’s in it for me?” reflected in the bottom line. And many dealers are concerned whether the technology will perform as advertised and whether it will be worth their while to sell it. If units are factory-installed, customers are accepting (See story, Page XX).

Eric Wong, general manager of AutoNation Inc.’s (autonation.com) Peyton Cramer Infiniti in Torrance, Calif., for example, complains about the high cost of telematics offerings. If future telematics devices were offered for about $1,000, he thinks he could sell nearly every car with one.

Customers also balk at paying in-vehicle cellular phone rates much higher than they would pay for service on their hand-held phones, industry watchers say.

“OnStar won’t be able to sustain their current rates,” Forrester’s Garretson predicts. “They’ll be forced to cut costs to the cell-phone average.”

Garretson says the potential for revenue is great for telematics providers, but “the biggest driver of revenue will be as people start to buy cell time through, say a telematics operator, rather than through a network provider. Of course, the operator is reselling wholesale minutes that they buy from the network provider themselves.”

Other big changes will force established players to change their business models as well. The twin forces of Bluetooth, a wireless local area network technology, and open standards, advocated by most of the industry, could profoundly change the telematics market soon. Bluetooth will let consumers plug cell phones into the vehicle’s sound system.

Open standards are important, Garretson says, because they will give consumers the option of what hardware, software and service they want, and make sure this technology works any time anywhere.

Chrysler’s Terrell shares that view.

“A standard that interoperates with the computer world is the only chance the auto industry will become a major factor in mobile communications,” Terrell says. “I believe that interoperability of services and capabilities from mobile devices, to the desktop, to the Internet market have to be based on open standards. If we decide outside open standards, we do it at our peril.”

And that could cost all of those wanting a piece of telematics revenues.

-- Staff Reporter Ralph Kisiel and special correspondent Lillie Guyer contributed to this report

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