The bursting Internet bubble ended hopes that telematics meant instant riches for car manufacturers.
Information technology could still provide a huge new source of profitable revenue. Just don't hold your breath.
Satellite navigation, back-seat DVD video, automatic roadside emergency assistance, voice-activated mobile phones and remote diagnostics all have enormous potential.
But most consumers don't seem ready to pay for these devices, which use two-way communication of voice or data to connect cars to the outside world.
The market still awaits the so-called 'killer application' that will excite car buyers. And there is also concern that European Union politicians might outlaw in-car telematics devices on safety grounds.
Still, the leading car manufacturers are pressing ahead and are forming alliances.
Early in April, Toyota and Volkswagen announced that they were exploring the possibility of sharing access to global positioning satellite systems, information services and content provision for telematics. In March, Ford, PSA/Peugeot-Citroen and Renault-Nissan said they would set up a joint venture in car communications systems.
Free service offer
In the USA, General Motors' OnStar system has led the way in telematics. In early 1999, GM introduced OnStar as optional or standard equipment on most GM cars and trucks in the USA. Factory installation let GM reduce the cost of OnStar hardware, which includes a three-button control panel, a microphone, antennae, voice recognition technology and a receiver for the global positioning system. To generate interest, OnStar also offered customers a year of free service.
By the end of 2001 OnStar had 2 million subscribers, up from 100,000 in two years.
OnStar, first offered on two Cadillac models in September 1996, now accounts for 80 percent of all US telematics customers. And it has started adding non-GM customers. Lexus, Honda's Acura brand, Audi, Isuzu and Subaru have signed up to use OnStar telematics.
But the percentage of customers who discontinue service rose substantially. In 1999, when OnStar had been limited to Cadillac, 70 percent of its customers retained the service after the initial free year of service, GM says.
Now that 36 GM vehicles in the USA feature OnStar as standard or optional factory equipment, OnStar executives say the retention rate has dropped to 50 percent. Some industry analysts believe the retention rate is as low as 20 percent to 30 percent.
So why are the car companies so determined to go ahead with this expensive investment?
Once automakers set up infrastructures of alliances between manufacturers, telecommunications operators and content providers, the opportunities are endless, said Friedrich Christeiner, general manager, global telematics solutions at IBM.
Just one aspect of telematics - remote online diagnostics - can provide huge savings for manufacturers. And when an infrastructure is in place, smaller software companies and inventors will design devices that appeal to car buyers.
'Diagnostic applications will save automotive companies millions of euros in warranty and maintenance costs and stock reduction,' Christeiner said.
He said sophisticated new software could fix complicated items such as electronic control units.
Christeiner said he expects the infrastructure problem to be settled soon.
'The industry is looking for strategic partners,' he said. 'This process will be largely completed this year.'
Research organizations such as Strategy Analytics in the UK and consultants Cap Gemini Ernst & Young believe that the market for telematics will eventually be big.
Cap Gemini predicts that by 2007, revenues in Europe from telematics including telephone and service revenues will reach E8 billion. But Cap Gemini analyst Ronald Lotgerink was less sure about where these revenues would actually come from.
'What that market consists of is very unclear,' he said. 'But it will definitely take off. Motorists will always want to be connected. The only problem is how to make money out of it.'
Joanne Downie, telematics director at Strategy Analytics, estimates that revenues from shipments of telematics terminals will reach E22.5 billion globally in 2007. In Europe, the figure is expected to reach E5.4 billion in 2007.
'The manufacturers pulled back after the dotcom hype,' Downie said. 'Caution is very much the theme and this is the right approach. There are significant costs in rolling [telematics] out and you must be very clear which target segments you are going after.'
As for which services will excite car buyers, Downie said: 'They are not out there yet.'
She said the infrastructure has to be delivered first. That will lead to smaller design companies developing compelling services and content.
'We won't see significant revenue generated by consumers for three or four years,' she said.
A Strategy Analytics survey in Europe and the USA found limited interest in most telematics applications and features, although safety, communications, entertainment and traffic information received positive ratings.
The research group concluded that satellite navigation would eventually lead growth in telematics in Europe and Japan. Currently, satellite navigation is prohibitively expensive for individual car buyers. Satellite navigation for a BMW 3 series is about E3,000. In the USA, emergency and roadside assistance is expected to be the big favorite.
But there is one nightmare scenario in Europe that could end the telematics dream. Legislators in the European Parliament could decide that on safety grounds, some telematics devices are liable to distract drivers and should be banned.
IBM's Christeiner said because of this, it is crucial that telematics devices be controlled by voice, and not by touch.
'Voice control and speech recognition are the absolute key to successful telematics,' he said. 'We do not believe in joysticks or touch screens. Telematics that do not allow voice control may provoke legislation to stop the whole thing. We need to talk about the safety-enhancing quality of telematics, showing where accidents or traffic jams are.'
Strategy Analytics' Downie says driver distraction could be a big issue with regulations in the European Union.
'There's a lot of talk about driver distraction, even using a cell phone hands-free is seen to be distractive and slows response down,' said Downie. 'But if they are concerned about distraction, there are more serious offenders. I have three children. You should ban children [in cars] too if you ban phones.'
John Lawson, European auto analyst at investment bankers Schroder Salomon Smith Barney, said prospective customers are holding back.
'There is huge price resistance by customers and a lack of conviction that anything being offered at the moment is in its final form,' Lawson said. 'No one wants to sign up for a service in its infancy; there is not a strong selling proposition so far.'
But Lawson said that so-called 'infotainment' for back-seat passengers could be the area where telematics may well take off.
'Delphi is quite excited about that,' Lawson said. 'It is more excited about the possibility [in the back] than the possibilities up front.'
Car commuters will be the next targets.
'People in the USA spend up to two hours a day in their cars,' Lawson said. 'It's a bit less in Europe, but for those who do commute, there's
one heck of a lot of time which could be used more productively with a little bit of help.'
Bob Schumacher, general director of mobile multi-media at Delphi, believes that in three to five years telematics modules will be installed in most cars.
'It could happen in a year or two if the right product turned up at the right price,' he said. 'Look at hand-held computers. A decade ago we had the Apple Newton, very expensive, and a number of personal computers like that. But it didn't take off until Palm got it right.'
Cap Gemini's Lotgerink said telematics has to clear five hurdles before it can offer attractive services. He said the industry needs:
* Capacity to add services to devices initially installed in cars
* Devices that can accept technology upgrades
* Reliable products from software makers
* Ability to capture and use the huge amounts of data about consumers that telematics can generate
* To manage alliances with telephone companies and content providers.
Lotgerink said the last hurdle was the most challenging and would deal with contentious issues such as profit sharing and control.
Who will profit from telematics?
Lotgerink said it is too early to say which of the contenders for telematics business - OEMs, automotive suppliers, telecoms or content providers - are best positioned.
'The carmakers have a major advantage because they are the closest to the customers,' he said. 'But I imagine it will be a battle between them and the telephone companies.'
US consultants McKinsey and Co. warned in a recent report that the risks of investing in telematics are high and revenues remain uncertain. It recommended that automakers focus investment on building cars and only get involved with the most promising telematics areas.
Rajesh Nellore, director of telematics at Fiat Auto, said it would be wrong for manufacturers to neglect their basic role of designing and producing great cars.
'In five to 10 years, most cars will have a basic form of telematics ability,' Nellore said. 'But telematics won't sell the car.'
* The first Automotive News Europe Telematics Conference begins today (April 22) in Stuttgart.
- David Sedgwick and Gail Kachadourian contributed