For decades, cars have connected us to our destinations. Now connected cars transform the very meaning of mobility and the automotive experience. How can OEMs take advantage of this once in a lifetime disruptive opportunity?

Today, passengers and vehicles leverage the powerful combination of elegant applications and high-speed networks to engage in a rich, continuous dialogue with an exploding number of parties to provide entertainment, solve problems and plan passenger days.

This connected car revolution, while transformative for consumers, also holds the potential to drastically shift the basis on which original equipment manufacturers (OEMs) compete, representing one of the greatest disruptions to the multi-trillion-dollar automotive industry since the invention of the internal combustion engine.

In this 3-part blog series, we will discuss the origins of connected cars, explore the challenges and opportunities facing OEMs and provide our viewpoint on how to successfully manage the rapid transformation taking place in the industry today.

The Need to Connect: Ubiquitous Internet Connectivity and Consumer Demand

Basic car connectivity originated in the early 1990s with telematics, a set of technologies that collected and distributed vehicle information to centralized hubs, enabling simple functions such as vehicle tracking and emergency communications.  In subsequent years, these applications expanded in scope, but remained focused primarily on business solutions.

This began to rapidly change with improvements in cellular data networks, increased consumer demand for focused applications and the emergence of a capable, entrepreneurial developer community.  These advancements, paired with increased phone processing power, enabled the rise of mobile apps, which trained consumers to expect elegant solutions to fulfill even their smallest needs (Figure 1).

Figure 1: Connected Car Drivers

Naturally, the same set of technologies were fully accessible to vehicles.  And because consumers carried their phones into their vehicles, the stage was set for vehicles and cell phones to vie with each other to best leverage connectivity – and each other’s data – to interact with customers.

OEMs were quick to recognize both the scale of the opportunity and this competitive dynamic with smartphones.  They have responded by making connectivity a core tenet of their corporate strategies and are racing to deliver new applications (Figure 2).

Figure 2: Connectivity as a Corporate Strategy

An important attribute of this new application set is the expansion of scope and complexity represented in the relationships people have with their car.  Historically, vehicles had a discrete set of responsibilities: safely, stylishly transport passengers to their destination and entertain them with music along the way.
With connectivity-enabled applications, however, the reach into consumers’ lives has exploded.

As indicated in the next chart, these features span well beyond entertainment, moving into previously untrodden areas such as personalization, insurance and cross-channel experience (Figure 3).

Figure 3: Connectivity Feature Explosion

The success and impact of these applications can be clearly seen by looking at their near-term revenue projections.  According to the Statista Digital Market Outlook, the market for in-car connectivity is predicted to grow at a 37% CAGR the next five years, generating a massive $72 billion in revenue by 2021.  And if one believes – as we do – that the way vehicles interact with technology will greatly influence automobile purchasing decisions in the future, this impressively large number significantly understates their full economic impact.

Figure 4: Connected Hardware – Top 5 Connected Car Markets

From a scale perspective, the next chart shows that the overall number of connected vehicles is forecast to increase by a factor of 7x through 2021, resulting in potentially 191 million connected cars (Figure 4).  Given the fact there were 94 million vehicles manufactured globally in 2016, this means that these technologies, already standard on many models, will be ubiquitous in a real sense, in the near future.

Brand Impact

The scope of this disruption – and the power it holds to re-shape consumer relationships with brands – represents one of the great opportunities of modern marketing.  Because software is developed more on the basis of data and an understanding of customer needs than on proprietary automobile manufacturing IP, the emergence of connected apps, and the in-cabin and remote experiences they enable, will not be constrained by legacy OEM advantages or brand positioning (Figure 5).

Figure 5: Brand Positioning

For example, while it would be incredibly difficult for mid-tier brands to usurp luxury German brands in consumers’ eyes on the basis of the driving experience, one can imagine an innovative upstart creating superior apps that create a more attentive, personalized transportation experience.  As we see, a defining element of this new playing field is that the strategic advantages of the past, such as proprietary automotive engineering, matter far less than astute, empathetic computer scientists.  And no segment is more vulnerable than the high end of the market, where OEMs enjoy a hard-won premium that will need to be re-earned in the future based on a completely different set of competencies.

The connectivity transformation therefore raises important questions for OEMs: what will the value chain of the future look like and what pieces do they need to own?

Stay tuned for the next two blogs in this series, where we will present our views on these important questions and provide guidance for consideration.