OEMs are announcing big, multi-year investments in new vehicle platforms that combine electrification with increasing driving automation. Under new mobility data and loyalty will become central forms of value. OEMs are testing how to monetize the vehicle-, driver-, and passenger-centric services these platforms enable. The services they introduce and the business models they use to monetize them will determine whether they become like Apple, AT&T, or Foxconn in the customer relationships they develop.
Stephen Zoepf and I had written about the technology and business model decisions automakers will need to make before they can participate in new mobility. In Transportation Transformation I stated that in new mobility OEMs will need to provide services in addition to vehicles. Several OEMs experimented with mobility services, for the most part unsuccessfully. However, in the process of creating direct relations with customers (business or consumer), and be in the position to monetize them, they will need to offer and monetize services that are centered on the vehicle. To this end, OEMs will need to decide what type of relationship they will aim to have with the customer and what business models will enable them to achieve it.
The demand for personally owned new and used vehicles remains high, while the inventory is relatively low. However, the automotive industry remains cyclical. The automakers’ executive teams know that booms don’t last long. For this reason, they are searching for models that are less cyclical.
Fueled by consumer, corporate, and government interest in zero-emission vehicles, OEMs are announcing new software-defined vehicle platforms that combine electrification with increasing levels of driving automation. Among the innovations it will introduce, the electrified software-defined vehicle will replace the relatively monolithic lifecycle that dominated vehicle introductions for the past 70 years with three separate lifecycles relating to the vehicle’s software content, its hardware components, and its skateboard and body. Skateboard and body will change less frequently than in the past (as we are already seeing with Tesla’s Model S). But software (middleware and application software) and certain types of hardware could be updated as frequently as every 12-18 months, and in the case of software more frequently than that.
The software-defined vehicle platforms will be a challenge and an opportunity for incumbent automakers. A challenge because these platforms require skill sets, processes, and tools the automakers don’t currently possess at the necessary scale. But also a big opportunity because due to these platforms and the lifecycles they enable, automakers will be able to offer data- and software-driven services that have the potential to provide them with new revenue streams. Depending on the business model used, these revenue streams will be recurring over the life of the vehicle that can span several owners. As customers keep their vehicles longer (the average age of consumer vehicles in the U.S. approaches 12 years) the services enabled by the software-defined vehicle will provide automakers with recurring revenue streams to supplement, or even replace, the transaction models they use today. The OEMs may not be able to recoup their costs at the time the vehicle is sold to its first owner, as is the case today, but they will be able to do more than that over the time the vehicle remains on the road, even as it changes owners. In addition, such post-sale services will enable the OEM to establish direct and frequent interactions with the customer. The OEM’s goal should be to offer a compelling customer experience within and outside the vehicle that entices the customer to participate in an ongoing value exchange. Synapse Partners is already helping corporations in the automotive and mobility industries to define such a monetizable experience.
Experiences from other industries demonstrate that such post-sale services carry high margins and the interactions they promote increase customer loyalty. GM had estimated that every percentage point of improvement in customer retention is worth $700 million. As I’ve written before, automakers need to transition from brand loyalty that is tested every few years, to loyalty that is constantly reinforced and continuously measured. But to take full advantage of the relationship-building opportunities provided by the software-defined vehicle requires transformations that we’re not yet seeing to the degree necessary.
You may ask how much could the services-based business be worth. Every year automakers sell in the U.S. 15-17 million vehicles. Assume that by 2025 fifty percent of those vehicles will be based on the new architectures. This means that by 2030, i.e., by the end of the new mobility’s second phase, in the US alone there will be over 37 million vehicles that will be based on new architectures. Further assume that fifty percent of these vehicles will subscribe to vehicle-, driver-, or passenger-centric software-based services. Finally, consider for every such vehicle a $20 per month all-in services revenue. That is an additional $4.5 billion of annual revenue for the U.S. market alone, with gross margins that can be expected to be at least fifty percent based on our experience with consumer and enterprise software. A $20 monthly revenue may be at the low end of what may be possible for automakers to charge consumers. To put such a fee in perspective, consider that GM estimated a $135 monthly revenue per vehicle from such services (today it charges $25-50 per month for its OnStar concierge service), and Mercedes will charge $576 per year to unlock the full rear-wheel steering capability of its new EQS model.
GM introduced the first connected vehicles to the market in 1996. Automakers have been capturing data from such vehicles ever since. However, while that low-volume telematics data provided a high-level picture of a vehicle’s health that proved of some value to the OEM, it is not rich enough for the services being envisioned. The data generated by the software-defined, situation-aware vehicle is big in volume and rich in information. It can be used in a variety of applications for entertainment, insurance, predictive diagnostics, marketing, shopping, refueling, and fleet management that cover the spectrum from vehicle consideration to configuration, sale, and post-sale experience. For example, Ford has identified multimillion-dollar efficiencies by leveraging the data it captures from the fleet management application of its Mach-E electric vehicle. Some of our portfolio companies are developing applications for services including fleet management, shopping, marketing, and insurance. They are being licensed by automakers and other members of the new mobility ecosystem to help them create their brand-specific flagship experience.
To monetize these services and the associated data while increasing their customer loyalty automakers must determine what type of customer relationship they will establish and the business models they will use. We identify three alternatives:
- Owning the complete customer relationship (Apple). To achieve this, OEMs will need to provide the entire platform, from the software-defined vehicle to the collection of services. This implies that they will need to develop a Walled Garden of services (accessible through a comprehensive and complementary set of applications, as in Google’s case, or through a super-app, as in Grab’s case), and a marketplace for third parties to introduce additional services. The automaker may require an annual commitment, as in the case of Mercedes with EQS’ rear-wheel steering service, or monetize the service on a pay-as-you-go basis. It may also be possible to monetize these services with advertising models or hybrids of a low monthly subscription plus advertising. Spending on Walled Garden advertising is growing faster than the corresponding spending on the web. Over time the automaker’s Walled Garden can be combined with a marketplace of additional third-party applications that, while carrying lower margins, nonetheless contribute to customer loyalty. This approach will create the biggest conflict between automakers and their dealer networks. Apple’s recent announcements CarPlay show the company’s intention to own the customer in-vehicle relationship as an extension of already owning the smart mobile device customer relationship.
- Owning parts of the customer relationship (AT&T). Under this alternative, the OEM controls some of the vehicle’s architecture and may even become responsible for the movement of data. For example, the OEM may control the vehicle’s electrification platform but not the autonomous vehicle (AV) stack, or the platform responsible for collecting the data from within the cabin during each trip. The recently announced partnership between Ford, Argo AI, and Lyft, the previously announced partnerships between Toyota and Grab, and between Hyundai, Aptiv, Motional and Lyft are examples of this model. In Ford’s case, Ford will have access to the data of the robotaxis that use Argo AI’s AV stack and are operated by Lyft. It could use the data in applications such as predictive diagnostics. But it will not have access to the data generated by the passengers in the course of using Lyft’s service. The agreement between Toyota and Grab is also similar but relates to Toyota’s ICE vehicles in Grab’s ride-hailing fleet. In these cases the OEM has only partial ownership of the customer relationship since it will only be accessing a component of the generated data, particularly missing the data generated by the vehicle riders. As new mobility advances and transportation is increasingly offered as a service, the data generated by the riders will be the most valuable. This alternative will result in fewer monetization opportunities for the OEMs, and lower-margin services.
- Owning little, if any, of the customer relationship (Foxconn). As new mobility advances the OEMs that remain exclusively focused on vehicle manufacturing and systems integration, e.g., integrating third-party infotainment systems into their vehicles but not gaining access to any of the data generated by such systems, will not be able to capture the valuable parts of the customer relationship. While this approach will enable them to continue taking full advantage of their manufacturing know-how and capacity and operating without undertaking significant transformations, it will not provide them with any additional monetization opportunities or the ability to improve their margins. In these cases, as it happens today, the dealer will be the relationship owner.
In other words, the decisions OEMs make about the loyalty-enhancing and data-driven services the software-defined vehicle platforms will enable, will determine the type of customer relationship they will establish and the ways they can monetize it. Or, to use an analogy from the smartphone world, will the OEMs become Apple (or Google, Amazon, etc.), ATT (or Verizon, Vodafone, etc.), or Foxconn?