Strategy& launched Connected Car Study 2015

Oct 29, 2015

Executive summary

In 2015, our annual study of “connected car” technologies shows innovation racing ahead as auto makers unveil new digital services and autonomous driving features. The connected car is an automobile designed with direct access to the Internet, enabling automated links to all other connected objects, including smartphones, tracking devices, traffic lights, other motor vehicles — and even home appliances. Volkswagen and Daimler led the industry in a year that saw high general levels of innovation in infotainment systems and safety-assistance technology. We foresee annual sales of connected car technologies tripling to €122.6 billion by 2021. This is a slight slowdown in adoption speed compared to earlier estimates, attributable to the decision by European regulators to give OEMs a three-year extension until 2018 to install automatic emergency calling systems.

Both premium and volume auto makers clearly see connected car technologies as essential to their futures. They also realize that overall vehicle prices aren’t rising as rapidly as the prices charged for digital capabilities. This means returns on investments in traditional car components are shrinking.

Over the next five years, the connected car could disrupt the entire automotive ecosystem. The industry will undergo fundamental change as semi-autonomous driving emerges, followed by an eventual shift to full autonomous driving. Auto makers that have always seen themselves as product suppliers will take on a new identity as providers of mobility services. This will open the door to lucrative new digital revenue streams, especially as they begin to explore opportunities in other digital areas such as entertainment, commerce, and monitoring a driver’s health and fatigue level.

Of course, auto makers aren’t the only ones pursuing these opportunities. Technology companies such as Apple and Google have staked their own claims to the connected car and autonomous driving markets. Auto makers will need new capabilities and cultural change to compete.

No one will win, however, if security concerns undermine consumers’ trust in connected car technology. Recent widely reported incidents have focused public attention on the vulnerability of Internet-enabled autos to hacking. To ease these fears, auto makers need to embed security in every aspect of their designs. Those that convince consumers their digital networks are secure will win the trust essential to capturing the connected car opportunity.

The connected car accelerates

The annual Connected Car Study conducted by Strategy&, the strategy consulting team at PwC, tracks the growth of connected car technologies and their impact on pricing, sales, and innovation in the auto industry. The 2015 study shows innovation accelerating as more manufacturers develop smart driving systems. Recent advances include BMW’s remote parking valet, which autonomously parks a car after passengers exit, and Volkswagen’s Emergency Assist, which automatically stops a car in an emergency. All OEMs are seeking a path for creating value in this digital arena. At the high end, car companies and their suppliers are differentiating themselves by creating digital experiences that stand out in a crowded market. Mass-market auto makers are looking to incorporate basic digital capabilities on a cost-effective basis. This may require them to join forces with outside partners.

Connected car developments continue to center on seven functional areas:

• Autonomous driving: Operation of the vehicle without a human driver at the controls, existing only on a partial basis. Examples include self-parking cars, motorway assistance, and the transportation of goods by trucks on well-delineated routes.
• Safety: The ability to warn the driver of road problems and automatically sense and prevent potential collisions. Examples include danger warning signals and emergency call functions.
• Entertainment: Functions that provide music and video to passengers and the driver. Examples include smartphone interfaces, Wi-Fi or Local Area Network hotspots, access to social networks, and the “mobile office.”
• Well-being: Optimization of the driver’s health and competence. Examples include electronic alerts that detect or mitigate fatigue, and other forms of individual assistance.
• Vehicle management: Support for minimizing operating cost and increasing comfort. Examples include remote control of car features, displays of service and vehicle status, and the transmittal of traffic data.
• Mobility management: Guidance on faster, safer, more economical, and more fuel-efficient driving, based on data gathered for the vehicle. Examples include real-time traffic information displays, displays of repair and service-related information, and the transfer of usage data.
• Home integration: Links to homes, offices, and other buildings. Examples include the integration of the automobile into home alarms or energy monitoring systems.

Today’s market: Prospects and competition

We expect connected car technologies to generate €40.3 billion in end-customer spending next year. Safety and autonomous driving are the largest categories, accounting for about 61 percent of the total. In the premium automobile segment, the spending on digital technology is expected to rise to 10 percent of total vehicle sales by 2021, more than double the current level of 4 percent.

OEMs and Tier 1 suppliers are making the related R&D investments despite the uncertain economics of the connected car. Many elements of the connected car replace older digital and non-digital features.

In the premium automobile segment, luxury car auto makers see these features as “table stakes.” They are necessary to stay competitive and avoid price dilution, but they will not boost overall vehicle selling prices — at least not in the way new product features have in the past. For example, the total price of a Mercedes E-Class automobile with the 2015 digital package is just €1,654 more than the 2010 model, despite the addition of more than €7,000 in connectivity options, most of them substituting previous features that have now become standard. Similarly, BMW spends more than €6,000 per car to include connected-car-style digital features, including the bundling of concierge services and real-time traffic information into its navigation device. Audi and Lexus have similar stories to tell. But overall car prices are not expected to grow materially. In general, competition has kept luxury car prices in the €60,000 to €70,000 range: The average price of an E-Class car rose only about 4 percent, despite all the investments in digital features that auto makers have made. This is expected to continue.

The volume segment, of cars made for middle-income purchasers, also sees auto makers adding basic connectivity functions. Here, digital content is on course to reach 2.6 percent of total selling prices by 2021, up from just 0.5 percent in 2015. However, our research shows that buyers in the volume segment are less willing to spend money on connected features provided by OEMs, despite their appreciation of the importance of digital services (see Exhibit 1). Today, they’d rather seek cheaper alternatives from third-party aftermarket makers or from simple apps on their smartphones. To preserve profit margins, mass-market OEMs will have to figure out which digital features their customers will pay for. Volkswagen and other volume OEMs are experimenting with digital packages for value-conscious auto buyers. So far, however, sales penetration rates are low. In the end, consumers may not be willing to pay for proprietary packages; they may choose aftermarket solutions like third-party navigation devices instead. Currently, a TomTom navigation system costs about €180, compared to roughly €600 for a manufacturer’s option. 

Yet despite all of these factors slowing down growth, we expect overall revenue from digital auto content to grow 204 percent, to €122.6 billion, between 2016 and 2021 (see Exhibit 2). One key catalyst for this is the European Union’s mandate that all auto makers implement emergency calling technology (eCall) in new cars by 2018. When there is a collision or other incident, an eCall device in each car will automatically alert authorities and send data about the impact. Although currently smartphones can fill this mission more efficiently than eCall devices, and at a fraction of the cost, customers are demanding that connected car manufacturers incorporate this potentially life-saving technology, and several OEMs have seen success with it, notably GM’s OnStar. As eCall technology evolves it will provide a platform for a range of additional digital services.

Other drivers of near-future growth include the increased availability of high-speed wireless networks and cloud-based data services around the world, and the development of application programming interfaces (APIs) needed to create connected car software. On the demand side, growing awareness of digital safety features and entertainment options will spur sales. This, in turn, will encourage investment in connected car services, and give rise to aftermarket demand for connectivity equipment from owners of cars manufactured without digital features.

Our projected growth rate through 2021 slowed a bit from last year’s five-year forecast, partly because European regulators pushed back the eCall deadline to 2018 from 2015. Also slowing growth is the OEMs’ resistance to connected car technology from industry outsiders. For example, manufacturers aren’t allowing Apple CarPlay or Google’s Android Auto to serve as primary dashboard interfaces. They require that these options coexist with factory-installed systems; otherwise the manufacturers will block them altogether.

The innovation leaders

Das Auto Institut, together with Strategy&, compiles annual statistics on connected car innovations at OEMs and Tier 1 suppliers (see Exhibit 3). This includes an innovation strength index based on each company’s degree of innovative activity, as well as the originality, focus, and maturity level of its innovations. These are divided into two categories: safety-related driver assistance technology (which showed record levels of innovation investment in 2015) and infotainment innovation (where R&D investment matched a 2009 peak). The institute surveys all new innovations in the market and rates them in terms of inventiveness and importance, all of which determines an OEM’s innovativeness rating. The stakes are highest for the companies that consistently launch relevant and ground-breaking new features, as the index is cumulative over time.

VW ranked first and Daimler second in both the safety and infotainment categories in both 2014 and 2015. BMW, the leader in connected car infotainment innovations between 2009 and 2012, dropped into fourth place in 2015 behind Ford, in that category, as well as in safety innovations.

Among Tier 1 suppliers, Bosch was at the top in innovation in 2014, with Continental in second place, followed closely by Visteon. TRW and Valeo were further behind.

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