An Owner’s Manual for Investing in the Connected Car

car

In a little more than two years, the number of cars in operation around the world is expected to reach 1.3 billion, or one for every seven people on the planet. Along with the boom in all those Fords, Hyundais, Toyotas — you name it — the amount of time we spend behind the wheel is sure to continue its steady climb upward. The typical American urban commuter already spends 42 hours a year stuck in traffic jams — more than twice as much since 1982.

Those numbers paint a future of busy highways and epic horn-honking. But within the automotive industry, they present a wealth of opportunity. Those billion-plus souls are a captive audience waiting to be served by product and service providers who will interact with motorists and their cars through the connected technology now making its way into our vehicles. From infotainment options to maintenance and performance data to auto insurance, the interactive relationship between vendor and driver is a new commercial environment estimated to exceed $100 billion per year by 2025.

According to McKinsey & Company, one out of every five cars is expected to be connected to the Internet by 2020. But the evolution of the “Connected Vehicle” is moving so fast that providers trying to capitalize now may find themselves stalling out in a market that is still immature. Understanding the state of the market will facilitate wise investment decisions and reduce risk.

Where the Cars Are

The automotive industry is in the best shape it has been in for years. After a disastrous period of plummeting sales and bankruptcies following the Great Recession of 2008, the industry emerged leaner and more efficient. Annual production is humming along at a record pace, with an all-time high of 72 million vehicles produced globally in 2016.

Two emerging economies with burgeoning middle-classes are helping to spur demand: China and India, making the aftermarket for service and parts in those countries a potentially hot ticket. In China — which produced a world-leading 24 million vehicles last year — the market for aftermarket parts could reach $114 billion by 2020.

But realizing that potential will require some effort. Chinese service and distribution companies must create an infrastructure that aligns with the digital era of car ownership. That means improvements related to predictive failure analysis, with better management of replacement parts needed for service and repair, including availability, inventory and distribution.

Fuel Economy and Emissions

Investors new to the auto industry must be aware of the impact that legislation related to fuel economy and emissions standards has on the connected vehicle market.

New cars today average 24.8 miles per gallon and CO2 emissions of 358 grams per mile. As more attention is paid to climate change and the effects of air pollution in urban centers, the auto industry is tasked with improving those numbers. Legislation signed by President Obama in 2011 set a goal of a minimum of 54.5 miles per gallon by model year 2025.

To achieve that goal, solutions range from advanced fuel and air systems using direct injection and turbochargers to after-treatment for exhaust systems. Many connected vehicles already come with packages that merge fuel economy, zero emissions and other enhanced productivity features together. But these add cost to manufacturing. The challenge for auto manufacturers is to contain these costs without passing them along to an informed consumer base that has become more savvy about sticker prices.

The Trend Towards Pay-per-Drive

For many years, the growth of the auto industry was directly related to population growth, especially so in North America and Western Europe. However, as cities sprawl and more people migrate to urban areas, car ownership has become less important.

The cities of the future are focusing on alternative transportation, such as rail and bus lines, ride-sharing (think Uber), hourly bike rental and pay-per drive models. This trend impacts upon the automotive industry by pointing toward a decline in urban sales.

However, most car companies are aware of the trend and are responding. GM, Ford, VW, PSA Groupe and Daimler are adapting to pay-per-drive. Last year, Ford entered the car-sharing market by offering leases of its vehicles to small groups of three to six drivers. This kind of forward-thinking is expected to open up new revenue streams.

Technology and Opportunity

Perhaps the most significant change in the auto industry is the transition of the vehicle from pure transportation to smart car. Following on the heels of the connected vehicle, the first autonomous vehicles (AVs) will begin appearing regularly. The supporting technologies related to the smart car will be a goldmine for providers, with the passive motorist in love with the comfort, convenience and accessibility that comes along with the ride of the future.

The Long and Short of It

The auto industry has long been capital-intensive with extended product development cycles. It is also complicated by volatile economic forces, including the price of oil and emissions and safety legislation, both of which add cost and complexity to the vehicle.

But this is not your grandfather’s auto industry. The market is far more progressive. Much of the content of vehicles made in the US is controlled by a group of eight to ten companies that are heavily invested in new technology and have significant infrastructure in Silicon Valley.

To be successful in this new era, providers must partner with companies with no automotive background and instead have cultures, processes and manufacturing techniques vastly different to automotive norms. Partnership, adaption and integration are the new measures of success.

Those who can climb aboard this future now will lead the pack. Those who do not will be left in the dust.

© Copyright 2017. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
More Info

Share this page

Published