This month, I wanted to share a couple of observations on the “Connected Car,” and the potential implications on franchised dealerships.
But first up, a bit of history.
The “Connected Car” isn’t a new phenomenon.
Since 2014, a growing number of vehicles have featured embedded cellular modems, allowing them to connect to the internet.
In the 1990s, the introduction of onboard diagnostics led to the connected car. Vehicle connectivity back then was simply meant for drivers to quickly place emergency calls during an accident.
Fast-forward to the current day, and the vast majority of new vehicles are now sold with connectivity.
The promises of vehicle-to-vehicle (V2V), vehicle-to-grid (V2G) and vehicle-to-anything (V2X) offer very powerful use cases that will unlock value across the mobility landscape.
But the impact on the aftermarket, service and parts is uncertain and still needs to play out.
Of all passenger cars sold in the U.S., around 91% are connected. This number is expected to continue to grow over the coming years; researchers predict that 96% of all new vehicles shipped in 2030 will have built-in connectivity.
Vehicle connectivity enables a number of interesting use cases. But for today, I’ll focus on:
1. Over-the-Air Updates (OTA);
2. Telematics & Predictive Analytics; and
3. The Unbundling of Vehicle Features into Subscription Services
OVER THE AIR UPDATES (OTA)
Back in 2018, Consumer Reports panned the new Tesla Model 3 for having worse breaking performance than an F-150 pickup truck. A few days later, they retested the same car and found that the vehicle’s stopping distance had been reduced by nearly 20 feet. All without anyone touching the vehicle.
It’s been four years since, but the Tesla Model 3 incident really opened the eyes of the world to the power of software updates to vehicles via Over-the-Air (OTA) software updates.
OTA updates to the vehicle now promise the reduction of warranty costs, increased completion rates for software-related recalls, improvement of customer satisfaction by elimination of trips to the dealership for software upgrades or fixes, and the ability to upgrade functionality and add features to automotive infotainment systems over a vehicle’s lifetime.
According to IHS Automotive, total worldwide automaker cost savings from OTA software update events has grown to more than $35 billion in 2022 (with telematics and infotainment system updates comprising most of the savings).
Consulting firm ABI Research reported that domestic automakers allocate about $20 billion annually in warranty reserves. While not all recalls can be fixed via an OTA update, ABI suggested that close to one-third of recalls can be addressed over the air, saving car OEMs at least $6 billion per year.
Is it any wonder that automakers are talking more and more about the software-defined vehicle?
TELEMATICS & PREDICTIVE ANALYTICS
Vehicle Telematics leverages vehicle connectivity to acquire, collect, store and analyze data generated from the vehicle.
There are four main industry segments that will benefit from vehicle telematics:
Automakers and Tier-1 Suppliers: Reduction of warranties and recalls, creating deeper customer relationships over lifetime of ownership and designing better parts.
Commercial Vehicle Fleets: Reduction of Total Cost of Ownership (TCO), increasing fleet efficiency and complying with regulation.
Passenger Vehicle Fleets: Reduction of Total Cost of Ownership (TCO) and improving safety, enhanced reporting, emergency assistance.
Insurers: Investigate driver risk and accident root causes and enable usage/behavior-based policies.
Given the high percentage of vehicles that are now connected, and the growing number of sensors onboard, Predictive Analytics may be “The Holy Grail”: enabling the vehicle to sense if/when key components are going to fail and alerting the driver to proactively visit the dealership for service for timely, preventative maintenance.
Pre-COVID, up to half of a franchise dealer’s gross profit was driven through their parts and service operations. At first glance, growing EV adoption is a negative development for dealers’ parts & service: EVs have dramatically fewer mechanical parts (~20-30K parts vs. ~50-100K parts in ICE vehicles) and are forecasted to have lower repair frequency.
But this only tells part of the story.
Offsetting these trends are expected higher repair costs (due to increased vehicle complexity) and higher service retention rates (due to extended warranty periods for EVs and the technician skill and tools required to work on them), coupled with potential share gain opportunities at the expense of independent aftermarket providers. These countervailing “tailwinds” could more than offset any negative impact on parts and service from fewer parts and lower repair frequency for EVs.
It’s also worth remembering that EVs are still several years away from making up a significant proportion of Vehicle in Operation (VIO), softening any near-term negative impact on Parts & Service revenue/profit for dealers.
But let’s circle back to predictive analytics. The fact that the car will be able to monitor its own health and report back when preventative repairs are needed should protect work being done at franchise dealer repair facilities. A vehicle that is constantly monitoring its own condition and alerting the driver if and when it needs work isn’t likely to suggest getting that work done at a location outside of the dealer network.
Independent aftermarket service providers may also have a hard time keeping up with investments into critical EV infrastructure including charging stations, battery storage facilities, high-voltage diagnostic tools and required safety equipment.
UNBUNDLING VEHICLE FEATURES INTO SUBSCRIPTION SERVICES
Over the past year, Ford, General Motors and Stellantis have each communicated their intent to generate over $20 billion in new, high-margin revenue from selling vehicle features via monthly subscription.
How might the automakers generate new subscription revenue? GM aims to collect up to $6 billion per year via usage-based insurance (UBI). BMW intends to allow consumers to choose between paying upfront for features like rear heated seats or simply paying by the month. Porsche has said that in the future drivers will be able to unlock 50 horsepower through their app. And Audi is exploring a future where their EV drivers who end up stranded at the side of the road with no remaining charge will be able to unlock 50 miles of battery range for a one-time fee.
For new Mercedes-Benz EQ electric models, customers will be given the option to pay $1,200 yearly via a subscription model to unlock enhanced vehicle performance. Mercedes calls this their "Acceleration Increase" subscription service that is available for all EQ models.
According to Mercedes, the yearly fee increases the maximum horsepower and torque of the car, while also increasing overall performance. Acceleration from 0-60 mph is said to improve by about 1.0 seconds along with the overall driving characteristics of the electric motors.
This news comes a few months after BMW faced backlash for offering subscriptions for certain options, such as heated seats. BMW North America faced so much public criticism that it even released a statement defending their subscription option.
Expect to see many of the automakers “unbundle” features as they release new models, focusing on billions of new revenue that will have very high profit margins.
But, in order to get there, the automakers will need to redefine themselves as software companies as they start to design the “Software Defined Vehicle.” Recently Hyundai reported that they intend to spend $12.6 billion to develop a new operating system that will accommodate over-the-air updates.
It’s to be seen how successful the legacy automakers can navigate redefining themselves as software companies, while at the same time making the not-insignificant evolution from internal combustion engine (ICE) to electric vehicles (EVs). Some automakers may not survive attempting to make both of these changes simultaneously.
A few questions remain regarding subscription services.
First, what will be the consumer appetite and willingness to pay for multiple subscriptions on a monthly basis for convenience and performance features that used to be included in the sale price of the car?
Second, when a consumer “unlocks” a vehicle feature post-purchase, how much of that revenue will be shared back to the dealership? Dealer Councils will need to actively negotiate with their automaker around future subscription revenue share.
Third, will the concept of unbundling of vehicle features into monthly payments survive challenges in the court of law?
NEW JERSEY LAWSUIT ON VEHICLE FEATURE SUBSCRIPTIONS
We have started to see some evidence of pushback against these new, proposed vehicle subscription models in the courts.
For example, New Jersey lawmakers have proposed to stop subscription services for vehicle components and hardware already installed and functionable without ongoing expense.
The new bill proposes that it shall be an unlawful practice for a motor vehicle dealer or a manufacturer of motor vehicles sold or leased in this State to offer to a consumer a subscription service for any motor vehicle feature that:
Utilizes components and hardware already installed on the motor vehicle at the time of purchase or lease by the consumer; and
Would function after activation without ongoing expense to the dealer, manufacturer, or any third-party service provider.
While I'm not a lawyer, I think it's going to be hard to stop an automaker from unbundling vehicle options and providing the consumer the option of either paying upfront or paying "as you go" on any month they want the feature activated.
But I'm excited to see how this plays out.
A FINAL WORD ON RIGHT TO REPAIR LAWS
Massachusetts voters approved a controversial ballot measure in 2020 that expanded the state's existing right-to-repair law. Manufacturers of vehicles sold in Massachusetts are required to equip vehicles that use telematics systems with a standardized, open-access data platform beginning with the 2022 model year. It also gives vehicle owners and independent repair shops access to real-time information from the telematics, such as crash notifications, remote diagnostics and navigation.
The Alliance for Automotive Innovation is locked in a legal battle with Massachusetts Attorney General Maura Healey. The alliance has argued that the state's amended right-to-repair law conflicts with several federal laws, poses cybersecurity and vehicle safety risks and sets an impossible timeline for compliance.
A U.S. district judge has yet to rule on the case.
In February, U.S. Representative Bobby Rush (D-IL), introduced a bill similar to the Massachusetts measure mandating vehicle owners and independent repair shops have the same access to repair and maintenance tools and data as automakers and their franchised dealerships.
Right to Repair or not, I struggle with how the average independent repair shop is going to be able to keep up with the technician sophistication and tools required to work on the next generation of more complex vehicles.
SO, WHAT’S THE TAKE-AWAY?
At this point, there are more questions than answers about how the increasingly sophisticated connected car will impact dealership parts and service revenues and profitability.
From a parts and service perspective, dealers may be in for a future of selling fewer parts and lower repair frequency, offset by higher ticket prices and greater retention over the lifetime of the vehicle.
The big unknown that could provide a windfall to dealer economics will rest on how successful automakers (and dealers) will be at convincing consumers to unbundle vehicle features and pay for them as recurring (monthly) subscription services. If they are able to generate billions of additional, high-margin revenue, and if this revenue is shared back with the dealer body, we may experience a future where dealer profitability is stronger than ever. But that’s a lot of “ifs” in one sentence.
In any case, there’s a lot of exciting change coming to the automotive space over the next few years that will be interesting to watch.