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The road ahead for

telematics

The market for automotive telematics

applications such as navigation and traffic

information systems is likely to explode.

Will the automakers again wind up providing

the infrastructure that others exploit?

Vehicles are now being transformed by a wireless revolution that will

substantially enlarge the telematics market over the next decade.1 But

carmakers are unlikely to win much of the revenue from this expanding

market unless they aggressively shape the environment so that telematics

applications can succeed commercially. Merely installing telematics units

in vehicles wont be enoughit will also be necessary to develop more

frequent and closer contacts with customers; to join forces with the best

technology, service, and content providers; and to engage the regulators.

Telematics includes in-vehicle applications such as navigation and traffic

information systems, collision avoidance systems, and mobile communica-

tions gear. Far more sophisticated devices lie on the horizon. Three distinct

submarkets are emerging. The front-seat market, constrained by the need

to avoid distracting motorists, will revolve around safety, security, and fea-

tures that make driving easier. The rear-seat market will include interactive

games, music, and video on demand. The third market, for engine and other

mechanical applications, will use data collected by on-board computers to

provide tools such as remote diagnostics, remote engine tuning, and the

intelligent ordering of replacement parts. In all, these markets could generate

up to $100 billiondepending on customer demand and regulatory deci-

sionsin the United States, Japan, and Western Europe by 2010 (Exhibit 1).

The car market as a whole now comes to about $750 billion in those three

regions.

The big question for carmakers is how much of this revenue they can actu-

ally capture. Mobile-telephone operators, car-stereo equipment suppliers,

and commercial radio stations have all done well from the increasing

amounts of time people now spend on the road. Yet carmakers have seen

their margins erode on options such as air bags and often end up merely

providing the costly infrastructure that others exploit.

Much of the revenue in the telematics market will come not from hardware

sales but from the provision of recurring services, such as information for

6 THE McKINSEY Q UARTERLY 2001 NUMBER 2

1See Lance Ealey and Glenn Mercer, Telematics: Where the radio meets the road, The McKinseyQuarterly, 1999 Number 2, pp. 617.

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drivers and rear-seat info-

tainment, which most

carmakers are ill-placed

to deliver. Customers buy

new cars infrequently and

have limited contact with

manufacturers. The latter

have entered the after-

sales marketa move

reflecting its significant

proportion of a cars life-

time valuebut telemat-

ics will demand much

bolder moves: providing

recurring services through

subscriptions or pay-per-

use schemes calls for an

entirely different rangeof customer-relationship-

management skills.

Not that carmakers are

standing still. General

Motors has set up OnStar,

a voice-based telematics system that comes free for a year with most of

the companys new cars. OnStar services include guidance for drivers who

have lost their way, an automatic help service when air bags deploy, and

remote unlocking for drivers who have locked themselves out. Although

OnStar had a user base of about 600,000 by the end of 2000,2 a majority of

these people dont pay. In 2001, Mercedes-Benz USA is providing a safety

and security system called Tele Aid as part of its standard offering; PSA,

together with Vivendi Universal, is developing an Internet portal for European

motorists; and Ford has formed a joint venture called Wingcast with

Qualcomm, a US specialist in digital wireless services.

Companies from other industries are also gearing up to grab a share of the

business. Clarion is promoting the Auto PC, an in-car personal computer

based on Microsoft Windows. Microsoft itself recently announced the intro-

duction of its Car.Net infrastructure platform. Meanwhile, Delphi and Palm

are developing MobileAria, a docking station to be launched in mid-2001 for

use with existing portable devices.

If carmakers are to profit from the wireless revolution, they will have tochange the way they operate and work closely with other players along the

7T H E R O A D A H E A D F O R T E L E M AT I C S

E X H I B I T 1

What drives market size?

Forecast revenues of telematics market in 2010,1 $ billion

1For automakers in the United States, Japan, and Western Europe.2Includes only revenues from applications involving off-board communications.

Rear-seatmarket2

Front-seatmarket

Engine andother mechanical

applications market

Neutral scenario Medium demand for

front-seat applications No rear-seat applications Use of engine and other

mechanical applicationsbecoming standard

5 035

Pessimistic scenario

Regulatory pressurerestricts front-seatapplications

No rear-seat applications No engine and other

mechanical applicationsmarket

0 013

Optimistic scenario High demand for

regulation-drivenfront-seat applications

Proliferation of rear-seatapplications

Use of engine and othermechanical applicationsbecoming standard

305 65

40

13

100

2Automotive News, January 15, 2001.

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value chain (Exhibit 2).

Shorter product cycles

and dissimilar consumer

demands mean that

the telematics business

moves at a pace different

from that of the car busi-

ness. To learn which

telematics applications

customers will pay for,

carmakers must interact

with them early and react

to their feedback effec-

tively. This new business

will clearly have broad

implications for the car-

makers strategies and

organizations.

That isnt all. Regulatory

agencies, which will

control the development

of the telematics market,

may restrict certain appli-

cations on grounds of safety. They might make other applications, such as

automatic collision notification, compulsory. To ensure that the full social and

economic potential of telematics can be realized, carmakers must work with

the regulators to shape the terms of such requirements.

Although the challenge is considerable, so are the potential rewards. At the

end of the year 2000, we estimate that DaimlerChryslers average market capi-

talization per customer3 was $1,700, while Fords was $900 and GMs $600.

Toyota, which has invested in mobile telecommunications and e-business,

did far better: at $4,500, its market capitalization per customer was nearly

2.5 times the industry average, suggesting that all carmakers should

embrace the changing role of the car and, more broadly, the new economy.

Franois Bouvard, Andreas Cornet, and Philip J. Rowland

Franois Bouvard is a principal in McKinseys Paris office,Andreas Cornet is

an associate principal in the Dsseldorf office, and Philip Rowland is a principal

in the London office. Copyright 2001 McKinsey & Company. All rights reserved.

8 THE McKINSEY Q UARTERLY2001 NUMBER 2

E X H I B I T 2

Opportunities for carmakers

1Value calculated as 10 times earnings before interest and taxes.2Electronic customer relationship management.

Contentprovider

Softwareprovider

Contentaggregator

Hardwareprovider

Value-creation

potential,1

$ billion

45 15 30 Low

Benefit tocarmaker

Captureshare ofvaluecreated

Limited;join only ifprepared toenter newbusinesswith limitedvalue-creationopportunities

Tap intorecurringrevenuestreams

Leverageexistingcustomerbase

ImproveeCRM2

Ensureappropriatehardware inits cars

Reservethe rightto play inother linksof valuechain

Controlsafety andreliabilityissues

The telematics value chain

Mobile networkbandwidth provider

Solutionprovider

Vehicleinstaller

3Based on the companys average monthly market capitalization per customer from June 2000 toJanuary 2001.