Automotive services – Backward business

Users are not going to subscribe to hardware.

• RFM has long predicted that automotive digital services are the solution to the problem of lower vehicle sales, but Mercedes and BMW continue to demonstrate that they don’t really understand what is happening in their industry.
• RFM Research predicts that as a result of the electrification of the automobile and autonomous driving, demand for passenger vehicles could decline by 65% over the next 25 years (see here).
• I do not think that there is a single OEM in business today that will survive a decline of this magnitude without needing to find another source of revenue.
• Digital services in the vehicle is the leading candidate as the opportunity should be very large and when executed properly, very profitable.
• Rising margins mean that OEMs will be able to grow profits even if revenues are falling thanks to the mix effect.
• However, this means that the automotive industry needs to get services right and when I look at what is being developed and offered today, it is clear that there is a huge amount of work the industry still needs to do.
• Two examples of this are Mercedes Benz and BMW.
• Mercedes’s latest idea of a good deal for its customers is to ask them to pay $1,200 per year to improve the driving performance of its EVs while BMW thinks that customers should pay $180 per year for heated seats.
• While Mercedes and BMW have the right idea that subscriptions are a good idea as they create a relationship with the users of their products for the first time and will generate data, they have no idea what a should be a subscription and what should be a one-off payment.
• Moving to software-enabled features has a lot of benefits as it means that OEMs will be able to significantly reduce the number of variations that they have to produce of their vehicles.
• More vehicles will be physically exactly the same with the optional extras being enabled by over-the-air permissioning improving volume-based savings and requiring fewer designs.
• This is a very common strategy employed by consumer electronics companies and has also been used to good effect by Tesla.
• However, the vehicle-buying public has been paying one-off fees for options for decades and I suspect that there is going to be a lot of resistance to paying $15 a month to keep one’s bottom warm in winter.
• Hence, I think the right approach is to charge for the options exactly as they have been for years and to offer subscriptions for services rather than products.
• Services could include updates for navigation, smart parking services, music subscriptions, pay-as-you-go insurance and so on.
• In order to achieve this, the OEMs need to ensure that users engage with their own digital experiences in the vehicle or risk being cut out from the services opportunity almost entirely.
• This is why many of the OEMs are working furiously to produce their own digital experiences for their vehicles but their progress to date is largely uninspiring.
• Outside of Tesla, Ford has a promising offering but the rest of the Americans, the Europeans and the Asians are having a very hard time getting this right.
• Renault has already taken an alternative direction by going with Google (see here) having decided that it will get nowhere on its own, but this ensures that it will only receive the morsels that Google has agreed to share.
• Unless the industry gets this right, it will become a carbon copy of the PC and Android smartphone industry where all of the value is sucked out by the technology suppliers and the digital ecosystems.
• Progress to date does not make me optimistic.