Telematics: Decision Time for Detroit

This article first briefly summarizes the potential of telematics. It then analyses the investment risks, particularly for automakers

Telematics Decision Time for Detroit 974x296

With implications for navigation, safety, entertainment and vehicle maintenance as well as regulation and infrastructure investment in roads, telematics has the potential to transform driving more than any other innovation for decades.

In the already well-established Asian telematics industry, revenue tends to come from extra charges at the time of vehicle-sale, with most subsequent services provided free.

The US model has evolved differently, with much of the cost of telematics hardware and software subsidized in the initial vehicle sale price and revenue coming from services used. The decision to invest in telematics is therefore riskier in the US. This article first briefly summarizes the potential of telematics.

It then analyses the investment risks, particularly for automakers. It concludes with recommendations on how the US auto industry can minimize risk and make the most of the opportunities.

The auto industry is currently out of favour on Wall Street, largely because of low growth expectations. Globally, automotive unit volumes are likely to grow at 2 - 2.5% per annum over the next ten years. But this expansion will be largely outside North America. With sales in their home market flat, US auto companies are searching for ways of increasing profits that do not involve selling more vehicles.

One seemingly promising avenue is telematics, which could be a $40bn market worldwide by 2010. Some think it could rejuvenate the stagnant US auto industry.

This article starts by providing some background on telematics, a technology that is not yet widely familiar. It then discusses the risks and potential rewards of investment in telematics and the ways the value delivery network might be structured as the industry grows.

Finally, it analyses whether automotive companies should invest in this technology, including the strategic implications of different approaches to pricing and customer service.

What Is Telematics?

The word telematics comes from the German telekomunikation + infomatik. It refers to two-way voice and data communication between the vehicle and information service providers, using wireless technology (Figure 1). It has the potential to change the experience of driving vehicles more fundamentally than anything since reliability became the norm two or three decades ago (see box overleaf, “Driving into the Future”).

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