Most manufacturers have some ambition in their strategic plan to generate some billions of additional profit in a few years from the sale of digital services.
Inspired by companies like Apple, these are seen to be very high margin products delivered over-the-air throughout an extended period of the life of the car.
This is not totally new, as GM launched OnStar in 1995 and now claims to have 4.2 million paying customers generating US$2 billion revenue with a 70% margin.
The focus has now switched to insurance, hoping to generate US$6 billion by 2030. Insurance is an attractive product for car companies for retention reasons, so it is unsurprising that in Stellantis’ ‘Software Day’ last December, insurance was included in the products and services which they hope will generate €20 billion in revenue from 34 million connected vehicles by 2030.
Insurance developments are still to come, but we are starting to see more announcements from OEMs that their customers can now buy features on demand (FOD) to expand the functionality of cars that they have already purchased.
This technology is not new – Tesla have offered it in some form on their cars since the Model S was launched in 2012 – but it is only recently that it has entered the mainstream with relatively affordable options such as heated seats, enhanced lighting and parking assistance.
Different OEMs are at different stages of the roll-out, partly related to whether their vehicle architectures allow the software to be safely and securely downloaded, and the feature can then be accessed by the driver.
At its simplest, if you rely on traditional switch hardware, you can’t power a device on and off unless you have included a redundant switch, so the car needs to have ‘soft switches’ that appear on the screen only if a device has been enabled.
BMW announced their Connected Drive offer in the UK last week, and the options available include heated seats for £15 per month (in a post-Brexit world we might as well call that €15 or US$15…).
Different terms are available including a limited one-month trial, one year, three years and unlimited. This is an expansion of their previous offer which allowed features to be permanently added such as adaptive cruise control and adaptive suspension.
Other features to come from the OEMs are less familiar such as digital keys that will allow the owner to authorise other people to use the car by sending them a ‘virtual key’ that operates through the OEM smartphone app, and allows the car to be unlocked and started.
The digital key will also include personalised information on the preferred settings for that user including seats and infotainment.
Announcements like this generate mixed reactions from owners and potential buyers. There was some wholly negative reaction when Audi launched FoD with the e-torn, but a more balanced response was “On the one hand, you feel angry that you have to pay for a feature that the car physically has but is blocked from you.
On the other hand, when you order the car and pay for the feature to be enabled up front, you’re kind of gambling that it’s worth it. If you don’t pre-pay then, for a token sum, you can try it out to see what you think it’s worth.”
A Cox Automotive survey in the US showed that three quarters of consumers were not willing to pay an annual or monthly fee for additional features and services. For those who were willing to pay, the most attractive features were safety items, performance features and comfort features.
We are all used to buying apps to run on our smartphones, buying additional functionality to add to a software programme that we have already installed, paying more to add channels to our satellite television package or (our children) paying a fee on a games platform to access more features or capabilities.
When we look at cars however, the offer encompasses a broader range of services. Some, like navigation, might be an updated map database that replaces one block of software with a newer version, for which presumably the OEM has paid an additional licence fee, so reasonably expects payment for that plus a margin.
Others, like the adaptive cruise control, may utilise sensors and systems that are already installed in the car supporting other functions, but the additional software downloaded or unlocked then links these together in a different way to provide the new functionality.
The digital key is a service provided outside the car to securely allow another person access, so again it is relatively easy to see why this will cost a fee. Where things become more challenging in my view is where the car has been built with redundant or deliberately restricted functionality such as the heated seat or steering wheel or power or suspension upgrades.
All vehicles have the functionality and in the eyes of the customer they have ‘already paid for it’, then are being asked to pay more to actually access it.
Even when customers are willing to buy a FoD, there are complications. If the car is leased or a business car, does the driver have the freedom to add features without seeking permission first?
What happens when the car changes hands or is written off in an accident? How are features valued, some of which might be on a short-term subscription, some purchased over-the-air, and others included in the original purchase price?
Does the OEM downgrade a car back to the basic ex-factory specification and ‘double dip’ with the next owner to upgrade the car again?
How does a repairer understand the actual specification of the car when it differs from that defined at the time of build by the VIN?
Should dealers get a commission on over-the-air sales, even if they are not directly involved in the purchase, as some OEMs are proposing?
It’s not only the customers who will need to adapt their thinking, but also everyone involved in selling or servicing cars throughout their lifecycle.
Steve Young is managing director of ICDP