In 2009, GM car owners in China may be the first to use telematics, a powerful vehicle communication service. The service has already become popular in North America, Japan and Europe.
In North America, drivers can make or receive a call without taking their hands off the wheel or looking around. Instead, calls are answered and made with simple voice commands. Emails, online news and entertainment news are also delivered in audio; drivers can listen rather than read or watch a screen. If lost, a call center can be connected to for assistance with directions. And if a vehicle breaks down, an onboard SOS service system can be activated.
But it’s not just drivers in Europe and North America can experience this service. Chinese car owners will soon have access to the same level of service.
Why Telematics?
On November 29, GM, Shanghai Automotive Industry Corporation (Group) (SAIC) and Shanghai GM inaugurated a joint venture (JV) in Shanghai to provide telematics services, including automatic collision alarm, roadside assistance, remote unlocking, hands-free system, remote vehicle diagnosis and turn-by-turn navigation for cars made and sold by Shanghai GM in China.
The JV is the first OnStar information provider outside North America. The OnStar system, first developed by GM, provides three central types of services for drivers: hands-free calls, road information and salvage. When using the telematics service, information about the drivers and vehicles is sent to a service center where attendants help drivers solve problems as quickly as possible.
The telematics service provided by OnStar makes drivers feel in control, a reason why GM has found the service to be a cash cow. Depending on package offerings, OnStar collects US$199-499 from subscribers each year. OnStar’s annual profit margin currently stands at about 70%, the automaker’s most profitable department. The US and Canada have a combined 5 million subscribers, a number that will increase significantly by the end of 2008 when all GM vehicles include the service. A survey in the US shows that over 75% of OnStar subscribers are willing to install an OnStar system in their next vehicles, and nearly 90% would recommend the system to others.
Toyota also plans to launch a similar telematics service.
At the World Congress on Intelligent Transport Systems held in October 2007, Toyota (China) announced that it would introduce telematics to the Chinese market at the beginning of 2009. Moreover, industry insiders revealed that another two carmakers are planning to provide telematics services.
An IDC forecast claims that the value of the global telematics market will total US$42 billion by 2010. A study report by Mckinsey is more optimistic. It shows that under ideal conditions, the global market will reach US$100 billion. The report also says telematics service providers will be big beneficiaries in the future.
The rosy prospects are attracting a growing number of Chinese and foreign automakers. In addition to GM, almost all big brands, including Ford, Mercedes Benz, BMW and Toyota have entered the market. It is obvious, however, that the market won’t bring quick profits. Pre-launch marketing, resource integration and service costs will require a large investment. As a matter of fact, it took OnStar six years of efforts to breakeven with GM’s support.
The primary motivation for GM and Toyota’s drive to set up telematics in China isn’t money. In fact, profit now seems far away. A source with Toyota (China) indicates that the company is launching the services to “provide users with a full-range of after sales services to establish and maintain long-term relations with users.” GM (China) also considers the service as another business brand, like the second-hand car sales and financial services it already offers. Yet it’s still fair to say that the two auto giants are expressing their desire to boost sales through brand service.
Chinese car owners have increasingly strong demands for security and communication services. Both are fortunately included in telematics. And service is also bound to improve given the ongoing development of China’s telecommunication infrastructure.
As the first automakers to introduce telematics services to China, both GM and Toyota are well aware how customers are won through service. As buying choices change from price to service and brand, differentiated services will help attract customers. Telematics may be just the thing to help manufacturers.
Telematics Doesn’t Come Easy
Will telematics be successful in China? Some hold that the service is doomed to failure.
“It is too difficult. We have so many problems to solve,” says Zhang Zheng, CEO of CarBase Technology Co., Ltd, a veteran engaged in the area for many years. He is cautious and unoptimistic about the issue.
Telematics require a complete industrial chain consisting of service providers, mobile network operators, hardware/software suppliers and content providers. Vieston and Motorola are, for example, the principle hardware suppliers in North America. Software providers include IBM, Microsoft and Tele Atlas NV. CNN and Yahoo! deliver content, while Sprint PCS, Verizon and AT&T form the major camp of network operators. The big telematics service providers (TSPs) are, meanwhile, OnStar, ATX and CCAS.
Automakers provide turnkey service. They purchase or develop and manufacture the equipment and software necessary for telematics services, and then install and load the hardware and software in the cars they build. They also need to set up or contract a call center. Moreover, they need to develop an agreement with mobile operators to cut over a wireless network that connects cars with the service center. In a few words, automakers are seen throughout the entire value chain.
At the end of 2005, CCID Consulting concluded that in terms of revenue, sales of hardware in North America dropped year by year, from 87.7% in 2000 to 70.1% in 2004. In contrast, the share of service sales rose from 12.3% in 2000 to 29.9% in 2004. This shows that service quality bears heavily on whether automakers can profit.
In 2005, CarBase Technology Co., Ltd tried to become the “Chinese OnStar”. The company got in touch with GM (China), expressing its hope to learn from OnStar’s techniques and experience. After a thorough study, it found OnStar mostly provided vehicle-based professional information services, such as remote diagnosis, emergency salvage, and theft prevention. This was done in close cooperation with GM. But OnStar provided little public information, such as food and entertainment tips. So CarBase decided to provide public information services so to avoid head-on competition with OnStar and make up for its lack of experience in the auto industry.
Zhang Zheng, CEO of CarBase, soon discovered that his company would have to do more than simply follow OnStar. Unlike the more experienced counterpart, which provides professional information service, CarBase mainly provides public information services for car owners. In return, owners pay less than RMB100 (US$14) for a monthly subscription, which doesn’t even cover operating expenses. In spite of this, drivers are still unwilling to pay the bill. “Gone are the days when service providers collected fees for the service they provide,” says Zhang Zheng. “To get the same public information as we provide, car owners can dial 114 and only need to pay the telephone bill. At this point, who will be willing to subscribe to our service?”
Will telematics be accepted as an information service? Even automakers cannot ensure.
Those positive about the service believe security features like remote vehicle diagnosis and emergency salvage are its saving grace. And to start, the service will only be standard in middle and high-end models, a bracket likely to have a higher subscription base.
Those holding negative opinions, however, think demand for the service has not grown adequately in China. An insider notes that OnStar is of a great help for accidents in American remote areas. The same observer stresses this may not be the case in China. “In our country, when a traffic accident happens, a large crowd gathers. Someone will call the police. How could the driver be left abandoned?”
Zhang Zheng holds the same opinion. “Presently, what Chinese drivers care most about is convenience,” he says. “What brings convenience to drivers is public information relating to daily necessities. This happens to be an area that automakers aren’t very skillful.” His remarks explain why GM has postponed the launch of OnStar service in China.
In addition to unfamiliarity with the market, mobile operators, another powerful participant in the telematics industry chain, may constitute an even more difficult competitor. Consequently, the telematics industry chain in China is expected to be different from its counterpart in North America.
Yet on the strength of OnStar outside China, GM has become the largest telematics service provider in the world. One big reason for this is the development of an OnStar mobile telecommunications network, something currently unattainable in China.
Mobile operators now differ considerably from ten years ago. They are no longer content to provide network platforms and collect low “rent”. Instead, they are positioning themselves as “information providers” to act as both competitors and partners with automakers. They provide wireless networks to support telematics, but also play a role similar to telematics service providers for an equal footing with automakers. When driving a vehicle, users can still get information from mobile operators rather than automakers via handsets and other mobile terminals whose functions are growing increasingly powerful.
After all, security and other exclusive information services provided by automakers have yet to go mainstream. Meanwhile, domestic mobile operators have a great deal of experience providing information to the public. It looks like an uphill battle for telematics.
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