Car manufacturers and automotive suppliers like Audi, Daimler, and Continental are looking to reinvent themselves – as digital car companies that not only sell automobiles, but also digital services. But while moving towards this business model, they will encounter several other industries on the way with significant roles to play.
“Your planned route includes 50 kilometers with no speed limit”, a friendly voice announces through the car door speakers. “Would you like to activate an additional 50 horsepower today? That would cost just €3.99.” The driver, napping comfortably in the cozy seat of his autonomous car, is awoken with a start. “Yeah, that’s fine”, he mutters quietly, still half asleep. The computer’s female voice immediately confirms the purchase.
“Thank you. The amount has been debited from your customer account. May I take this opportunity to tell you about today’s special offer? For just €1, you can turn on your seat’s massage feature. The regular price is €2.50 …” Now getting impatient, the driver interrupts: “No thanks!” The computer stops speaking immediately. The passenger leans back and within seconds is sound asleep once again.
Adding value with digital services
A story from the distant future? Not necessarily. In fact, several car manufacturers are thinking about changing their business models. They are considering a shift away from the one-time transactional sales model, focusing instead on a value-adding approach where digital services become increasingly important for revenue. “Our customers could then activate individual features on demand for the time they require them.
They would pay only for the functionality they need”, said Rupert Stadler, Chairman of the Board of Management at
, during an interview last year with German car magazine “auto, motor und sport”. Ingolstadt-based Audi has already launched an in-house reorganization program with the objective of becoming a “Digital Car Company” by the year 2025. According to the plan, success will be increasingly measured by digital revenue, and not just by the number of cars sold. Audi
Our customers could then activate individual features on demand for the time they require them. They would pay only for the functionality they need.
Opening the car window: available on subscription
But what kind of product will be left once this is complete? “Perhaps the Spotify version of the car”, says
. The author from Hamburg is an expert in digital business models. The notion of a Spotify car occurred to him during a workshop with managers from the automotive industry. Spotify’s free service streams music over the Internet, but songs are played at random. Christian Hoffmeister
To listen to a particular song on demand, you have to pay for a subscription. So why doesn’t the car industry do the same, Hoffmeister wondered. “Any component with a sensor can be made part of a certain service”, he says.
Taken to extremes, the result could be a basic version of a car where you can only open the windows a little or even not at all, and opening them any further would incur a charge. “Additional horsepower would also be possible using this model”, Hoffmeister continues.
That would certainly work from a technical perspective: Even today, manufacturers often offer engine versions that differ only in their electronic control systems in order to keep costs down. A few bytes is all it takes to influence the amount of horsepower a power unit can deliver. In other words, manufacturers could simply sell more power as a download.
Freemium: a popular future strategy
Soon, there could be a new magic word in the automotive industry: upselling. This is where companies sell or hire out a basic version of a vehicle, and the customer books everything else as an add-on. It’s similar to the model used by budget airlines, an area where people have long paid extra for more legroom, snacks, and additional luggage.
Expert Hoffmeister can even envisage some manufacturers taking what’s called the “freemium” route. The word – a combination of “free” and “premium” – stands for a strategy already perfected by companies like Google, Dropbox, and even some publishing houses: Customers are given access to a basic product for free, but have to pay if they want any extras.
“In future, a lot of things could be switched to a pay-per-use basis”, says Werner Köstler, Senior Vice President at
. Suppliers already contribute 70 percent by value to a premium brand car, and will have to provide the technical foundations for tomorrow’s digital business models. In the case of Continental, that could look something like this: Instead of selling a tire for 500 euros, the company hires it out for five cents per hundred kilometers. Continental
The manufacturer monitors the tire’s pressure, temperature, and mileage remotely and – should there be any signs of a problem – proactively takes care of a replacement. This isn’t a fanciful vision. It’s reality. In fact, Continental is already testing this kind of service with pilot companies in the commercial vehicle sector. “Here, customers benefit from not having any costs when there are no orders and their vehicles aren’t being used”, explains Köstler.
In future, a lot of things could be switched to a pay-per-use basis.
Additional digital services are not a panacea
Still, some people are skeptical and don’t believe that mini-sized revenues from digital services will dominate the market. “The most important value proposition is the car itself. That will remain the core of our business”, says Alexander Mankowsky, futurologist at
. He doubts that additional services alone will make up the business model of the future. “50 cents to switch on the heated seats? That isn’t premium. That isn’t Daimler”, explains Mankowsky. In his opinion, too much weight is being given to digital technology. “Facebook, Netflix, smartphones – these are the present, not the future. Daimler
I sense that at some stage, the reality of life and awareness of our senses will make a comeback.” Mercedes-Benz, he says, has always attached great importance to this with the “sensual purity” approach to its brand. He believes that in the future, manufacturers will still be producing physical articles more than anything else. However, these vehicles won’t necessarily have to be sold. According to Mankowsky’s vision, the future will see customers booking a car that suits their needs, whether it’s a moving office or a holiday car with games for the kids.
And it could still take some time before the Spotify car comes along. That’s because the majority of manufacturers have to establish a relationship with their customers before being able to sell them digital services. And currently, there is no relationship. Often, carmakers don’t even know who their customers are. They might know the ones that buy a brand new vehicle, but this connection is often lost – at the very latest when the car is sold on. Then, they have no idea who is sitting behind the wheel. The fact that nine out of ten cars will be connected to the Internet via a mobile radio module by 2018, according to a forecast by Continental, won’t help either.
Amazon and Apple are masters of digitalization
A further issue is that the heavyweights of the industry have no experience in making their money in the digital world. They wouldn’t even be in a position to charge for the additional 50 horsepower or five degrees additional cooling; after all, that would require them to process millions of mini transactions each day. Quite simply, the car manufacturers in Munich, Ingolstadt, and Stuttgart just don’t have the required know-how to put this into practice.
However, in Seattle and Cupertino there are companies that do. Pioneers like Amazon or Apple have a completely different overview of how digitalization works: They develop close relationships with their customers, know their tastes down to the last detail, and have years of experience in selling digital products.
The question that springs to mind here, therefore, is: Why doesn’t Amazon bring a car onto the market? It would be pretty convenient for customers – they could simply get in, log on with their email address and Amazon password, and with the click of a button book the laser high-beam headlights for their night journey.
This would be just one of Amazon’s endless selection of products on offer, alongside music and movies. Expert Hoffmeister sees this as a perfectly plausible scenario. “When it comes to software and artificial intelligence, companies like Apple and Amazon are way ahead of the pack. In theory, they could build the better car.”
Will Apple enter the car industry?
The more cumbersome parts – wheels, engine, chassis – could be bought as additional extras. How easy that would be in business terms is demonstrated by something last year that many may have missed. In September, there was talk that Apple wanted to acquire the sports-car manufacturer McLaren. In itself, nothing remarkable – especially since both sides denied it.
What was revealing, however, was the rumored price: the iPhone manufacturer allegedly offered the equivalent of 1.74 billion euros for the esteemed sports-car maker. Peanuts for a company that sits on cash reserves of around 200 billion dollars. For Apple, entry into the automotive industry would have been nothing more than a financial footnote.
Still, Daimler futurologist Mankowsky urges people to be realistic about the competition from Silicon Valley. “Technology companies tend to have problems when it comes to manufacturing physical products”, he explains. And besides, making a car is more challenging than making a smartphone, he says. “If the car doesn’t work the way it should, customers won’t be so quick to accept it.”
Just like Daimler boss Dieter Zetsche, Mankowsky sees technology corporations taking on the role of “frenemies” (a combination of friends and enemies). They could be cooperation partners when it comes to driving innovation like autonomous cars. But, they say, the car itself would have to come from Daimler – should technology companies enter the market, carmakers would quite simply regard them as competitors.
Technology companies tend to have problems when it comes to manufacturing physical products.
Private customers not necessarily the main focus
In any event, the automobile giants must clarify one important question: Who are the digital car company’s target customers? Presumably not private customers: two out of three vehicles already end up in the hands of car rental businesses, companies, or car-sharing services.
And experts agree that this number will continue to rise over the next few years. Soon, towns and cities could also appear alongside services like Uber on car manufacturers’ list of customers. “In the future, large cities may have to decide between building a subway system or buying a few thousand autonomous cars instead”, explains Köstler from Continental.
He generally has his doubts that tomorrow’s world of mobility will demand additional horsepower or other extra services to improve the driving experience. “This may sound a little German, but in future drivers would rather pay a premium for arriving on time”, says Köstler. In other words: People won’t be using their digital wallets to pay for the massage feature, but rather for the privilege of driving in the fast lane of the expressway. Or for a series of green traffic lights, available as a download for subscribers.
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