The coming revolution in Telematics
by Aaron M. Cohen

The term "telematics" is not yet widely recognized, but in the coming years, those connected with the automobile industry--among others--will start hearing it more often. In fact, telematics--the combination of applied telecommunications technology with computers to control electric, electronic, and mechanical functions--is going to change the definition of the automobile as a product, and the nature of automobile assemblers as manufacturers and marketers of motor vehicles. The economic and business implications of this are enormous, and they promise to create no less than a revolution in the automobile industry.

Wireless technology, combined with global positioning systems (GPS) and mobile or onboard electronics, comprise the integrated technology that is redefining the automobile, and hence the phases of product development, production, and marketing associated with it. Needless to say, this integrated technology is also helping redefine how cars are used by their owners. The change is not just a matter of more advanced application of electronics. It is a fundamental redefinition for one of the key industrial products of the world's economy.

Wiring the Model T
The first applications of electronics were simply to do what had been done mechanically and electrically in the past (roll down a window, switch on a heater). But telematics is adding entirely new functions to our vehicles, thereby changing its manner of use, its importance, and its fundamental nature.

In the past, we lived in a neatly compartmentalized world. We had a home, we had an office, and we had a car to get from one to the other. Now we have home offices, telework, automatic relaying of voice and computer messages, and access to our data from just about anywhere, and all data, voice, and image information flows are becoming totally mobile. Telecommunications and computer technologies have made information flows almost instantaneous, and this is becoming the normal state of affairs.

Americans spend 500 million hours a week in their cars. They have been able to carry their mobile phones with them, or use a phone installed in the car, and more recently have been able to purchase navigation units. For the moment, forget about radio or TV or CD players, because they are output devices only. The point is, the digital functionality that we enjoy elsewhere is coming to our cars, and there is no going back. What is bringing about the enormous change mentioned above is the integration of existing functions and the addition of new ones. This integration of technology is remaking our vehicles into moving environments that are extensions of the home and office, integrated with society at large. Not only communications and location-finding (including route identification) devices, but safety features and vehicle performance diagnosis functions are being combined. One archetypal example is the conversion of the rear view mirror from a passive reflecting device to one that also displays important information--like the heads up display that jet pilots see on their windscreen. This technology is available today, as are many other rather startling improvements.

The smart cars are coming (see "Swerving towards the Car PC" ). Integration of the personal computer with everything else means Internet access and e-mail access in the car. The first example of this is the Auto PC, from Clarion in conjunction with Microsoft and IBM, released in 1998. It was followed by the DVD 077V system from Alpine. Clarion countered with a DVD navigation system in June 1999. Pioneer had a DVD navigation system on the market in 1997. Casio, Panasonic (a DVD system), and Sony also offer GPS navigation systems. Navigation technology is widely available, and the future business opportunities are not in stand-alone units like those (although the market for installation in vehicles already on the road is very large) but in integrated systems. In addition to products from these companies, car navigation systems are made and sold in Japan by Kyushu Matsushita Electric, Kenwood, Sanyo Electric, Fujitsu Ten, Masupro Denko, and Mitsubishi Electric.

The new systems will not only provide enhanced versions of functions now available, such as voice-activated operation for safety and ease of use, but will provide additional integration. Voice synthesizer software in the computer will enable it to speak to you, and read your e-mail to you. Internet access? Of course. The system will dial your mobile phone for you. There are other software and hardware options available, and new features are being devised every day. For example, new systems available in Japan have data for home addresses of 26 million people in Japan and can search for telephone numbers among 11 million domestic listings. Pretty handy when you're out on the road--and truly a revolution in the functionality associated with our cars.

The bottom line
Since the new developments are appearing so fast, it is tricky to try to forecast earnings, as will be explained below. But the advent of telematics will from now on be a major factor to consider when anticipating potential earnings and business results of any of the companies mentioned above. For automotive assemblers, telematics is a bit tricky, but product development and marketing abilities should shrink the problems and magnify the benefits. It is tricky because these are expensive add-ons. If the economy softens and interest rates rise, it will be more difficult to protect margins and if these changes take place before the product life cycle curve advances to the point that substantial cost reductions are possible, it will be a bit of a problem. Of course, since the major assemblers in America also make a profit on financing their customers' purchases, higher automobile prices do have some value.

The first system available was Ford's Rescu, announced in 1996 (for the 1997 model year) and priced at $2,225 (with other options) for the Lincoln Continental, or $960 on LS models. Model year 2000 Infinitis from Nissan in America will have as an option a system for $1,599, including a four year service plan. The current big hit is GM's OnStar (a $700 option on some models, but also costing at least $199 a year for service). GM installed the 70,000th OnStar unit in November this year, and expects that in the coming 18 months OnStar will be in nearly one million of the company's cars and trucks. Now, it is available for only about half of the GM models sold in the US, but by 2002, it will be on all GM models. Volvo, encouraged by Swedish government subsidies directed at automotive IT development (hundreds of millions of krona) is planning on putting the new technology in all of its vehicles.

From the viewpoint of the automobile business, and beyond the change in functions and basic definition of what an automotive vehicle can do, what is important is that vehicle buyers become "subscribers." Whereas in the past vehicle buyers provided assemblers with earnings on the vehicle, on financing it, and on aftermarket replacement parts, now those who sign up for information services and a maintenance contract will provide ongoing service or subscription income--just like that received by mobile phone companies who give away phones and make their money off the service fees. In addition, telematics will generate demand for new hardware, new software, and additional services, such as integrated mobile phone calling. In addition, it will provide traditional automobile assemblers with an opportunity to enter new areas of e-commerce using the databases comprising lists of smart car owners (who better to market new mobile services to?).

The major research and consulting firms in the US have already produced reports (typically selling for several thousand dollars apiece) on market prospects for telematics. What the analysts are looking forward to, in the product development area, including what is already available, are:

• Navigation systems
• Travel information systems (concierge services such as restaurant locations, hotel reservations, etc.)
• Driver information systems
• Entertainment systems (multimedia)
• Vehicle safety systems (collision avoidance, obstacle detection, adaptive cruise controls, etc.)
• Vehicle operation control systems (engine, other system monitoring)
• Integration with traffic management systems
• Electronic payment collection (tolls, parking fees)
• Internet and e-mail links (paging, voice synthesization, etc.)
• Personal safety and security systems (door lock including remote door unlocking, automatic air bag deployment notification, stolen vehicle tracking, etc.)
• Fleet operation data collection (time and fuel consumption, vehicle tracking, vehicle performance monitoring, etc.)

Telematics--key points
From the viewpoint of the government, the auto industry, and the population in general, telematics has three different sets of meanings.

For vehicle owners
The advantages to be gained from buying cars equipped with integrated systems must be greater than the several thousand dollar cost and the continuing services. What, precisely, do users want?

Because it is early in the product life cycle, any answer must be tentative. Surveys of car navigation system purchasers will not be of much use. A recent US survey centered on telematics found that 70% of respondents would value emergency-related features, such as an automatic distress signal function. Parents who worried about their teenage children's driving would be among the buyers of these features--but we don't yet reliably know what people will pay. Other preferences: alert warnings that the car operation system had a malfunction or possible malfunction (63%), recommendations on mechanics to use (57%), and ability to take and make phone calls (51%). The phone calls, of course, are with both hands on the wheel--especially applicable in Japan. A research executive with Allied Business Intelligence, in Oyster Bay, NY, has stated that, "Rising traffic levels, the increase in the amount of time spent in a vehicle, and the aggressive nature of those behind the wheel has led many to see themselves as professional drivers and in need of the latest communications technology."

As a frame of reference, stand-alone car navigation systems sold in Japan are priced from JPY185,000 to JPY314,000.

For auto manufacturers
The automobile industry will find lots of marketing attractions in the new features, as well as entirely new areas of competition and the opportunity to redefine the product itself, as mentioned above.

For governments
Governments are in a different position. As a matter of industrial policy, the US Dept. of Transportation has submitted a set of 17 industrial standards to Congress, against a deadline of January 2001. DOT is obliged to have at least these "critical" standards in place by then to help foster the Intelligent Transportation Systems (ITS)--expected to provide greater efficiencies (vehicle user time, operating costs, social overhead costs, safety-related costs, etc.) and environmental protection.

Standards alone mean nothing; they must be applied and there must be institutional adjustments. But they are milestones, nevertheless, in the advance of the development and application of telematics technology. Government standards are intended to insure compatibility of different manufacturers' products, but there also are industrial standards adopted voluntarily and having the potential for widespread use. At present, there is no data interchange ability in the navigation systems offered in Japan by navigation equipment makers, and unless this is fixed, the systems will remain limited in the medium term. Earlier this year, a consortium, the Automotive Multimedia Interface Collaboration (AMIC), was formed by Chrysler, Daimler-Benz, Ford, GM, Renault, and Toyota to develop a standard for telematics. For electronic toll collection (ETC) systems, an international standard for onboard devices is expected to be ready this year.

But other than the fuel conservation and operating (socio-economic) efficiencies, as well as favorable environmental effects, there are major implications with regard to the planning, construction, and maintenance of national highway systems, and hence implications for construction companies and equipment vendors. Governments, such as that of Japan, are interested in the total economies that ITS can provide. In a preliminary report, a private-sector study group in Japan calculated that the annual savings accruing from reduced road congestion would reach JPY1.2 trillion per year by 2015, and 50 million hours per year could be saved for drivers alone if all vehicles on the road had electronic toll collection functions. Substantial reductions in the number of accidents and their cost, and the numbers of injuries and deaths, would also result. In June, the Japanese Association of Electronic Technology for Automobile Traffic and Driving (JSK) announced that route guidance and navigation alone would save 2.8 billion liters of crude oil, and that ITS would result in an 11% reduction in annual fuel consumption. Reduced fuel consumption and less atmospheric pollution are certainly two powerful incentives for government to support efficient vehicle operation.

ITS components
Next-generation highways are not so far off. The Ministry of Construction plans to start remodeling some of the major existing highways, such as Tokyo's No. 2 Tomei and Meishin Expressways, starting in 2003, and continue gradually to extend the system to cover the nation by 2015. Contracts have already been let for several expressways and the Ministry of Construction plans on having 50 ETC stations in operation this year and 300 more in the coming fiscal year.

But the idea of creating a system of "smartways" that is under development right now can only be justified if a sufficiently large number of vehicles are equipped with the digital equipment that will make use of them. Industry sources quote "about JPY50,000" as the cost of an onboard ETC device, but at this price even fleet operators would have a hard time justifying the expense. This means the likelihood that the usual pattern of gradual reduction of unit costs as a product market matures may be assisted by government subsidies, since the economic and business ramifications of smart cars on smartways are much greater than what is evident at first sight. The Japan Highway Public Corporation estimates that it will have 730 ETC stations in operation by 2002; currently in Japan the cost of ETC stations is estimated at JPY20-70 million per lane on the road, and additional funds would be required for data processing and control at central locations.

The future
Estimates of telematics market growth are high. CEMA, the Consumer Electronics Manufacturing Association, forecasts that this year total mobile electronic sales will rise 4% to $8.5 billion. The Strategis Group, in Washington, predicts that by 2003, hardware sales will be $240 million, and subscription fee sales (from the operators of the 1.2 million smart cars on the road) will be $162 million. Allied Business Intelligence sees the market as being worth $403 million in 1999 but $31 billion worldwide in 2005. The Yankee Group, in Boston, sees a $6.6 billion market by 2004. The amount forecast of course will vary widely depending on the assumptions, but everyone is expecting a huge market to develop.

Who is going to be dividing up that market? We're still in early days, and there is no guarantee that the leader today will be the leader in 18 months. New entries and new alliances are being announced frequently. Nokia, for example, has entered into an agreement with Protection One Mobile Service, which provided technology for Nissan's Infiniti Communicator. VDO North America recently announced another Carin navigation system; VDO is owned by Mannesman AG, a large German company (Carin technology was originally developed by Philips). One GPS technology firm, SiRF Technology of Santa Clara, California, has many partnerships with companies around the world, including Aisin AW, a car navigation maker, and NTT DoCoMo. On August 12, Yahoo! announced expansion of its Yahoo! Mobile services. In Japan, mobile phone service companies have been rapidly expanding their services to include non-voice services such as e-mail, teletext, data transmission, and information services. This means a strong increase in awareness of what can be done on the go, and thus is useful for preparing the market for onboard telematics.

For electronic vehicular-use audio component makers, such as Clarion (part of the Nissan Group), future earnings and indeed the future well-being of the company may be linked to the ability to quickly sell systems to an assembler--such as Chrysler--that does not yet have its own system, and to enter into strong, viable alliances or partnerships with software developers outside of Japan (other than Microsoft). The volatility of the market is a great danger because of the surge of new entries and the fact that a key part of the development team may be a relatively small unit. This means greater difficulty in deciding on a partner, and in evaluating the opposition. GM is in a leading position today, according to Wired, because of the work of the OnStar service division--comprising just some 250 employees.

Aaron "Marty" Cohen is executive of Capital Investment Advisory, a licensed asset management firm. He was chief financial economist in the Daiwa Securities Group until retiring in 1998.

Back to table of Contents

Comments or suggestions?
Contact cjmaster@cjmag.co.jp