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 And each time they do, GM will get a small cut from the seller.
When the automaker began offering 4G LTE high-speed wireless
connections in some cars last year, it wasn’t clear how it would
generate revenue to offset the costs of the hardware. Now, as the
company prepares to expand the technology to most of its 2016 U.S.
models, GM is lifting the curtain on its digital business strategy.
During a recent investor presentation, company executives put a
number on their 4G expectations for the first time, saying they
expect to reap at least $350 million in improved profits over the
next three years from adding the OnStar 4G systems to its cars.
GM is the first automaker to reveal its projections, but it is not
alone in chasing digital profits. Its wireless partner AT&T works
with seven other carmakers, including BMW, Nissan Motor and Audi,
which was first to offer 4G connections in a car in late 2013. As
in-car broadband usage grows, GM's estimates could turn out to be
conservative, some analysts say, since the potential for revenues
from in-car broadband connections are still being developed.
Taking a cut of e-commerce transactions conducted on in-car systems
is one obvious revenue generator, but automakers also expect that
software upgrades pushed through a broadband connection will one day
save them hundreds of dollars per car in repair costs. And they are
looking at developing other features as well, such as automatic
order placement when a car approaches its driver's favorite coffee
shop or fast-food outlet.
IHS analyst Mark Boyadjis estimates GM could add about $439 million
in profits from 4G over the next three years. And that figure
doesn't include lower warranty costs related to services driven by
high-speed connections, a number that by itself could dwarf that
estimate, he said.
By the end of 2020, Gartner analyst Thilo Koslowski expects as much
as 80 percent of all new vehicles will be sold with connectivity and
automakers will make a tenth of their revenue from these services.
GM and the rest of the auto industry want to avoid ceding control of
revenue or customer allegiance to companies like Google and Apple.
All major automakers are investing heavily in hardware and software
to connect drivers to the mobile web. But it hasn't been clear how
the manufacturers would generate revenue from their connected cars,
or how that money would be divvied up.
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GM debated whether it was wise to publicly reveal its profit target,
Phil Abram, GM's point man on connected car strategy, said in an
interview.
In the end, he said, the company decided that pulling back the
curtain was "part and parcel with painting a vision for the future."
It also could help GM with investors who question whether it risks
being undermined as cars become increasingly digital devices.
Tesla Motors has long used over-the-air updates on its Model S
software. Last month, the electric carmaker said it would offer
automatic steering through a software update in three months, and it
took similar approaches previously to prevent overheating in its
charging systems and increase ground clearance to avoid road debris.
Networking equipment giant Cisco Systems estimates automakers could
generate at least $300 per car per year in improved profits - more
than the estimated profits for many small cars. And that is before
tapping China and Europe, where GM will launch 4G later this year.
One risk is that consumers will simply use their own smartphones,
bypassing the automakers. But Abram expects that if carmakers offer
an easy-to-use product "people are inherently looking for the path
of least resistance."
Citi analyst Itay Michaeli, who earlier this year valued GM's OnStar
as high as $9 billion, foresees the ability to sell services and
features long after the initial car purchase. "There's an
under-appreciation of what OnStar is morphing into with 4G LTE."
(Reporting by Ben Klayman in Detroit. Editing by Joseph White)
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