Mallinson: Apple, Google and 'smartcar' makers will disrupt the automotive supply chain

Keith Mallinson

After 15 years of being used almost entirely for voice calling, increasingly-smart mobile phone models started appearing around the time of the millenium. By early 2013, most phones sold globally were smartphones, as we understand the term today. But this change was very disruptive for suppliers, many of whom have significantly declined or have resultantly exited the handset market.

A similarly dramatic transition toward predominantly "smartcars" is well underway. By smartcar, I mean a car which is connected, highly-automated and might even be self-driving, as distinct from a Smart-branded car which might or might not have these capabilities. Increasing proportions of smartcars will be at least intermittently electrically-powered. The recent acquisition of Nokia's Here digital mapping and location services business by a consortium comprising Audi, BMW and Daimler is a harbinger for widespread strategic change in technology supply for automobiles.

Creative destruction

The transition from plain old mobile phones and feature phones to smartphones has been very disruptive, with new suppliers and business models. For example, leading handset manufacturers Alcatel, Ericsson, Nokia, Motorola and Siemens all exited the business with the rise of Android, Apple, Samsung and many others in an expanding ecosystem in software and mobile-broadband data services.

Likewise, the smartening and electrification of cars and other vehicles will also have very profound effects on the value chain, competitive landscape and markets in manufacture, distribution and servicing. Automotive OEMs have very strong positions in their supply chains, which include the Tier 1 manufacturers who supply components, including alternators, tires, seats and anti-lock braking systems. This order is challenges by a number of different factors, including technological differences in information and communications systems, together with associated economies of scale in development, production, branding and development, and with scope extending across other industry verticals, as well as cars and smartphones.

Smartcar companies including Daimler and Volkswagen admit they need Apple and Google as partners, but these Silicon Valley companies also pose significant threats as suppliers and as direct competitors. They can insist on commercial terms which are less attractive than usual for car OEMs and Tier 1s, and might even start producing cars themselves.

There is no consensus on whether an Apple car is simply a rumor, or something the firm is seriously considering and has, or has not yet, decided to launch. Relatively new entrant Tesla is pioneering a major technological shift toward electric vehicles, which is already having profound impact on the supply chain. Electric cars need battery, charging and battery management technology in place of internal combustion engines. And maintenance requirements, a mainstay for dealers, are much lower for the former than the latter. Tesla's differentiation also includes its software and ICT-intensive capabilities and elimination of dealers with direct sales.

Many smarts in future cars

Our smartphones have collected a Swiss-Army-knife-like range of capabilities. In addition to expanding person-to-person communications capabilities with social networking applications and LTE connections, they have significantly substituted for standalone devices including GPS navigation devices, still and video cameras, and portable media players. While some of these capabilities were widely implemented in feature phones by around 2005, it was several years later before the market impact was significant on consumer use and before it overturned the status quo in mobile phone supply.

Cars are also becoming increasingly automated in their traditional driving capabilities, for example, with adaptive cruise control and collision avoidance, while also adding functions such as HD video streaming to entertainment systems. The possibilities are limitless, including fully automated driving; and yet it is still too soon to know when and how very dramatic shifts in supply and demand will occur. For example, for now, many mid-range consumers are still quite happy to use their smartphones for navigation in cars rather than pay extra for in-built systems. Apple and Google, therefore, already compete with incumbent motor manufacturers whether they partner with them or not.

Software and systems expertise is also required to protect against other threats including hacking, which have been revealed with recent incursions at Tesla and Chrysler's Jeep division.

Smartsourcing

Nokia's sale of its Here digital mapping and location services business was long awaited and the fact that Audi, BMW and Dailer bought it was not surprising.

According to Nokia, "Here is developing a location cloud that harnesses the power of data generated by vehicles, devices and infrastructure to deliver real-time, predictive and personalized location services. In the automotive industry, where it serves most of the world's leading automakers, its focus is on developing precise and accurate mapping as well as services that will enable an entirely new class of driver experiences, including highly automated driving. The company also serves the world's leading enterprises and Internet players, including Microsoft, Samsung and SAP, and offers highly rated apps to consumers using Android, iOS and Windows Phone."

The logic of the acquisition is strong and clear. Control of this strategic asset can ensure these and other car makers who license Here's technologies and services have access to the best capabilities and will not be disintermediated in a world where this supply might become pivotal with highly-automated driving, as described above. Here and rival TomTom are the only companies offering an alternative to Google and Apple for car-navigable maps on a global basis. Other OEM sourcing models are also applicable in the diversifying automotive ecosystem.

The information and communications technology sector has grown rapidly through increasingly-widespread division of labor among many specialists. For example, the companies who develop most of the standard-essential technologies in smartphones including Ericsson, Nokia and Qualcomm no longer manufacture handsets. Android is the predominant smartphone operating system and Apple's iOS takes almost all the rest of the market. Chipset supply is mostly independent of device manufacturers in PCs, tablets and smartphones. The companies who have been most harmed by market disruption in smartphones saw change coming but were unable to adapt. For example, I recall being briefed about the onset of horizontalization by a very senior Nokia executive around 2005.

Similarly, car manufacturers, even in conjunction with their captive component suppliers, cannot do it all themselves in smartcars. In order to employ competitive, let alone the very best, ICT-based systems they must diversify sources and the manner of supply significantly. 

This includes acquisitions in consortia, illustrated by the example of Here. There will be limited scope for bilateral purchases because the ICT platforms need the larger addressable market with multiple OEM and Tier 1 suppliers that this kind acquisition is likely to preclude. In other cases, it will be necessary to agree supply relationships with potential direct competitors such as Apple, whose brand and ecosystem will enable it to take high profit margins on these sales.

Broadening supply also requires addition of entirely new specialized suppliers of batteries, battery management and other systems with rapidly growing numbers of electric and hybrid vehicles.

Licensing-in technologies for product development and production by established Tier 1 suppliers is also very suitable with the wide array of technologies required. This applies to conventionally-powered cars and electric vehicles in particular. For example, the wide combination of capabilities required for wireless electric vehicle charging including various associated ICT systems, is clearly illustrated with power-transfer-effective, easy-to-use and safe wireless charging technologies supplied under licensing by Qualcomm Halo to OEM Daimler and Tier 1 supplier Brusa. Automated driving also demands capabilities which are highly compliant with safety and interoperability standards. It is most likely these will also be provided under license on software-technology platforms which will be adopted by many manufacturers.

Consumers will also insist on having the best navigation and infotainment systems and brands built in, one way or another. It is what they are accustomed to and what they expect. 

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. Find WiseHarbor on Twitter @WiseHarbor.

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