Investing: How to Profit From the Connected Vehicle Sector

Introduction

The automotive industry stands at a pivotal moment. Connected vehicles - those using connectivity and digital features to enhance the mobility experience - are expected to dominate global auto sales this decade. Yet most manufacturers have struggled to deliver offerings that resonate with consumers. To overcome roadblocks and capture the full potential of connectivity, automakers should build new businesses focused on agile development.

The main problem is that automakers have struggled to develop compelling and profitable connected vehicle offerings, despite strong consumer demand for enhanced in-car experiences through connectivity. Hurdles like limited customer adoption, ineffective monetization models, talent gaps, and technology complexity have prevented most players from delivering solutions that resonate with car buyers. As a result, the industry has failed to capitalize on the sizable growth opportunities inherent in connected mobility. The article aims to highlight these challenges and propose business building as an effective approach to overcoming the roadblocks holding automakers back from unlocking connectivity's full value potential.

Connected Cars: Growing Demand, Underwhelming Offerings

Connectivity has become a highly sought feature for car buyers worldwide. According to McKinsey's 2023 Global Automotive Connectivity Executive Survey, over half of auto executives ranked connected vehicles as a top mobility trend, second only to vehicle electrification. Across regions, 50% of consumers say they would switch brands for smarter in-car tech, up 30 percentage points since 2014 (McKinsey, 2023). Among electric vehicle (EV) owners in particular, most anticipate increasing their use of connected solutions.

Several factors will likely accelerate adoption this decade. Autonomous driving could free up driver time for productivity and entertainment. Generative AI and virtual assistants will enable more seamless, conversational interactions. And integrated social media could tap into consumers' desire to share experiences.

By 2030, 95% of new cars globally to have connectivity features, with 12% equipped for autonomous driving, versus just 1% in 2025. The consultancy has identified nine use case clusters - like seamless experiences and vehicle health monitoring - with the potential for automakers to generate value. For example, GM aims to reach $20-25 billion in annual software-enabled revenue by 2030 (General Motors, 2022).

Yet current offerings remain limited despite this demand. Just 17% of consumers are satisfied with in-car features today (McKinsey, 2023). Unnecessary complexity, distracted driving risks, and replicating smartphone functionality are top complaints. To deliver on connectivity's promise, OEMs must overcome key hurdles.

Profitability, Technology and Awareness: Key Challenges for Automakers

Automotive executives recognize connectivity's potential but have struggled to capitalize on it. McKinsey's survey identified three primary obstacles faced by OEMs (McKinsey, 2023):

1. Profitability. 60% of executives cited making a profitable business case as a top challenge. Key factors included limited customer adoption and ineffective monetization models. Developing clear value propositions and pricing strategies is difficult but critical.
2. Technology. 45% pointed to technological hurdles like complexity, compatibility, and capability gaps. Specialized skills like AI, data analytics and cross-platform development are often scarce within OEMs. Building these competencies in-house can prove demanding.
3. Awareness. 34% noted generating customer interest and adoption as an obstacle. Minimal hands-on experience, unclear messaging, perceived cyber risks and technology complexity hinder awareness and uptake.

While recognizing connectivity's importance, most automakers have yet to translate that into compelling solutions. New approaches are required to meet consumer expectations.

Business Building: An Effective Approach to Unlocking Value

To overcome these challenges, OEMs and other players should consider building connectivity offerings as standalone businesses. This start-up style model provides greater agility, talent attraction, risk tolerance and customer centricity versus traditional automotive development.

Precedents Across Industries

Spinning out an independent unit to attack new opportunities is a proven tactic across sectors. European telecom Sunrise Communications launched the low-cost mobile brand Yallo as a digital attacker. A major Chinese bank created a fintech unit focused on social sales.

Automotive Success Stories

Within automotive, GM's BrightDrop commercial EV business reached $1 billion in sales in just two years by moving with start-up speed (BrightDrop, 2023). Toyota's Woven subsidiary can rapidly build capabilities in automated driving, software platforms and connected "smart city" environments.

Start-Up Ecosystem Innovation

Meanwhile, automotive connectivity start-ups like China's Banma, Israel's Upstream and US-based Haas Safety Cloud have demonstrated agile development and value creation. Their example highlights best practices OEMs can emulate through business building.

Six Characteristics of Effective Business Builds

According to McKinsey, key success factors for digital business builds include (McKinsey, 2023):

• Cross-functional teams with autonomy
• Investor's mindset toward funding
• Deep user understanding
• Data as a product
• Open innovation policies
• Freedom to operate

These attributes help address automakers' connectivity struggles:

1. Customer-centricity and agile development can create compelling value propositions and revenue models. Frequent releases gather user feedback to refine offers.
2. Access to tech talent enhances capabilities in areas like AI and the cloud. Building outside the core structure provides flexibility in processes, tools and partners.
3. Specialized skills in marketing, pricing and customer journeys sustain engagement over time versus one-time engineering sales.

By embracing start-up behaviors within new ventures, OEMs can overcome entanglements and compete at connectivity's cutting edge.

The Road Ahead

As connected technologies reshape mobility, automakers should take decisive action to capitalize on this potential rather than playing catch up. Forming independent business units offers a proven model to break through profitability, talent and awareness barriers holding back the industry.

With experienced competitors emerging across the ecosystem, partnerships will also grow in importance. But automakers who can build connectivity brands leveraging consumer insights, digital skills and entrepreneurial spirit will gain sustainable advantage.

Connectivity unlocks immense possibilities to enhance experiences and enable new offerings. Through business building, automakers finally have a roadmap to overcome obstacles and steer into this connected future.

Investors should focus on:

• Focus on automakers building standalone connectivity businesses. These new ventures with start-up DNA are poised to outpace legacy organizations. Backing incumbents who embrace this model and spin-off-focused units is a wise bet.
• Prioritize player partnerships. Collaboration across the automotive ecosystem will be crucial as vehicles become software-defined and mobility-as-a-service expands. Firms integrating complementary capabilities through strategic alliances will thrive.
• Target differentiated experience capabilities. Winners will craft personalized, seamless experiences via AI, UX design, and cloud services. Look for players mastering user-centricity and leveraging data across the value chain.
• Evaluate monetization and retention capabilities. With connectivity, recurring revenues and continual customer engagement grow in importance versus one-time sales. Ensure targets have the digital skills to maximize lifetime value.
• Assess strength of aligned non-automotive capabilities. Adjacent competencies like infotainment, e-commerce, mapping, and cybersecurity will become differentiators. Back ventures combine these strengths.

By focusing on new automotive business builds equipped with specialized digital, software and human-centered design talents, investors can capitalize on surging connectivity demand. Gauging ecosystem partnerships and aligned capabilities will also reveal winners in this space.