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Telematics: where the radio meets the road.

Communications technology will almost certainly transform the auto industry - but how?

Look to past technological revolutions for clues about the future

Incorporating new technologies in mass-produced automobiles has always been a risky business: the unfortunate fellow who suggested that redesigned engine valves might improve the performance of Henry Ford's Model T was pitched from a moving car into the company parking lot by Ford's security chief. Although the chances of suffering this particularly humiliating fate may have declined, in many ways the difficulties of introducing new technologies into automobiles have not.

One challenge is the way unpredictable events outside the auto industry can profoundly affect the development of new vehicle-related technologies inside it. In the late 1970s, for example, many US original-equipment manufacturers (OEMs) and their suppliers, betting heavily that fuel prices would reach astronomical levels by the 1980s, planned to increase their production of four-cylinder engines significantly. When oil prices came down to earth and remained there, such companies - locked into a five- to seven-year product development cycle for these engines - had little time to react to a new market that demanded power rather than fuel efficiency.

Even when the industry's external environment doesn't change, predicting where, how, and when a technology will catch on is difficult. For starters, new technologies can have very long gestation periods. Automotive antilock brake systems, for instance, were first researched in the United States in the late 1950s, introduced there in luxury cars in the late 1960s, withdrawn from the market in the late 1970s, and reintroduced in Europe in the 1980s. Such currently ubiquitous technologies as cruise control, which inventor Ralph Teetor first shopped around in post-World War II Detroit, were not broadly accepted for two decades. Electric power steering, which has yet to be introduced broadly, was touted as "the next big thing" in Popular Mechanics magazine during the 1950s.

Another problem for those attempting to divine the course of automotive technological change is the fact that different countries accept new technology at different rates. In Europe, for example, resistance to automatic transmissions is only now weakening - decades after the United States embraced them as standard equipment. Yet once a technology is accepted, it often sweeps the market much more rapidly than many experts expected: radial tires zoomed from a 2 to an 82 percent market share in the United States in only three years during the 1970s.

Government regulation further complicates the picture. Technologies promoted by legislation often penetrate markets in much less time than those driven by market pull or by the cost reduction and efficiency push of automotive manufacturers.

Even at an application-specific level, successful approaches vary significantly over time. A variety of configurations of feedback carburetors and fuel injection systems, for instance, took turns dominating the marketplace in the 1970s and 1980s as OEMs struggled to meet tightening emission regulations.

Airbag crash-sensor systems were at first mechanical but are now, after only a few years, electronic; early models with multiple crash sensors were quickly succeeded by models with only one, and they were followed in turn by models that again relied on multiple sensors, to differentiate among types of crashes. And airbag inflators seem to be on the verge of migrating from pyrotechnics to inert-gas technologies because of health and safety concerns.

The vast uncertainties surrounding the prospects of all new automotive technologies and the large investments and financial risks they demand - an airbag inflator plant can easily cost $1 billion - mean that senior managers both at auto companies and at suppliers must understand the mechanics of technology dissemination. One way these managers can develop such an understanding is to study the ideas of theorists like Stuart Kauffman(*) and economic historians like Nathan Rosenberg.(**) They argue that certain technologies trigger waves of change, speeding up the acceptance of related technologies that otherwise might not achieve significant penetration levels quickly. At least from the automotive standpoint, we would agree.

Blasts from the past

Since the Second World War, two major waves of technology have swept over the auto industry: one generated by high-compression engines in the 1950s, the other by microelectronics in the 1970s. Roughly 20 years separated the two waves. Keeping approximately to the same 20-year cycle, the industry is now on the cusp of the next major wave: "telematics" - essentially, on-board communications technologies - which will promote the introduction of many other new communications and information applications into automobiles and the infrastructure of highways.

The telematics wave represents an exceptional value-creating opportunity for the auto industry. Yet it could just as easily miss the boat, either by betting on the wrong applications or by permitting new entrants to capture the value. To stay ahead of the curve, automakers should carefully study the way "trigger technologies" diffused during the two previous waves, for they can teach us a good deal about the one that lies ahead (see text panel).

The first wave: High-compression engines

The quest to raise engine compression ratios began in the 1920s, when Charles Kettering's experiments with a variety of gasoline blends led him to the fuel additive tetra-ethyl lead, which prevents power-robbing engine detonation and "knock." During this period, engine compression ratios rose to 6:1, from 4:1. But not until 1946 did Kettering start to experiment with truly high-compression ratios of almost 13:1, which had such benefits as higher power output for each liter of displacement, significantly better fuel efficiency, and cleaner combustion.

Oldsmobile and Cadillac both introduced high-compression overhead-valve V8 engines in 1949. Although the postwar increase in compression ratios was at first relatively modest, the trend started to surge as higher-octane fuels compatible with high compression appeared on the market and improved engine designs came on stream in the late 1950s and early 1960s [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. As compression ratios rose, horsepower for each liter of engine displacement went up as well. This increase could be used either to improve fuel economy - a smaller engine produces the same power while using less fuel - or to allow the introduction of new power-consuming features and technologies.

Europe during the 1950s was beset by high fuel taxes imposed to fund large welfare systems and by a massive switch in home heating from coal to heating oil. Both developments drove up petroleum prices. Europe's auto industry therefore had to focus on increasing the fuel efficiency of its products, and high-compression engines promoted this goal. In the booming United States, by contrast, fuel taxes were low and oil was cheap and plentiful. Yet here, too, the advent of high-compression engines came at an opportune moment. The average weight of US passenger cars had been increasing since the late 1930s as they grew larger and acquired new features. An important measure of potential performance - the ratio of a car's power to weight - had thus been dropping steadily through 1948. Acceleration became noticeably more sluggish.

With the introduction of high-compression engines, power-to-weight ratios jumped dramatically, from just under 3.5 gross horsepower for each 100 pounds of vehicle weight in 1949 to more than 7 horsepower for each 100 pounds by the late 1950s, restoring and then surpassing historic levels of performance. Meanwhile, the market penetration of power-hungry new technologies soared: power steering jumped from less than 5 percent in 1952 to 40 percent by 1959, while air conditioning went from less than 4 percent in 1956 to almost 30 percent just a decade later. The extra power that high-compression engines provided let manufacturers introduce these and additional power-hungry features, including electric seats and windows, dual headlamps, and wider, softer-riding tires.

The add-on technologies enabled and triggered by high-compression engines had an enormous impact - far beyond that of the engines themselves. By 1959, ten years after they were introduced, the wave they generated (including the add-ons) was largely responsible for increasing the revenues of automakers by more than $1.3 billion, or about $235 for each car in 1959 dollars - fully 8 percent of the industry's turnover.

The second wave: Microprocessor-based electronics

The pull of consumer demand and the push of manufacturers' marketing drove the first wave of innovation. It was the many new emission, fuel economy, and safety regulations imposed by governments in the early 1970s that drove the second major wave, whose key triggering innovation was the microprocessor. If not for these regulations, the carburetors, mechanical distributors, lap belts, and perhaps even ignition points and condensers of old might even now fill the innards of many cars, particularly the cheaper ones. But only electronically controlled engines could possibly run under the precise conditions required for the simultaneous optimization of emissions, fuel consumption, and performance, and only electronically controlled safety devices could meet ever more stringent demands emanating from government agencies.

Of course, once microprocessor-based engine controls had been installed, it was natural that they should be integrated with transmission and then chassis electronics systems (for example, antilock brakes). Likewise, the chips' robust, high-speed processing capabilities promoted the introduction of similarly capable control units for other systems - some mandated by law and others pushed forward by the market, such as airbags and automatic air conditioning, respectively. Primarily thanks to the existence of microprocessor controls, technologies as disparate as cruise control, antilock brakes, advanced audio systems, and sophisticated heating, ventilation, and air conditioning systems became feasible in a broad market sense.

Like high-compression engines, microprocessors have had an enormous impact, far beyond what might have been foreseen at the outset. The penetration rates of technologies they make possible will continue to outstrip the industry's overall growth well into the next century. Even now, average drivers are surrounded by an increasing number of electronically controlled airbags - a total of eight in some high-end cars. In 1997, according to recent estimates, the annual worldwide market for automotive semiconductors (the chips) reached more than $7 billion, and the total annual value of automotive electronic systems around the world stood at about $60 billion. By 2002, that figure may grow to nearly $90 billion [ILLUSTRATION FOR EXHIBIT 2 OMITTED].

The next wave: Telematics

Microprocessors will also play a key role in the next wave, whose core triggering technology will be telematics: one- and two-way automotive communications technologies. Unlike the previous waves, this one promises to extend beyond automobiles and into the transportation and communications infrastructure.

Auto-related telematics is not a new phenomenon: AM, FM, and CB radios and cellular car phones have been with us for some time. Yet the revolutionary elements of current thinking in telematics suggest that in the future, automobiles will be vastly more integrated into the world surrounding them. For once they have been wired both to transmit and to receive a given radio signal, the possibilities for piggy-backing new and valuable products and services on it explode.

Communications systems of this sort can take many forms, and no standard has yet been accepted. They can be active or passive (accessing specific sources of navigational information or listening to CDs, respectively, for example) and targeted or dispersed (such as a cellular phone call to a particular car or a traffic warning broadcast to all vehicles on a stretch of highway). The signals can come from roadside traffic information beacons or from Global Positioning System (GPS) satellites orbiting the Earth.

Ultimately, telematics will make "wired" cars a reality. To cite only a few applications, this technology will help drivers access local traffic and navigational information, find places to dine and shop, and tap into the Internet. Local repair shops will even be able to undertake real-time system diagnostics on cars or to upgrade their operating systems as their owners drive them to work.

Indeed, the range of technologies that could fall under the umbrella of telematics is quite large. Some of them (such as antitheft transponders) are already in use; some (automatic toll-collection devices, for example) are currently being introduced; and some (notably automatic driving and other advanced vehicle control systems) are now in the experimental stage. Other applications might include automatic annual vehicle registration, the automatic renewal of driver's licenses, the tracking of stolen vehicles by police departments, automatic traffic control, and systems to verify the way drivers use their vehicles - an innovation that could let insurance, leasing, and rental companies give discounts to good drivers.

Between now and 2004, the in-vehicle computing systems market, including telematics equipment as a major component, is expected to grow at a compound annual rate of more than 16 percent [ILLUSTRATION FOR EXHIBIT 3 OMITTED]. By the end of the first decade of the 21st century, the global telematics market alone may range into the billions of dollars. But though telematics will act as the trigger, it is far from clear which applications will be triggered.

Even more problematic for automakers than this kind of uncertainty is the absence of any guarantee that they will be able to profit from telematics applications by hard-wiring the components into automobiles. During the previous waves, it is true, novel technologies were part and parcel of the vehicles they adorned. But if recent experience holds, major elements of telematics could bypass cars entirely and migrate to products resembling personal digital assistants, hand-held navigation units, and other devices carried into cars by users and associated more with their phone systems than with their vehicles. The current dismal penetration rate for factory-installed cellular car phones serves as a warning: less than 2 percent of the phones installed in US cars each year are OEM products; aftermarket shops install the other 98 percent. Should the same fate befall all telematics applications, the auto industry will miss one of the best opportunities it has ever had to create new consumer value.

However, if telematics products and services are bundled into packages that create real synergy, it will make more sense to install them in vehicles at and by the factory. Bundling played a critical role in the rapid introduction of automotive semiconductors, and big suppliers like Motorola and Siemens, which now provide automakers with integrated multifunction electronics packages, have since consolidated the industry. Such factory-installed packages make it hard for aftermarket players to gain ground, since the electronics are just too closely integrated into the car. In automotive telematics applications, it might make sense, for example, to bundle together a single multiband antenna for AM and FM, a cellular phone, television reception, and the GPS rather than have separate masts for each.

Even if autos are hard-wired for telematics, consumers may wish to move their links to these systems from car to office to house. In this way, personal digital assistants could do triple duty as in-car personal computers and as home-computer base units. Consumers might also be able to "plug and play" a variety of communications products into their cars and to retrofit and update older systems.

Despite the great promise of telematics, some potentially serious problems might suppress the wave it presages. Perhaps the most controversial of them is best described as "driver overload": telematics applications could distract drivers from their primary mission - driving - while they answer e-mail, find restaurants, and surf the Internet. Research has already demonstrated a link between the use of hand-held cellular telephones and automobile accident rates. To control the problem, suppliers are focusing on such technologies as voice recognition and "heads up" displays that project key data onto the windshield, making it unnecessary for drivers to take their eyes off the road.

Lessons from the past

To some extent, the telematics wave differs from the two that preceded it. The most important distinction is the large number of ways of participating in telematics, with its "open" and beyond-the-vehicle characteristics. Companies can, for example, provide either on-board hardware or on- and off-board products and services, operate satellite networks, provide "content" (such as traffic reports), or combine some or all of these elements. Previous waves involved technologies that were relatively hard to disaggregate, so that companies had to make an all-or-nothing decision about whether to embrace them.

Another difference is the role of standards. During the multiprocessor wave, such companies as Robert Bosch GmbH cornered the European market for advanced engine management systems and effectively set the standards for the equipment that European OEMs installed. But evolving standards will play a far more critical role in the wave to come and may be less influenced by the actions of any one company. Thus, the specter of the struggle between Betamax and VHS hovers over the industry; telematics suppliers will have to weigh the benefits of committing themselves early to one of a number of would-be standards against the risk that their choice may not triumph in the end. Indeed, business coalitions are already doing battle over a variety of rival standards, especially in such key areas as a car's basic operating system. Suppliers should consider the lessons of the PC industry's "Wintel wars" before committing themselves irrevocably.(*)

Yet in other important ways, the telematics wave will resemble its predecessors. For one thing, it will require supporting infrastructures, much as high-compression engines benefited from the creation of a national network of highways in the United States and the autobahn system in Germany, as well as the upgrading of gasoline quality on both sides of the Atlantic. This dependence on infrastructure means that some technologies may be limited to particular regions. Japan's Vehicle Information Communication System, for instance, uses roadside infrared or radio beacons. It could be transplanted to other parts of the world only if their governments invested in such beacons, and it is not wise to rely upon the promises of governments to spend money on infrastructure!

Another similarity between this wave and the earlier ones is the possibility of making money by looking beyond the trigger technologies to the longer-term opportunities they create. No doubt, General Motors and Bosch did well by producing high-compression engines and electronic engine-control modules, respectively. Yet companies that focus on the triggered technologies may create as much value as those focusing on the technologies that trigger them.

Such enterprises as Japan's Denso and France's Valeo, for instance, have thrived by supplying the air-conditioning systems that powerful engines made possible. Many other companies enrich their shareholders by manufacturing the sensors that automotive microprocessors need for their inputs. (At present, for instance, there is more money to be made by selling yaw rate sensors to the manufacturers of stability control systems than by making stability control systems themselves.) And in the telematics wave, to cite only one example, insurance companies may earn more money by selling usage-based insurance to drivers than other companies can earn by producing the transponders that make this kind of insurance possible. As the telematics wave breaks, companies should therefore take a "whole-vehicle system" approach to assess potential synergies.

For suppliers, the biggest danger is the possibility that they could focus too intensely at the subsystem level and miss opportunities to leverage or leap to other incoming technologies. The conversion from 6- to 12-volt electrical systems, for example, occurred just as the high-compression engine wave began, reflecting the greater demands that many of the new electrically operated technologies placed on automotive electrical systems. Companies that blithely carried on making 6-volt products quickly found themselves without a market.

Moreover, these waves don't reach their full height quickly, so automakers must prepare for the long haul, not by sitting back passively but by adopting longer planning horizons - perhaps as long as five years. Many automotive suppliers in the past have bailed out of technologies just as they started catching on. Suppliers that need a "quick hit" in telematics may do better by pursuing aftermarket opportunities than by taking the OEM route, since the aftermarket moves more quickly, as the experience of the car phone arena shows. Aftermarket penetration there reached 98 percent because aftermarket producers could ignore traditional OEM concerns like "how is it branded?" or "who pays the warranty cost?" or "what if technology changes?" They just sold what worked.

Automotive suppliers should remember as well that there is more than one way to ride a wave. Most of them would normally wish to offer the best possible product for a new market like telematics. But this may not be what people want or will pay for: Kelsey-Hayes showed that cheap two-channel antilock brake systems could be more profitable than their costly four-channel counterparts, since average drivers didn't necessarily understand the marginal difference in performance. And there is something to be said, in the world of telematics, for being ready with a fast-follow product introduction, leaving expensive market development investments to the electronics giants. Remember, the competition for a $2,000 GPS navigation system - a map - costs only $1.50 or so! Sometimes, the first company to jump into the fray is the first to lose money - and lots of it.

Another way to lose money is to ignore regional differences. Drivers in the United States, for instance, have consistently shown less interest in navigation systems than do drivers in Japan. Why? Perhaps because of the Japanese love for electronic gadgets, and certainly because of the inscrutable nature of the country's street system; most streets and buildings are not clearly identified, so graphical route directions are very important.

Another point not to ignore is the value of incumbency. It may make more sense for an OEM to purchase telematics gear from its proven mechanical-parts partners, for instance, than to change technologies and suppliers simultaneously. An electronics giant may have the better electronic steering system but an OEM may prefer one from its long-standing, trusted supplier of hydraulic systems. Likewise, an OEM may trust more in a low-grade car operating system from a manufacturer of engine control modules than in a "bells and whistles" system from a PC maker - especially given the high rate of PC crashes! Conversely, companies that supply automotive mechanical gear, for example, should consider offering this experience as an asset to electronics partners new to the auto industry.

In fact, most companies will have to enter into joint ventures and alliances to gain access, credibility, and expertise during the uncertain early years of the telematics wave, when standards and technology platforms will be evolving continually. "Lone Rangers" won't succeed in telematics, since it brings together an unprecedented number of clashing and distinctive technologies and industries.

Something similar happened in the two previous waves. True, the one triggered by high-compression engines was not in itself driven by alliances and joint ventures. Nonetheless, it depended on explicit cross-industry cooperation between automakers and gasoline companies, which could charge a premium for the high-octane gas the new engines required. As for the wave triggered by microprocessors, at its start joint ventures and alliances between large traditional suppliers of brakes and other mechanical systems, on the one hand, and experienced electronics suppliers, on the other, did play an important role. Telematics will probably follow a similar pattern. Both to control risk and to acquire new capabilities, suppliers will have to find allies.

Understanding trigger technologies and the waves of change they launch will help corporate market planners step back from immediate concerns to assess the big-picture potential of a given course of action. Planners working in this way will develop the ability to plot relationships logically and to assess potential synergies between proposed new technologies and those already in the marketplace.

Furthermore, planners will be able to use their knowledge of the past to understand how classes of technologies can change an industry and how new technologies can be combined to create a bundle of value that greatly surpasses the value offered by any one of them. Companies that actively seek to identify trigger technologies and the application waves, both large and small, they create will succeed in imposing logic and order on the process of assessing new technologies - among the riskiest tasks in any industry.

* See Stuart A. Kauffman, "Technology and evolution: Escaping the Red Queen effect," The McKinsey Quarterly, 1995 Number 1, pp. 118-29.

** See Nathan Rosenberg, "Innovation's uncertain terrain," The McKinsey Quarterly, 1995 Number 3, pp. 170-85.

* See John Hagel III, "Spider versus spider," The McKinsey Quarterly, 1996 Number 1, pp. 4-19.


By creating an environment that allows other, perhaps at first sight unrelated, technologies to enter such products as automobiles, a trigger technology shapes the direction of industries, Consider the example of the antilock brake system, a recent (though relatively minor) trigger technology. Once such systems have been designed into the car, their components, notably hydraulic actuators and wheel speed sensors, can be co-opted for use by many other kinds of equipment.

Hydraulic actuators, for example, can handle active wheel braking for such applications as traction control (for getting out of mud) and follow-on cruise control (for maintaining a safe distance from tine car ahead). Wheel speed sensors can replace mechanical speedometer cables and serve (with the addition of a yaw sensor) as the foundation of advanced vehicle stability-control systems (also called "antispin" systems). They can be used for tire inflation-pressure warning systems, as well. (Wheel speed sensors can identify deflating tires by tracking the change in the speed of the affected wheel, as compared with that of the others.) In addition, the sensors can monitor traction conditions and automatically engage a four-wheel-drive system or "off-road" suspension settings when the going gets rough.

Few original-equipment manufacturers would have considered putting speed sensors on all four wheels if antilock brake systems hadn't forced them to do so. Those systems therefore made it cheaper to introduce the other technologies. Likewise, installing purpose-built brake actuation units solely for the sake of traction control would have increased its cost significantly and probably made it less attractive in the market.

Lance Ealey is a consultant and Glenn Mercer is a principal in McKinsey's Cleveland office.
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Title Annotation:automotive communications technology
Author:Ealey, Lance; Mercer, Glenn
Publication:The McKinsey Quarterly
Date:Mar 22, 1999
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