Telematics in China: Making sense of the market

James

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9th October 2012

With billions of dollars of potential revenue beckoning, China represents an irresistible market for telematics services and hardware.

The prospect of exploiting the largest market in the world has set off what Andrew Hart, head of advanced research at British automotive technology consultancy SBD, described as a “bit of a gold rush,” with 17 vehicle manufacturers having launched some form of OEM telematics in China and eight more planning to do so.

However, the initial wave focused mainly on being seen to do something rather than having something to bring to consumers. As a result, Hart says, “uptake is mainly zero for many manufacturers.” He added, however, that interest in OEM telematics in China is very high, much higher than elsewhere. But willingness to pay for it is much lower.

Consequently, many analysts agree, to best exploit the market’s promise, manufacturers will have to be more creative and more flexible than they have been in traditional markets. (For more on China, see Emerging telematics opportunities in China and Telematics in China: ‘Reverse innovating’ for success.)

Doing business in China

According to Hart, “Market conditions are very unique. Manufacturers are having to rethink the way they do business in China.”

This “rethink” will have to be include pricing policy, subscription models and local partnership strategy, as well as how to maneuver around government restrictions that aim to tilt the playing field in favor of domestic companies.

In terms of pricing, the relatively low cost of the smartphone-connected system of Ford SYNC, available in China since April 2012, has proved very promising, says Michael Liu, senior market analyst with IMS Research’s Automotive and Transport Group.

Its low cost, compared to standalone telematics modules and embedded systems, make it more attractive for drivers of low- and middle-level vehicles, which comprise about 70 percent of the total Chinese automobile market. As a result, IMS expects revenues for smartphone-connected telematics services to total $819 million in 2019.

Another advantage of Ford’s approach is its pricing model. Rather than a fixed-fee subscription, or a menu in which price is linked to the functions and services selected, Chinese consumers seem to prefer the SYNC’s pay-for-use approach.

Annual subscription fees are viewed as expensive in China, and the G-Book service has the disadvantage of being offered in high-end vehicles, such as the Lexus, owned by people who use drivers and therefore do not have first-hand knowledge of its functions. “Drivers don’t pay the bills,” Hart notes.

Therefore, once the Lexus G-Book’s and other free trial periods have elapsed, the service is generally not re-subscribed.

Problems with pay-for-use

On the other hand, the problem with pay-for-use, according to Hart, is that it is difficult to predict customer usage and if the usage will be enough for manufacturers to recover their cost.

New, more flexible business models are clearly needed. One alternative under consideration is a subsidy model in which free access to a range of telematics services is provided in exchange for the customer returning to the franchise for all servicing. But it is too early to predict if any form of subscription will attract the cost-conscious Chinese car owner.

Another problem facing OEMs in China is that one solution or service will not be appropriate to every region of the vast country. A prime example is stolen vehicle tracking (SVT). There are regions in China where automobile theft is far less common than in others, and interest in the service will be far lower there.

In addition, to protect its own industry, the Chinese government has imposed a number of restrictions on licenses. (For more on SVT, see Telematics in Brazil: Security for cars and cargo, part I and Telematics in Brazil: Security for cars and cargo, part II.)

Reliable domestic partners

To navigate these potentially treacherous market shoals, it is essential to find reliable domestic partners who can assume some responsibility from the OEMs.

“Western manufacturers have struggled because partnerships are different in China,” Hart says. “The value chain is constantly evolving, and what they’re being told by local partners is constantly changing.”

Also, there are many domestic players in the field offering services although they lack experience or knowhow. According to Hart, a database is needed of all prospective local partners to inform OEMs of what they can actually do.

Another, more costly, alternative is the strategy chosen by Shanghai OnStar Telematics: establish its own call centers. There are now two of them, in Shanghai and Xiamen, providing 24-hour telematics services for OnStar subscribers nationwide. OnStar customer service advisors speak different Chinese dialects, which addresses another issue OEMs must resolve.

This solution also addresses the problem of an uncertain telecommunications infrastructure, which is essential for e-call and b-call services. Most manufacturers are now offering security services, Hart says, “but they won’t be very useful if you have no one at the other end of the line.”

Nevertheless, despite the obstacles, analysts expect the Chinese telematics market to fulfill its promise. IMS forecasts the shipment of more than 10 million OEM telematics systems to China in 2019, a 13-fold increase over this year. And SBD sees telematics revenues in China soaring to nearly $6.5 billion by the year 2020.

Siegfried Mortkowitz is a regular contributor to TU.

For more on China and other emerging telematics markets, see Industry insight: Telematics and emerging markets.

For all the latest telematics trends, check out Telematics Munich 2012 on October 29-30, Telematics for Fleet Management USA 2012 on November 13-14 in Atlanta and Content and Apps for Automotive USA 2012 on December 4-5 in San Diego.

For exclusive telematics business analysis and insight, check out TU’s reports: In-Vehicle Smartphone Integration Report, Human Machine Interface Technologies and Smart Vehicle Technology: The Future of Insurance Telematics.