Telematics innovation: Twilight of the tier 1s?

The connected car may require a different approach to supplying components, which are now divided between hardware and software.

As Gartner analyst Thilo Koslowski pointed out at the Telematics Detroit conference, the role of a tier 1 is a systems provider and a coordinator, so there is new opportunity for many different kinds of companies to grab this spot. (For more on the changing nature of tier 1s, Telematics and the connected vehicle value chain.)

There are advantages to playing tier 1. In the past, it's been the markup. Traditionally, according to Roger Dewey, CEO of consultancy M2MV, "The tier 1 takes the spec from the OEM, wins the contract, and everybody below them, they try to treat as a commodity.

Tier 1s want to get the cost as low as possible to increase their margins." As a Booz Allen Hamilton report notes, "Suppliers might win programs on the strength of their innovations, but they frequently fail to get paid for the investment that allowed them to innovate in the first place."

But there's heartache, too. "The tier 1 suppliers are caught in the middle of having large investments in old operating architectures and needing to move quickly to new platforms and more adaptive applications," says Morris Kindig, president of consulting firm Tier One.

A new market opportunity

As traditional tier 1s stall in delivering the quick innovation that OEMs need, lower-tier suppliers are leapfrogging them and pitching automakers directly.

It's an opportunity for them to cut out the middleman and get paid more for what they provide. While automakers scramble to keep up with trends in consumer electronics, they are working directly with tier 2 and 3 suppliers, Kindig says, as well as newcomers to the automotive sector, such as mobile phone application developers.

In this emerging market, it's crucial for lower-tier suppliers to sell themselves directly to automakers, even if they actually sell their products through tier 1s, according to Dewey.

"You need to sell to the tier 1 but also go to the OEMs and explain to them what your technology has and its value proposition so when they write the spec it's included," Dewey says. "You're trying to push to the tier 1 but also to create pull from the OEM."

Smart suppliers act as consultants to automakers, he adds, helping them understand the possibilities and market developments—and tell them things the tier 1s might not. "OEMs want to know what's cool out there, and they want the cool new stuff in their car,” according to Dewey.

“They don't want it to be based just on low cost or what they asked for, because they didn't know to ask for something else."

For example, Panasonic Automotive Systems, traditionally a tier 2, was the first company to bring DVD players to the car, according to Hakan Kostepen, director of product strategy and innovation for Panasonic.

"The concept of rear-seat entertainment came from our team," Kostepen says. "Nobody in Japan or the US thought it was a good idea." So Panasonic created a concept car and both GM and Honda picked up on it.

The tier 1 role used to be: The carmaker gave you a spec, and you built to it. “Now,” Kostepen says, “companies like us are trying to bring in a different philosophy."

Managing the business process

Taking on the tier 1 role is also a business-process problem. Developing and managing relationships with multiple providers can be … unmanageable. "The Achilles heel for any supplier is the need to be robust, redundant and failsafe," says Kindig. "This poses a huge challenge for many lower tier companies."

If an application is not safety-related, and the developer can demonstrate reliability and performance benefits, it is possible to sell directly to the automaker.

"OEMs are seeking more partnerships with lower tier suppliers to reduce costs," Kindig says. “At the same time, [these relationships are] often construed as a nuisance. Between the number of applications presented and those chosen, the latter is a small number."

Mobile network operators have already been through the evolution from monolithic service provider to application and services switchboard, so they may be in the best position to manage the more app-centric ecosystem that's coalescing.

The fact that they already have solid partnerships with Google, Apple and other providers of mobile operating systems is all to the good.

Tim Johnson, Sprint's emerging solutions strategic opportunities manager, has been clear that Sprint is eying this role, which might include providing equipment as well as connected car services. "If everything makes sense, we certainly have the scale and wherewithal to be the tier 1 of a program," he says.

Susan Kuchinskas is a regular contributor to TU.

 

For more all the latest telematics trends, join the sector’s other key players at Telematics Munich 2011 on November 9-10.

Read TU’s report Smart Vehicle Technology: The Future of Insurance Telematics for exclusive business insights into the global UBI market.
 


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