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The Greatest Disruptive Force in the Automotive Industry - UPDATE*

by Roger Lanctot | 2月 21, 2013

“Fasten your seatbelts, it’s going to be a bumpy night.” – Margot Channing as played by Better Davis in “All about Eve”

It is the evening before my test drive of Tesla’s new Model S, the $100,000 sedan intended to change everyone’s thinking about what an electric vehicle can be or do.  But what the car can be or do is secondary to the impact the company is having on the automobile industry.

What is interesting is that Tesla’s impact has almost nothing to do with the car itself, but it is important to first understand how the car itself is influencing industry thinking about infotainment systems, safety and connectivity.

My test drive tomorrow in Washington, DC, follows an impromptu test drive last week in Silicon Valley.  I did not have the nerve to drive the car, which was privately owned, instead experiencing the naked, neck-snapping EV aggression from the comfort and safety of the passenger seat.

The Model S is a coiled spring capable of reaching 60mph in 4.4 seconds.  Along with that speed comes balance and poise with extra attention paid to steering and suspension. 

Of course, in the automotive infotainment industry the Model S has garnered attention for its 17” center stack display and embedded connectivity.  The display is impressive and the system’s access to streaming audio or Internet radio content sources via the embedded modem is the ultimate in convenience.  (Every competing system in the market accesses the driver’s mobile phone and data plan to deliver these services.)  The wireless access is free for the first three months and Tesla has yet to announce the pricing or pricing tiers thereafter.

More impressive than the convenient access to content, though, is the provision for over-the-air software updates – a capability that Tesla appears prepared to liberally leverage to its advantage.  In fact, the 17” display facilitates the process by detailing the latest software updates to the driver as they occur – usually overnight with the customer’s approval.  (Since first introducing the capability, Tesla has shifted to conducting initial download tests on the marketing fleet before deploying to consumers.)

The embedded modem also allows Tesla to monitor vehicle performance at all times, as was reflected in the recently disputed NYTimes review of Tesla's new East Coast fast-charging network intended to enable a gas-free, electrified journey from Washington, DC to Boston.  Setting aside the details, CEO Elon Musk's use of vehicle data to question the claims of the reviewer regarding his speed and use of HVAC was a revelation to some.  But, as a company representative clarified later to me, Tesla does NOT gather location information, only performance data.  And the customer opt in is purely binary - yes or no - and, with no location data, clearly does not encompass probe data for enhancing traffic information.

There are shortcomings to the Model S infotainment system which are readily apparent from a short drive.  The user interface – tends to default to a vehicle information screen.  Often featured prominently is a Google map which, while driving, may pixilate or disappear entirely based on the quality of the wireless connection.  This is a bit surprising given the fact that Audi has been out for two years already with AudiConnect consistently displaying Google Earth imagery over the Nokia Navteq map thanks to 2GB of cache memory.  Of course, Audi and Tesla currently share a lack of automatic crash notification capability.  (Tesla execs say they have yet to figure out a solution for replacing Google maps for the launch in China.)

What is missing in the homegrown head unit of the Model S, which is based on Linux, is a personalized experience that anticipates the driver’s needs and preferences and/or anticipates driving information needs such as traffic or weather data.  While multiple content aggregators have demonstrated interfaces fusing multiple inputs into a user interface capable of actively anticipating the contextual information needs and wants of the driver, Tesla appears to have put its entire emphasis on vehicle information management and map illustration.

Yet, even in its presentation of map information the Model S lacks 3D graphics or even Audi’s Google Earth.  Also missing is a more advanced safety portfolio leveraging sensors and cameras.  Company representatives say a more advanced safety offering is in the works and the center console display is ideally suited and prepared for such an integration.

But these “complaints” are quibbles, especially in the context of a car that can be transformed overnight by software updates.  The Model S I drove in last week may actually be different, by now, from the Model S I drive tomorrow.

But the real impact of Tesla lies in its distribution and service strategy.  Tesla is selling its cars from more than 22 stores nationwide and has won its first battle with traditional automobile dealers as a Massachusetts court dismissed a lawsuit brought by the Massachusetts State Automobile Dealers Association (MSADA).  The lawsuit claimed that Tesla was in violation of Massachusetts law governing the sales and servicing of cars.

The National Automobile Dealer Association has indicated its intent to support the MSADA’s efforts to challenge Tesla’s sales model setting up an ongoing clash between the massively influential and politically connected NADA and Tesla, which is backed by a combination of deep pockets, green technology cachet and its own political connections.

At a time when antipathy between North American automobile dealers and OEMs is at a peak around the question of facilities standardization and modernization strategies, Tesla presents a disruptive approach to vehicle sales that aligns well with the growing retailing mantra of the Apple Store.  In fact, as part of the NADA’s Phase II report on factory image programs focused on showroom modernization and standardization, the association’s consultant noted Apple’s stores as a touchstone for future store design.  (Tesla hired Apple's former VP of real estate, George Blankenship more than two years with precisely this objective in mind.)

It is no secret that car makers have been trying to steal a few pages from Apple’s playbook with “genius bars” popping up in Hyundai showrooms and with Ford, BMW and GM all adding more in-store personnel/sales counselors to explain new vehicle systems.  But if Tesla is successful in defending its right to sell cars from company-owned stores, a no holds barred struggle could emerge between OEMs and independent dealers in North America.

Further challenging the traditional model is the fact that Tesla showrooms are divorced from the vehicle servicing function.  Vehicles are serviced by independent agents dispatched directly to visit customers.  Tesla has indicated plans, at least in Massachusetts, to open a service location separate from its store, but even this concession is viewed by MSADA as either a violation or a compromise of the law governing vehicle franchises which must have service on-site.  (Tesla is showing its cars in a mall in Natick, Mass.)

So, Tesla is disrupting the automotive market in a number of ways such as:

Including the cost of the embedded wireless service in the cost of the vehicle – though reserving the right to charge for this at some point in the future

Delivering Internet radio and streaming audio via the embedded modem

Delivering seemingly unlimited and endless software updates over the embedded modem

Developing vehicle systems almost entirely “in-house” with only limited support from traditional industry suppliers

Servicing the cars using independent agents

But, most importantly, selling the cars via company owned stores and with little or no service component - since there is almost nothing to service.

With all of the attention paid to Google’s self-driving cars in the past year, one might have concluded that Google was the most disruptive force in the industry.  In fact, it is Tesla that is rocking Motown, Munich, Tokyo et. al. with its fresh-baked, homegrown approach to automotive marketing.

In comparison to Tesla, Google is a virtual lapdog doing everything it can to play nice with car makers offering up Google Maps, POIs, Google Earth, Google Search and even Android as tools for vehicle development.  Even the Google car is seen as nothing more than a marketing platform for Google technology intended for sale to the industry.

Tesla is taking no prisoners and tipping its hat to no conventions as it continues to hit or surpass its own financial and production targets.  The company is selling cars with 25% margins in a market where new internal combustion engine driven cars are sold with single digit margins and dealers hope to make up the revenue on service.  And, like Google, Tesla is sharing its powertrain development with Toyota (RAV4 EV) and Daimler - which provided Tesla with a steering wheel for the Model S.

What should OEMs do?

It is not too late for car makers to update their dealer franchise strategies and business models.  Among the steps that ought to be considered is giving dealers greater flexibility around the manner in which facilities upgrades are funded and approved.  Car makers should recognize the important customer interface role played by dealers and work to lower their costs of doing business (ie. reduce the expenses associated with diagnostic hardware and software) and give dealers access to vehicle data derived from telematics systems.

Independent dealers need to be viewed by car makers as important allies in connecting with consumers.  It is time to put aside the adversarial relationship that is undermining the customer interaction – a relationship that is essential to improving customer satisfaction scores and retention.

It is inevitable that OEMs – particularly in the luxury segment - will seek to open showrooms to match Tesla’s high profile market presence.  But these measures should go hand in hand with supporting the existing independent dealer network.  Whether or how the OEMs choose to walk this tightrope remains to be seen.  In the meantime, Tesla will be opening soon in a mall near you

*A final note on the Model S infotainment system: The car comes with access to Slacker and TuneIn Radio via the embedded modem, an industry first.  Additional apps will require Tesla approval before being implemented.  The system also allows for Web browsing.  More importantly, the nature of the configuration suggests an upgrade path focused on software rather than hardware, since the 17" display consumes so much of the space normally reserved for a more traditional center stack.  Not all drivers will be pleased with the 17" display, which tends to wash out in bright sunlight, but it is fairly stunning at night.  The navigation feedback in the display is supplemented with instrument cluster guidance.  Some customers will be tempted to rip out the standard 17" display and start from scratch - but most will be too jazzed by the car's performance to much care about that kind of radical automotive surgery.

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