[Auto]Cars Are Going Digital, But Detroit Has a Long Road Ahead

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Tomorrow's cars will behave more like giant smartphones than today's. Drivers could enjoy the benefits sooner than manufacturers. So-called connected cars aren't new: The majority of vehicles sold in the U.S. today and almost half globally are already fitted with a modem. But vehicle electronics are only now being reconfigured to take full advantage of fast mobile broadband, notably to deliver smartphone-style updates "over the air." This is a game-changer. Take the Ford F-150, the bestselling vehicle in the U.S. since 1981. The new generation now arriving in showrooms debuts a new Ford-built software tech stack that will bring the kind of capabilities consumers are used to in smartphones. A "central brain" will deploy updates around the vehicle to fix bugs or add features, says Stuart Taylor, Ford's head of connectivity. After launching on the F-150, the system will go into Ford's other key new products, the Mustang Mach-E and revived 2021 Bronco.

More new vehicles will, like the Ford-150, have a crucial difference from their predecessors: They will improve even after leaving the dealership. For drivers, this promises to bring down the curtain on clunky infotainment systems that feel out of date even when new. For manufacturers, the hope is for new revenue streams. For example, General Motors recently announced that it would start offering insurance as part of its OnStar connected-services brand. "Electric vehicles are putting margins under pressure, so developing functions that can be sold on demand will be crucial for a lot of auto makers," says Johannes Deichmann, a partner in McKinsey's Stuttgart office. Auto makers can't charge much, if anything, for services freely available on smartphones. Beyond insurance, selling driving tools with proprietary content may be their best bet. For example, BMW, an early mover like GM, can direct connected drivers in 45 U.S. cities to streets that have a high probability of having a parking space, based partly on data crowdsourced from other BMWs on the road. Another form of potential "aftermarket" revenue involves car makers pre-installing hardware and then charging consumers to turn it on after the car is sold. All Teslas come with the misleadingly named "Full Self-Driving" function that costs $10,000 to unlock. Having a single fully loaded car variant makes manufacturing simpler, but probably only works for premium brands that can expect a sizable chunk of their customers to upgrade. Part of the allure of connected cars for auto makers also is their potential to cut costs. Ford's new chief executive Jim Farley has been particularly vocal about the need to clamp down on high warranty expenses. If the remote diagnostics and feedback possible through internet connections can resolve problems that currently require attention in dealerships, it will be a big win. Being better connected with drivers could also be a valuable marketing channel, helping to trim advertising costs. But getting into a position where such cost reductions are possible is itself costly. At Ford, Mr. Taylor's "enterprise connectivity" team had roughly 300 programmers four years ago; now it has some 4,000. Volkswagen, the world's largest vehicle manufacturer by sales, said as part of an annual budgeting exercise this month that it will invest €27 billion, or almost $32 billion, into "digitization" by 2025 -- double the amount it expected to spend a year ago. Manufacturers are completely rewiring the car. Most of today's tech-heavy vehicles have dozens of so-called electronic control units, often sourced from different suppliers, each with a specific function. That approach resulted from auto makers' traditional expertise in systems integration, but made it hard to connect the car beyond the infotainment system. Now, control functions are being amalgamated, often by manufacturers in house, into more powerful computers that can be centrally updated via the modem. The new approach was pioneered by Tesla, which had the advantage of designing vehicles from a blank sheet of paper. Although new cars are changing fast, it will be a long time before the changes become widespread. U.S. consumers upgrade their phones roughly every three or so years, enabling regular hardware improvements that support software upgrades and data-rich services. With an average U.S. vehicle age of almost 12, according to IHS Markit, any similar virtuous cycle will play out far more slowly in the auto industry. It could take as much as a decade for new connected platforms to have critical mass in manufacturers' vehicle fleets. Even when they do, connected services are unlikely to make up a big proportion of total revenue for manufacturers, given the high price of a new vehicle. That means selling cars will remain a cyclical hardware business for the foreseeable future, with a low stock-market valuation to match. Much talk of new business models seems premature. Cars are going digital, but investors shouldn't be dazzled by parallels with more fashionable tech industries. Detroit can move neither far nor fast.