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In the initial article of this series “The More Things Change…” we set the stage for discussing the four major innovations in automotive – either manufacturing, usage, or both – that are in development now and have been rolled out only in the early stages or to a small amount of the overall market. While each of the four innovations: Connected Cars, All-Electric Cars, Car Sharing, and Self-Driving Cars, are generally independent of each other, vehicle connectivity is most important to achieving the other three innovations sooner, and is also the further along now, but there’s still much more to come.
First and foremost, the “Internet of Things” (IoT) is the idea that every thing would be connected to the internet, and the common, and mundane, example then provided is that even your toaster will be connected to the internet (even though it likely shouldn’t be for safety reasons). But the thing that is most changed by being connected is automobiles: and this will have impact both in terms of convenience (and the price premium that brings) as well as potentially changing the depreciation curve.
Connectivity Brings Convenience
People do, and will, pay for convenience, and as incomes rise people will pay even more, because their time has become more valuable. This gets counterbalanced by the ability to deliver the convenience with less expense and therefore establishing an even cheaper provider of the basic level of convenience. However, the end result is that “convenience” is usually best sold on a subscription basis, and therefore gets worked into a lease payment very well, adding to the overall convenience.
One of the earliest examples of vehicle connectivity is OnStar, the connectivity, security, and communications product offered on many GM vehicles. The focus was on providing services such as navigation services, ability to make a call directly from your car, and features that provide peace of mind such as automatically making an emergency (911) call if the vehicle was in a severe accident. Over time, the services have changed to fit people’s needs when almost every person drives around with a smartphone in their car, but the integration directly into the vehicle’s console and user interface is still something being perfected through new partnerships between the different vehicle manufacturers and major communication service providers. In any event, while the delivery has changed a bit, OnStar is a great example of the add-on product that is offered as a subscription in exchange for the convenience and peace of mind it provides, and most other services are following a similar delivery method now – even if the first 12-36 months of the service is included in the price of the new vehicle, or the service is automatically included in the lease package offered.
Software Updates Driven by Connectivity
The changing depreciation curve could occur because hardware moves towards obsolescence as soon as it gets delivered, while software can consistently get updated and upgraded. Newer vehicles are much more dependent on software, so that the advances made in durability and reliability of the vehicle’s hardware combined with software that can be regularly updated and upgraded means that 40,000 miles may be the new 30,000 miles (or even 20,000 miles). The marketplace drives actual used vehicle prices, which drives the predicted (and realized) depreciation curves, but attitudes are changing, so that a vehicle with a slow 0-60 time but a lightning quick user interface for the main console can be valuable even on a heavily driven vehicle to a greater portion of the driving public today.
capability to build a single model and then alter some performance capabilities through computer programming instead of through physical changes. In a conventional vehicle, if the base trim level offers X Horsepower and the premium trim line offers Y, and Y is substantially more (like 20%+) the easiest way to explain it is one could have a 6 cylinder engine and the larger has an 8 cylinder (or 4 and 6, respectively). With an electric vehicle, it could be as simple as the software was programmed to limit power to a certain level, and by pushing a button that program is updated to remove the limiter. This also means it can happen at the time of sale, or potentially any time later – including when a vehicle is resold after coming in as a lease return or trade-in vehicle. Please note: this is in theory a capability of controlling performance through software, and not necessarily something Tesla, or any other manufacturer, is doing or plans to do. Contact your dealer for specific information before buying or leasing.
One of the obvious risks with cars that can be updated remotely is that the car’s systems are hacked and malware is transmitted into the car’s computer system instead of the proper updates and upgrades intended by the manufacturer. It’s one thing when a computer crashes because of malware, it is quite another when a car literally crashes because of it. A related risk is that the software is properly distributed by the authorized party (the manufacturer or its software partner), but that it hasn’t been properly tested and causes severe issues when on actual vehicles used by customers that didn’t arise on the sterile machines kept internally for testing. Again, when a mobile phone manufacturer releases an update that makes it impossible to type “I” that’s inconvenient. If a vehicle manufacturer released an update that interfered with normal operation of its vehicle that could be deadly. Therefore, while remote software updates do occur today, and will grow in the future, it is an expensive undertaking to develop the secure infrastructure that can foil hackers and also provide the rigorous and comprehensive development and testing protocols needed to ensure updates will not negatively impact the existing systems. Solving for these issues will be as much, if not more, of the effort to make vehicles capable of being easily updated and upgraded following delivery.
The last aspect of the connectivity we’ll focus on is Vehicle-to-Vehicle, known as “V2V”, connectivity. Basically, this means vehicles that are able to communicate among themselves; most likely types of information communicated will be position, velocity, acceleration and destination. This type of communication will facilitate self-driving vehicles in particular, but even before fully autonomous vehicles there will be applications based on this level of connectivity. Many of these applications will be to provide a safer driving experience – the vehicle will know based on data inflow that a lane change is unsafe or to decelerate because of some not yet visible slowdown ahead. Other applications will be to provide information to the driver that can make for a better trip: if the vehicle is collecting data that all the vehicles on a highway are averaging only 30 miles per hour five miles ahead it may be too soon to brake, but it may be able to alert the driver to plot a different course or communicate an updated arrival time estimate because there’s clearly a slowdown that may not have been anticipated. Again, like other connected tools discussed, this isn’t brand new – the mapping and navigation app on your mobile phone uses a similar concept of tracking users velocity and general count and then extrapolating to determine the quickest and least crowded route. It’s likely the telecommunications providers will partner with the vehicle manufacturers on delivering vehicle-to-vehicle connectivity that will improve upon the services offered today because more data will feed into a single source, increasing data accuracy.
V2V connectivity will be like many other products and services that are impacted by the network effect: the value will increase exponentially as a larger portion of the market is part of the network. The reason our phones provide traffic and navigation data today is because retrofitting 200 million vehicles for vehicle-to-vehicle connectivity is logistically impossible. As new vehicles are built with these capabilities, and the share of cars on the road with these capabilities grows, the adoption of this technology will take off, and additional applications will be developed that utilize the platform.
The Impact on Leasing
There are three main platforms within the connectivity innovation set: in-cabin connectivity for passenger comfort and convenience; manufacturer-to-vehicle connectivity for software upgrades, and vehicle-to-vehicle connectivity for combination of passenger convenience and network management. The features that bring additional convenience can drive a price premium – either the vehicle’s price (and in turn capitalized cost) will be increased, or potentially these services would be subscriptions that are added on to the base lease price. The ability to change the performance of the vehicle after delivery will have an interesting impact on residuals – it can only increase them from the baseline – but the question will be how much they change. In any event, this could reduce the price of leasing as a greater residual will reduce the amount of depreciation being paid for more than it will increase the rent charge, and thus reduce the overall cost to lease. Finally, the vehicle-to-vehicle connectivity will likely not be optional: because of the network effect the value overall will be to place the basic capabilities on every vehicle, but certain applications specific to convenience more than safety will likely be disabled unless a premium is paid and would be integrated in with other in-cabin connected applications.
Next Article: “Mobility Services”
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