1. Original Equipment Manufacturers' (OEM) integrated systems are expensive and often not tailored to customer needs
2. Retrofitted dongle solutions could already enable over 90 percent of cars to be connected today
3. By 2020 more than 90 million cars across Europe will be fitted with a dongle – Non-industry players are capturing significant market share
4. OEMs should develop their own dongle solutions so as not to be squeezed out of the market

Munich, September 6, 2016

The connected car is a hot topic for the future of the automotive industry. While Original Equipment Manufacturers (OEMs) already offer a range of in-car integrated solutions, these often fail to provide what customers really need. They are also extremely expensive owing to the substantial R&D costs invested in their development. As a result, connectivity solutions have been slow to find their way into the car parc – nowhere more so than in the volume segment. Consequently, more and more providers from outside the industry, such as IT and insurance giants, autoparts suppliers and start-ups, are pushing their way into the market by offering low-cost adapters in the form of dongles that are easy and quick to retrofit into a vehicle and can be linked up to smartphones and other devices. In their new study, "Connected car – App based dongle solutions as a shortcut to connectivity", experts from Roland Berger examine what OEMs and providers from other industries need to do to achieve profitable growth within the connected car space.

"A dongle is simply plugged in to the standardized vehicle diagnosis port (OBD II). Nearly 94 percent of cars in Germany already have such a port," explained Jan-Philipp Hasenberg, Partner at Roland Berger. And app based dongle solutions that transmit vehicle data to a smartphone for a range of different services are already a constant feature in the lives of many drivers. For Germany, 2016 marks the first year that the number of smartphone users (47 million) exceeded the number of cars on the roads (45 million). The potential of app based dongle solutions for vehicle-to-driver communications is therefore huge.

Ninety million dongles in use across Europe by 2020

"We anticipate that more than 90 million cars across Europe will have dongle solutions retrofitted by 2020," said Philipp Grosse Kleimann, Partner at Roland Berger. "On the other hand, only about 70 million vehicles will be equipped with OEMs' factory installed systems."

OEMs are already lagging behind on vehicle connectivity. Despite the fact that customers already perceive a great deal of added value in online applications, just one third of new cars rolled off the production line with integrated solutions of that kind in 2015. The Roland Berger study found that more than 80 percent of drivers are prepared to pay more for extra services like parking spot search, car finder and the eCall emergency call facility. However, the most they are willing to pay is about 50 euros a year. "Some automakers are charging thousands of euros for their integrated connectivity features, plus annual usage fees on top," said Jan-Philipp Hasenberg. "That is much, much more than today's car owners are willing to pay." Dongle suppliers from other industries are coming in and selling their adapters for less than 100 euros a piece – with a similar level of convenience in the solutions and services offered.

OEMs need their own dongle solution

"Numerous market players are already attempting to occupy the customer interface with retrofit solutions," explained Grosse Kleimann. "Such solutions can track insurance customers or inform drivers of when their car needs servicing and so on."

OEMs therefore have to act fast. What they need is a mind shift to enable them to keep up with the competition that is springing up. As Grosse Kleimann explains, "In the medium-term perspective we can expect to see more and more market share going to whichever providers are able to persuade the most customers to buy their connectivity solutions. Once a provider achieves critical mass, that creates a lock-in effect and the system becomes the market standard. But at this point in time, no one knows precisely which industry these providers are going to come from."

OEMs and dongle solution providers: Two different strategies

With this in mind, the Roland Berger experts recommend two different strategies, one for OEMs and one for dongle solution providers from other industries.

OEMs: To achieve faster market penetration, OEMs will have to consider whether they can reach critical mass on their own or whether they need partnership arrangements to help them develop their own dongle solution. This would enable them to grow their customer base; new customer data would also put them in a position to offer other products and services to better match their customers' needs. "OEMs will need to actually see and use the app based dongle solutions as an interim step on the path to realizing the connected car before they'll be able to establish their own closed ecosystem in the market long term," explained Jan-Philipp Hasenberg.

Third-party providers: IT and insurance giants, autoparts suppliers and start-ups should target inter-industry collaboration. Developing new digital technologies on an open platform can enable innovations to be taken to market faster and more cost efficiently. The focus needs to be on app based dongle solutions as these are of interest to customers in all price segments owing to the ease of accessibility and ease of use that they offer. For third parties it will be important to offer the right range of services that can make their solutions into the standard for customers in the market.

"Both OEMs and third-party providers are capable of winning the race to make a profitable business out of the connected car. If the non-industry players manage to get a standardized data format and a single industry-spanning platform established, they will have every chance of success," said Grosse Kleimann. "If not, the OEMs are going to control this market. That said, none of the market players should forget that customers are not always tied to a single brand."

• Photos posteriori / iStockphoto