Peter D. Henig
Red Herring
April 9
This article is from the April 1, 2001, issue of Red Herring magazine.
My grandfather owned a Pontiac, a 1965 Bonneville. The kind of car others lusted after. It was as wide as it was long. And, almost unbelievably for its vintage, it had power windows, air-conditioning, and a fancy FM radio. A poor Jewish boy from Brooklyn, he bought that Pontiac for the same reason that everyone else in America bought one -- it was a symbol of success. And for General Motors (NYSE: GM) in the early '60s, that translated into nearly 50 percent market share.
At the start of this new century, GM, one of the world's largest corporations, is suffering an identity crisis. Domestic market share has been nearly halved to 27.9 percent, as the grandchildren of poor Jewish boys from Brooklyn opt for Hondas, Toyotas, and BMWs. Consumers now enjoy a smorgasbord of car choices far beyond GM's eight tired brands. Detroit is no longer GM's fortress. "This is a low-margin, slug-it-out, tough business," says Mark Hogan, president of e-GM, GM's e-commerce initiative.
By GM's own admission, its margins on vehicle sales are roughly 3 percent while revenue growth sputters along at less than 5 percent. Too many dealers, declining brand value, and a massive oversupply of trucks and sport-utility vehicles -- those high-profit vehicles that made the Big Three fat and happy over the last eight years -- are converging on a corporation sorely lacking the one thing that made it great: exciting cars that people will buy in droves. The company has been buoyed by downstream revenue from sources like financing and insurance. Now, Mr. Hogan and other GM top brass are counting on new revenue from wireless initiatives that would emerge from its OnStar division. But will that be enough to restore GM to its former glory?
THIS YEAR'S MODEL
Call it a credit card on wheels or simply the latest node on the information highway. GM is betting that the automobile is the next thin client. It's called telematics and proponents view the car as a platform through which to sell not only wireless safety and security services -- keyless remote access or stolen-vehicle tracking -- but through which they will gain slivers of revenue from drivers downloading email, stock quotes, and voice-activated concierge services from the Internet (see "Will telematics drive the industry to distraction?"). (Not to mention what would have been my grandfather's favorite: usage-based insurance -- the perfect insurance savings plan for Sunday drivers.)
Eager for new revenue streams, mobile e-commerce and telematics has GM's, if not the entire auto industry's, undivided attention. "For 100 years, all they've been doing is selling the hardware; now they're looking at the software and saying, 'We don't want to be IBM anymore, we want to be Microsoft,'" says Thilo Koslowski, senior auto analyst with the Gartner Group, a market research firm. And for good reason: even in today's market Microsoft (Nasdaq: MSFT) trades at a price-to-earnings multiple of 33, while GM lags far behind at between seven and eight times earnings. If in-vehicle Internet services become a high-growth, high-income business, the reasoning goes, shares of GM should theoretically trade more like those of a technology company.
GM's revenue streams first have to become transaction fee-based, like those of an Internet or wireless company. If GM can generate telematics revenue per customer every three to four minutes through online transactions, rather than every three to four years -- the usual replacement rate for buying a new car -- it might indeed justify a higher valuation on Wall Street. "Call it a nickel, call it a dime, call it a buck, call it ten bucks -- we make money on every personal call that's made and every connection with the wireless environment," says Mr. Hogan.
Add further technology initiatives -- Covisint, its trading exchange, or GM BuyPower, its Web site, which are intended to cut costs from the supply chain while selling directly to customers online -- and GM's transformation starts to take form.
THE NET BEHIND THE WHEEL
Defined as bringing together the capabilities of voice, data, and automotive technology to facilitate Internet and wireless cellular services, telematics represents GM's best opportunity for generating recurring revenue since it started GMAC (General Motors Acceptance Corporation), its own financial services business. Within a few years, OnStar -- or other telematics initiatives like Ford Motor's (NYSE: F) Wingcast, a joint venture with Qualcomm (Nasdaq: QCOM), or DaimlerChrysler's (NYSE: DCX) DCX -- will come not as an option, but as a built-in feature.
Auto analysts like Saul Rubin of financial services firm UBS Warburg estimate that domestic telematics revenue -- including subscription fees, wireless reselling, and hardware sales -- could reach $12 billion by 2005 and more than $20 billion by 2010. Such forecasts don't include advertising, sponsorship, and slotting fees derived from future in-vehicle Internet services, or the transaction-based revenue derived from other location-based applications, like Bluetooth or virtual-adviser concierge services.
But not everybody is buying the vision. "GM will solve its issues by creating cars and trucks people lust over," says Gary Lapidus, senior auto analyst with Goldman Sachs, pointing out that while telematics services might carry high margins, they won't be the savior for GM or any other automaker.
In fact, out of this burgeoning market, GM's OnStar will garner barely $3 billion in domestic revenue by 2010; worldwide, it will struggle to generate $6 billion, according to estimates from UBS Warburg. For a $180 billion corporation, such revenue is like peanuts on an elephant's tuchas. GM refuses to release its own revenue forecasts for OnStar, but Chet Huber, managing director of OnStar, disagrees with analysts who doubt that OnStar can fundamentally change GM's revenue mix, calling the forecasts "grossly underestimated."
STARRY-EYED
Technologically, GM remains in the driver's seat. In 1996, when GM unveiled its telematics services, the company was first to market; its technology was incubated within Hughes Electronics (NYSE: GMH), the valuable electronics and satellite subsidiary of GM. By the end of this year, GM will have more than a million installed OnStar systems in at least 32 of GM's 54 car and truck models. "Our competitors, they're not even in the ball game yet," says Ralph Szygenda, GM's chief information officer (see "Can a non-car guy remake GM?"). GM will also be the largest reseller of wireless minutes in the country by year-end. Yet, as another industry competitor, speaking on condition of anonymity, likes to remind GM, "Just because you're the first one in the pool, doesn't necessarily make you the best swimmer."
OnStar is not a guaranteed winning business. At potentially 15 million subscribers by 2010 -- at an average of $15 per month in subscription fees -- there's no doubt OnStar can generate several billion dollars in revenue. Yet, as with any other commodity business, subscription fees will fall. And as safety and security wireless applications become embedded within more vehicles, the OnStar of the future starts to look more and more like today's factory-installed air bags. "Telematics will be something all car manufacturers will have to do," says Mr. Lapidus.
GM's best use of telematics could be as a way of getting new drivers into its cars during the years that it still has the lead -- and getting them out of BMWs, Hondas, and Toyotas. GM would be shortsighted to depend on telematics services for its survival, let alone a primary means of growth. That's not to say OnStar or GM's other Internet commerce initiatives won't add to the top or bottom lines. Or even generate nice profit margins, possibly as high as 25 to 30 percent. But recurring revenue streams and incremental additions to overall net income will do little to change how GM is perceived in the hearts and minds of those on Wall Street.
Even Rick Wagoner, the CEO of GM, is under no illusion that the company's e-business initiatives will convince analysts that GM has become anything more than a slightly faster-than-average brick-and-mortar company. "Wall Street analysts, for us, they're auto analysts," says Mr. Wagoner. "They look at production schedules and penetration and economic forecasts and they see what's driving earnings, and that's the way they determine the stock price."
GM's argument that telematics and technology will reshape it into a high-growth, high-margin enterprise is overly ambitious. It's far more likely that telematics will be an evolutionary phase (remember Oldsmobile?) for the auto giant as it tries to reclaim a competitive edge. In the end, these vaunted, yet basic, telematics services -- wireless safety and security features -- "become the price of admission for simply selling vehicles in the future," says Mr. Huber. Or as my grandfather used to say, over and over again -- an admonition GM may not wish to hear -- "growing down is harder than growing up."
GENERAL MOTORS AT A GLANCE
CEO & PRESIDENT Rick Wagoner
LOCATION Detroit, MI
PHONE 313/556-5000
URL www.gm.com
OWNERSHIP Public (NYSE: GM)
FOUNDED 1897
EMPLOYEES 388,000
PRODUCT Automotive, communications services, financing and insurance operations
COMPETITORS Ford Motor, DaimlerChrysler, Toyota Motor, Volkswagen, Honda Motor, BMW
PROFITABLE? Yes
THE HERRING TAKE One of the world's largest corporations, weighed down by too much inventory and flat demand, is struggling to keep market share in a highly competitive market. Telematics initiatives and high-tech-driven efficiencies won't do much to improve the company's revenue.
AI
