Do or Die

Every morning when Chet Huber climbs into his Cadillac Escalade at his Grosse Pointe home in suburban Detroit, he issues a command to his OnStar Virtual Advisor. “Give me my traffic,” he says.

Within a minute, a pre-programmed route to his office in Troy or to Metropolitan Airport in Romulus is overlaid with Westwood One's Metro Networks traffic grid for the Detroit area. That same grid generates the traffic reports heard daily on radio.

If a semi-trailer has jackknifed five miles up the road on Interstate 696, or if a 5-car accident has turned I-75 into a parking lot, OnStar will tell him immediately, before he gets to the bottleneck. He can find an alternate route and avoid a lot of hassles.

True, he may hear the same information on the radio, but maybe not until he's mired in bumper-to-bumper traffic. And a $1,500 navigation system with Global Positioning System (GPS) looks cool on your dashboard, but it knows nothing about traffic conditions.

Often before sun-up and before the paper arrives at the office, Huber has Virtual Advisor read stories from that morning's Wall Street Journal. When he goes home each day, Virtual Advisor reads him his preprogrammed stock quotes.

In the evening, when he acts as family chauffeur, his teenage daughter likes to impress her friends by having soap opera reports read by Virtual Advisor. “They giggle and think it's cool,” Huber says.”

Privately, Huber thinks it's cool, too. That's why as the president of OnStar Corp., he's the auto industry's most important — and most inconspicuous — champion for telematics, the catch-all term for 2-way wireless communication in vehicles.

Telematics uses a hands-free cell phone that's embedded in the vehicle architecture. Instead of merely transmitting a person's voice, the telematics system also can read e-mail, browse the Internet and convey diagnostic information to a service center or dealership if, for instance, the vehicle's engine is misfiring. The system even interacts with the vehicle's GPS receiver so the vehicle can be located in the event of a crash.

If consumers merely could experience the value of the OnStar services, Huber contends, people would buy into the technology faster than you can say “Batmobile.” The Caped Crusader's hot ride remains the key ingredient of OnStar's ad campaign.

In a prior life at General Motors Corp.'s Electro-Motive Div., this Harvard grad from Hammond, IN, sold locomotives. Since 1995, he has been toiling quietly as president of OnStar, the wholly owned GM subsidiary that installed its first in-car communication network in Cadillacs (Seville, DeVille and Eldorado) in 1996, priced as a $1,000 option.

Since then, GM has rolled out OnStar on a growing number of its vehicles. For the '03 model year, 44 of 60 GM models sold in the U.S. (including Saab and Hummer) are available with OnStar. It's all part of the No.1 auto maker's presumptive and risky strategy to dominate the telematics market by giving OnStar to consumers who may not want it on their new cars.

The cost of the hardware and a 1-year subscription is figured into the price of the vehicle. As a free-standing option, OnStar costs $695, a price that includes one year of service. After the first year expires, the basic service costs $16.95 a month, or $199 a year. The top-of-the-line Luxury & Leisure package for hotel reservations, concert tickets, etc., costs $69.95 a month.

Huber admits the premium package isn't very popular, but overall, he says the strategy is working. He says OnStar has 2 million users, the service is reliable, and the system is getting great support from GM's dealer network as well as GM's top management. CEO Rick Wagoner, Vice Chairman Bob Lutz and North American President Gary Cowger all have sung its praises. OnStar also has won significant business outside GM — including Audi, Acura, Isuzu, Lexus, Subaru brands and, most recently, Volkswagen. That's no small feat.

In his sleep, Huber can recite the frequency his customers use the service. Every month, he says OnStar supplies roughly 200,000 navigation routes, remotely unlocks 15,000 cars with the keys inside, dispatches roadside assistance to 14,000 stranded or injured motorists, helps police locate 375 stolen vehicles and alerts authorities of 500 airbag deployments. Every day, 5,000 new cars wired for OnStar roll off the assembly line.

But critics find OnStar's statistics dubious. They doubt whether 2 million people really are using the service, and they note that OnStar reported 2 million users as of early 2002. If the number hasn't changed several months later, doesn't that suggest it's losing subscribers as quickly as it gains them? One thing is clear: GM will miss the projection it made two years ago that OnStar would have 4 million subscribers by 2003.

Detractors also suggest that as few as one in five renew their subscription after the first year expires. For every upbeat testimonial that Huber conveys, a skeptic talks about a neighbor who got OnStar on a new vehicle and never even activated it.

Profitability in Question

There are more questions than answers with regard to the stability of OnStar. That's because it lives inside the GM cocoon, protected from the requirement to report earnings and subscriber renewal rates. Executives won't disclose whether the operation is making money, but they don't dispute reports that OnStar plans to break even this year and turn a profit in 2003.

Morris Kindig, president of Tier One, an automotive electronics research and consulting company based in Mountain View, CA, maintains OnStar is losing money, and that it's just a matter of time before GM pulls the plug. “I can't see how GM will continue to support this operation,” he says.

GM refuses to disclose OnStar's renewal rate. Some critics have suggested it's as low as 20%, but OnStar officials say it's much higher, without being specific. Huber has said it's “north of 50%,” GM's Wagoner was quoted as saying the rate is 60%, and a recent telematics study by Paul Hansen Associates of Rye, NH, pegs OnStar's renewal rate at 42%.

Kindig says that after two years of service, only about 20% of OnStar customers opt for a third year, supporting his skepticism about the company's ability to survive long-term.

Lexus, one of OnStar's smaller customers, has been the only auto maker to publicly talk about renewal rates. Toyota Motor Corp.'s luxury division announced two months ago that 60% of the owners who had OnStar on a Lexus vehicle (marketed as Lexus Link) paid after the first year to continue the service. Lexus offers it on the LS 430 luxury sedan, the LX 470 SUV and the upcoming GX 470 SUV.

Both Kindig and Hansen suggest that OnStar may fall victim to the “decontenting” trend that is making its way through GM platforms in an attempt to cut costs and improve profitability, but Huber denies any such discussions have taken place regarding OnStar. In mid-September, Huber says decontenting champion Lutz paid a visit to OnStar's offices in Troy, MI, to give a pep talk rather than a downbeat sermon about cost cutting.

OnStar's role in the growth of telematics can't be overestimated. By far, it's the largest player in a sector that wouldn't exist if there were no OnStar. The Hansen Report study counts 2.3 million telematics subscribers worldwide; 2 million of them belong to OnStar in the U.S. Japan has 35,000 telematics users, Europe 18,000.

By one estimate, the U.S. alone was supposed to have 8 million telematics subscribers by 2003. The market would be “hotter than a jalapeno in a heatwave,” promised the Strategis Group Inc. in a study published in 1999.

Dreams Deferred

During the dot-com heyday, Silicon Valley was breathless with anticipation for telematics. Everyone who used the Internet at home and at work, the logic went, would naturally want it in their cars as well. Auto makers would go along for the ride down the path to mega-profitability.

Then the cultures clashed.

It was a battle of big versus small, methodic versus go-fast, notes David Andrea, director of the Forecasting Group for Altarum's Center for Automotive Research in Ann Arbor, MI. Andrea says tough questions, such as who controls the revenue stream and the content, became stumbling blocks. When the dot-com bubble burst, the future of telematics appeared about to pop as well.

Some players have suffered more than others. A case in point is Infiniti, the luxury division of Nissan Motor Co. Ltd. It has struggled mightily with its telematics strategy and has endured not one, but two high-profile failures.

The Infiniti Communicator system was offered in 1999 and 2000 on some Infiniti vehicles in the U.S., in partnership with electronics giant Motorola, AT&T Wireless and ATX Technologies, the only viable competitor to OnStar. The system was similar, offering wireless communication, 24-hour emergency service, airbag deployment notification and remote door unlocking.

On paper, it looked great. The reality, however, was disappointing. An Infiniti executive says the brokering of a nationwide roaming agreement for analog airtime was, itself, a monumental task, and it was expensive, too.

The business model for Infiniti Communicator never justified itself; more customers meant more revenue, but it also required more infrastructure and staff to support those customers. And selling the system was a lost cause.

“How do you convince someone to buy the service when they already have a cell phone that does the same thing?” the exasperated executive asks. “Dealers couldn't sell it or service it, and they couldn't market it.”

At first, the option price was close to $1,000 for the hardware alone, then it was slashed to $500. Approximately 5% of the Q45 and I30 luxury sedans sold in 1999 and 2000 were equipped with Infiniti Communicator.

More recently, Infiniti again was on the losing end with the demise of Wingcast, the telematics joint venture Ford Motor Co. created with telecom hardware producer Qualcomm Inc. It was supposed to be Ford's answer to OnStar, complete with 24-hour service advisors. Infiniti said it would offer Wingcast as standard equipment on all its '03 models.

But Ford was distracted by other more pressing issues — namely cash flow — and this summer it pulled the plug on Wingcast in the U.S. market. (In Europe, Ford has the Signant telematics partnership with Nissan, Renault SA and PSA Peugeot Citroen.) Insiders say Ford and Qualcomm never saw eye-to-eye. The auto maker likely concluded it would be awhile before all the bugs got worked out of such on-board devices and even longer before car and truck customers were willing to pay for such services.

Perhaps Ford had studied OnStar and found the prospects less than inviting, says Phil Gott, director of automotive consulting for DRI-WEFA.

Ford also realizes it doesn't need to own a telematics company to offer such services. Before Wingcast, Ford had contracted with ATX Technologies of Dallas, beginning in 1996 as the service provider for the RESCU roadside assistance program on certain Lincoln models. Jaguar launched a similar program beginning with the '00 model year.

ATX continues the service today for Jaguar and will continue monitoring telematics-equipped Lincoln vehicles through model year 2003. Last year, Lincoln chose not to renew its contract with ATX beyond 2003, because of Wingcast.

If it weren't for ATX, OnStar would have a telematics monopoly in the U.S. ATX has 400,000 subscribers, primarily through its two biggest customers, BMW AG and Mercedes-Benz.

Outlook: Diagnostic Tool

Steven Millstein, president and CEO of ATX, argues the telematics market is alive and well. “Did the forecasts come true? No, in part because some people were looking at the wrong services,” he says. “The industry is fine for those of us who defined the industry as we defined it all along.”

The future of telematics, Millstein says, isn't in browsing the Internet or downloading e-mail but in remote diagnostics — the ability to extract critical data from a vehicle and transmit it to the OEM. The potential for heading off recalls and warranty costs is enormous.

As an example, a faulty engine controller can go undetected for 15 months because of the glacial pace at which OEMs respond to assembly problems. “We can look at it immediately and get it (the information) to the plant so they can call the Tier 1 supplier and tell them they have a problem,” Millstein says. “Huge, huge savings.”

ATX refers to its diagnostics strategy as VRM, for vehicle relationship management, and Millstein says parts of that strategy will be rolled out with an auto maker customer at the beginning of next year.

The future of telematics promises to be a central theme at the Convergence automotive electronics conference in Detroit this month. It's a much different market than it was two years ago — both for telematics and automotive in general. Today, if Scott McNealy, chairman of Sun Microsystems Inc., tried to give his “Java browser on wheels” speech as he did at Convergence 2000, he'd probably be laughed off the stage.

Jerry Rivard, one of the founders of Convergence and considered by some the father of automotive electronics, says there's no question telematics features will become common in future cars. It will just take longer than a lot of companies and their investors would like.

“The unfortunate thing about telematics is that it was touted by people who don't know the auto industry,” says Rivard, hired in 1976 as chief engineer of Ford's electrical and electronics division.

Rivard says the auto makers and service providers need to come up with a new revenue model that doesn't require monthly payments by customers. They already pay monthly for the cell phone; it's only a matter of time before they will choose one or the other. “People are tired of that monthly bill,” he says. “It gives them heartburn every time they sign the check.”

Andrea, of the Center for Automotive Research, suggests that auto makers get on the same page with other service providers so that consumers receive just one bill for information-related expenses such as cell phones, Internet access and cable TV. Most car owners, he argues, want no other transportation expenses beyond filling the gas tank, changing the oil and making their monthly payments.

“For telematics to make inroads, there can't be an incremental charge up and above,” Andrea says.

Despite the hand-wringing in the automotive electronics community, Chet Huber soldiers along, talking up OnStar at every opportunity and constantly striving to improve the product. He says it's likely that OnStar will be offered soon in Mexico, and Europe remains under review. Across all of Canada, he hopes to offer OnStar's Personal Calling program early in the fourth quarter, in both English and French.

For the '04 model year, OnStar will be upgraded with an advanced automated crash notification system. Rather than alerting OnStar to send medical help only when a front or side airbag deploys, the updated system will employ sensors to alert OnStar of a medical emergency based on force of impact — regardless of whether an airbag deploys.

Huber thinks back to OnStar's milestones, such as the adoption of the “3-button” (white, blue and red) system a few years ago and the first factory installation for Cadillac Escalade in 1999.

He knows the technology is not perfect, and that the approach to telematics must be iterative. “If we waited until the technology was perfect,” he says, “we wouldn't have launched.”