OnStar Exclusivity Under Review

DETROIT – OnStar is shopping its telematics service to other auto makers as a means to generate extra revenue for its ailing parent, General Motors Co.

“We’d be open to discussions with other vehicle manufacturers going forward and we’ve had some of those discussions over the last six months,” outgoing OnStar President Chet Huber tells Ward’s during an interview Tuesday at GM’s world headquarters here.

Last month, Hughes Telematics Inc. walked away from an aggressive, long-term rollout planned by Chrysler Group LLC. But OnStar declines to discuss which auto makers it may be targeting.

Eight months ago, Huber says OnStar probably would have been content to keep its technology exclusive to GM. The auto maker severed ties with Honda Motor Co. Ltd. and Volkswagen AG to position OnStar as a differentiating feature on GM vehicles.

But with industry sales slumping to an annualized rate of just 10.35 million units through the first eight months of 2009 and GM’s decision to jettison four brands – Saturn, Saab, Hummer and Pontiac – OnStar finds itself hungry for new subscribers.

Pontiac is being phased out, but discussions continue with the proposed buyers of the other three brands. However, no decisions about maintaining service have been made.

The telematics service – which performs tasks as mundane as unlocking car doors and making dinner reservations to more sophisticated work such as plotting a navigation route on the fly and notifying emergency personnel of crash severity – currently boasts some 5.6 million subscribers.

OnStar has managed to keep its subscriber list at that level for the last three years despite losing an estimated 500,000 customers whose older telematics systems became obsolete in the recent shift from analog to digital technology.

Downturn presents opportunity, says Chet Huber, outgoing OnStar president.

The system is free for the first 12 months of ownership and after that costs $199 annually for a basic program and $299 a year for services including navigation. Typically, OnStar’s retention rate runs about 65%.

GM does not break out OnStar’s financial contribution to the auto maker, but it is believed to be a consistently profitable venture.

While the sales slump has challenged OnStar, it also has presented it with opportunities. Except for Toyota Motor Corp. and Daimler AG, few auto makers have been able to follow through on plans to roll out the costly technology.

“The reality of how challenged the overall vehicle business has been the last six to nine months has caused everything to get retimed,” Huber says.

“So where a year ago I might have told you everyone is going to play out their version and get going quickly, things have been bumped around a bit.”

Lexus Enform, the anticipated successor to OnStar-based Lexus Link, makes its debut starting with model-year ’10, while Hughes displaces ATX Group as a provider to Mercedes-Benz.

However, demand for telematics from auto makers remains, Huber says. Beyond safety and security, car companies want the technology because engineers can draw performance data from the vehicle and it maintains a relationship between the customer and the manufacturer.

GM, for example, reaches out to customers by email every month with OnStar vehicle diagnostic reports.

“There’s been a great desire over the years, for vehicle manufacturers to have a relationship, in parallel with dealers, with customers in an emotional way,” Huber says.

“The foundational services do that, but the monthly reality of an email touch that gets crazy-good open rates and click-through rates because people are very interested…the other vehicle manufacturers are really, really working hard to get their own version.”

Aaron Bragman, an analyst with IHS Global Insight in Troy, MI, says a successful marketing of OnStar to auto makers outside of GM hinges on which telematics services will be provided.

“It depends on what they are trying to sell,” he says. “Automatic crash notification – that is marketable to other auto makers. But turn-by-turn navigation, that remains unproven by OnStar, itself.”

OnStar’s turn-by-turn system allows for navigation without expensive LCD screens, relying instead on automated, spoken-word directions. OnStar bills it as the industry’s “simplest and smartest navigation system,” but critical acceptance of the feature has been uneven.

Whatever the case, Bragman says GM is shrinking quickly today and it could be years before it regains the U.S. market share it enjoyed before the downturn.

“If OnStar is looking to maintain or grow subscriber rates, they may have to look outside of GM,” he says.

Huber retires from GM next month after a 37-year career at the auto maker. Former GM Vice Chairman Harry Pearce tapped Huber some 15 years ago from the auto maker’s locomotive division to lead the formation of OnStar based on technology from Hughes and EDS Corp., a pair of onetime GM subsidiaries.

Since launching in 1995, OnStar now is in its eighth generation and by far the industry leader in safety, security and information services. It appears on 88% of GM’s vehicles and rolls out later this year in China.

Walt Dorfstatter, general manager of OnStar and a 14-year veteran of the subsidiary, will take Huber’s position.

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