Photograph by Jim Fets
By Kirsten Korosec
June 23, 2015

The race towards connected, electrified, self-driving (and even shared) cars is pushing automakers towards an existential crossroads.

Global automotive sales will increase at an annual rate of 2.6% for the next seven years, down from a rate of 3.1% between 2007 and 2014, according to a study released Tuesday by New York-based Alix Partners. At the same time, automakers are under pressure to put an increasing amount of capital towards autonomous driving systems, connected features, electrification, and car-sharing options.

Automakers that fail to master these four tech-centric areas over the next decade will be forced to make strategic partnerships, merge with larger companies, or risk being left behind, the report says.

Most major automakers, especially mass market players will have to find ways of funding the additional capital expenditure and research and development investments required to master the car of the future, said Stefano Aversa, vice chairman of Alix Partners, in a statement.

The upshot? The automotive industry is poised to undergo a major consolidation. Automakers are already linked by a series of joint ventures and equity stakes. In the industry today, there are 16 joint ventures, 17 assembly alliances, 15 technical alliances and nine deals where an automaker holds equity in another, Alix Partners says.

 

The industry has gone through waves of mergers in the past, including a period when when volume players premium brands. Alix Partners predicts the industry could see more technology and brand-driven mergers and acquisitions with emerging Chinese and Indian players snapping up Western-based automakers.

Connectivity: The great enabler

While each of these four areas is linked, connectivity is the great enabler for practically all aspects of the car of the future. More than 20% of vehicles sold worldwide in 2015 will include embedded connectivity solutions and more than half will be connected either by embedded, tethered or smartphone integration, according to data from Connected Car Forum.

By 2025, every new car will be connected in multiple ways, Alix Partners predicts. Not surprisingly, that means a lot of money is pouring into the connected car space. The drive to equip new cars with different mobile connectivity solutions—for infotainment, navigation, security, and safety features—will cause the connected vehicle market to double to $40 billion by 2018, the report predicts. More than half of that market will be dedicated to apps and services.

It will no longer be enough for automakers to roll out new models or develop better powertrains and other components. Future profits will be linked not only to hardware, but increasingly to the car’s software and to real-time data collection and application, Alix Partners says. Automakers that fail to meet this demand risk losing out to software and Internet players.

Google and Apple jump in

Apple (AAPL) and Google (GOOG) are the two dominant players in the connected car market. The two companies have developed connectivity systems that allow the smartphone to take over a car’s center screen. Once users plug their smartphone into the car’s USB port, the phone’s music, maps and navigation, and selected apps are integrated onto the central screen.

 

Several automakers, including GM (GM), Hyundai, and Mitsubishi have announced plans to offer CarPlay or Android Auto—and in many cases both.

Despite the seemingly endless cycle of Android Auto and CarPlay announcements, not all automakers are ready—or willing—to give up their own in-car communications and entertainment systems. For example, Toyota has not committed to either Apple or Google’s connectivity platforms. Instead, Toyota engineers are studying whether to adopt SmartDeviceLink technology, an open source version of Ford AppLink, which gives drivers command and control of smartphone apps through dashboard buttons, display screens and voice recognition tech. SDL is maintained by Livio, a subsidiary of Ford.

GM has offered some version of wireless connectivity in its vehicles since 1996, when OnStar was born. Now the company is putting Wi-Fi into dozens of new Buick, Chevrolet, Cadillac, and GMC models, thanks to a new AT&T 4G radio module that gives users a high-speed link comparable to what you might experience on the latest Samsung Galaxy or 4G iPad.

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