Car Feature Subscriptions in the Automotive Industry
As part of its 2021 investor presentation, General Motors provided a detailed plan to double its annual revenue to $280 billion from a rolling average of $140 billion and to expand its operating margins from 7.9% in 2020 to 12-14 percent by XXXXXXXXXXMary Ba
a, the CEO, stated that much of the revenue growth is to come from its new and service-based businesses, with โmoderate growthโ from its traditional vehicles and operations.
GM said revenue from software and new business is expected to have a compound annual growth rate (CAGR) of 50%, reaching $15 billion by 2025 and $80 billion by 2030. The software and new business category include Cruise, a self-driving car service; BrightDrop, a line of electric commercial vehicles; GM Defense; and software-enabled services.
By 2030, software-enabled services are expected to account for between $20 billion and $25 billion of GM revenue from a projected 30 million connected vehicles. In 2021, GMโs subscription services generated $2 billion in revenue and EBIT margins above 70% primarily through OnStar, the industryโs leading connectivity platform.2 Despite the excitement, according to a recent Cox Automotive survey in the United States, 75 per cent of respondents said they were not willing to pay an annual or monthly subscription fee for most items on their next vehicle. Rather, they expect most features and services to be included in the upfront sales price.
GM, like other automakers, are hoping that software enabled services, which provide recu
ing revenue, can alleviate the boom-and-bust profit cycles inherent in the automotive industry. Additionally, given that the electric vehicles account for a growing share of the global car market, and that electric vehicles typically require less maintenance, automakers need to identify new after-sales revenue streams.3 EVs donโt require oil changes, transmission repairs and other services. A 2019 report from AlixPartners estimates that dealers could see $1,300 less revenue in service and parts over the life of each EV they sell.4
At a recent investor conference, Steve Carlisle, President of GM North America, said that the automaker has 50 value-added products and services to be available in connected cars over the next 36 to 48 months.5 Internal research from General Motors suggests that customers are willing to pay up to $135 a month for the right mix of products and services. These could include enhanced map services, data
1 https:
news.gm.com/newsroom.detail.html/Pages/news/us/en/2021/oct/1006-investo
2 https:
www.theglobeandmail.com/investing/markets/stocks/GM-N/pressreleases/9290193/why-wall-street-loves-this-new-car- option-that-drivers-hate
3 https:
www.mckinsey.com/industries/automotive-and-assembly/our-insights/a-turning-point-for-us-auto-dealers-the- unstoppable-electric-ca
4 https:
www.cnbc.com/2021/06/13/gm-ford-are-all-in-on-evs-heres-how-dealers-feel-about-it-.html
5 https:
www.reuters.com
usiness/autos-transportation/gm-plans-50-new-digital-features-services-by-2026-executive XXXXXXXXXX
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analysis for business owners who run fleets of GM (and non-GM) vehicles, and software-enabled performance upgrades that boost acceleration.6
The new digital products and in-vehicle subscription services will be supported by GMโs Ultifi software and Vehicle Intelligence Platform (VIP).7 VIP can be thought of as the smartphone and Ultifi as the operating system.8 Like software on a smartphone, Ultifi can provide regular updates and let customers choose from a variety of over-the-air upgrades, personalization options, and apps. The vehicle's electronics systems will deliver services or features via software for a monthly fee.
Through software as a service, GM like other automakers, are shifting the buying process so that instead of buying the features and packages you want when buying a new car, features will be provided on a subscription program.9 From a manufacturing perspective, rather than having to make vehicles with various options, automakers can make one model with all of the options, which can be locked or unlocked at the discretion of the consumer. Therefore, while there is more complexity in the car, there is less complexity in manufacturing which should reduce manufacturing costs.10 Furthermore, different features can be unlocked by subsequent owners of the vehicle.
6 https:
www.wired.com/story/subscriptions-automakers-mimic-netflix
7 https:
www.gm.ca/en/home/company/canada/pdc.detail.html/Pages/news/ca/en/2022/may/0510-redhat.html
8 https:
cleantechnica.com/2021/10/04/gm-previews-new-ultifi-software-platform-ahead-of-investors-day
9 https:
www.caranddriver.com/news/a XXXXXXXXXX
mw-subscription-menus-cars
10 https:
www.caranddriver.com/features/a XXXXXXXXXX/on-demand-options-automakers
Assignment:
Familiarize yourself with the 2022 GM Annual Report.
Use the articles referenced in this assignment to your benefit. You are not limited to these documents and are encouraged to supplement your research with other articles and resources.
Part 2: Cost Structure and Financial Statement Impact (9 Marks):
From slide 17 of its most recent earnings deck, GM is predicting the following by 2030:
ยท Total revenue to be $275B-$315B
ยท 50% CAGR in software and new business
ยท Cruise revenue of $50 billion
ยท Core auto business CAGR of 4%-6%
ยท New business operating margins in excess of 20%.
ยท Overall margin expansion of 12% to 14%.
For simplification, based on the above and other facts presented, the subsequent โguidanceโ is created:
Revenue Sources
2022
2030
Automotive
(5% CAGR, 8 Years)
$143,975
$212,716
GM Financial
(5% CAGR, 8 Years)
$12,760
$18,852
Cruise
$50,000
Software-enabled services
$25,000
Other New Business
$5,000
Total Revenue
$156,735
$311,568
Operating Income
$10,315
$37,388*
Operating Margin
6.58%
12%
*the Operating income was computed using the lower range of the overall margin expansion estimate.
While not perfect, if the operating margin of existing revenue (i.e., automotive and financial) remains at approximately 7%, the implication is that the operating margin on new businesses would be 26.5%. While increased delivery of electric vehicles may increase the operating margin of automotive sales, the difference in margins would likely remain material.
Required:
ยท (4 marks) Is the fixed vs. variable cost structure fundamentally different between the โnewโ businesses and the existing revenue streams to justify such higher margins?
ยท (3 marks) How would the existence of these new revenue streams impact firm-level operating leverage?
ยท (2 marks) Would the expected operating margins of 26.5% for new business be realized before 2030?