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Plenty of room in automotive pipelines for smaller players, says ERM

The automotive industry is frantically trying to develop self-driving cars, and Silicon Valley technology providers have leapt at this new opportunity. There is tension between the old-guard automotive suppliers (the Tier 1s, 2s, and 3s) and these new entrants, with early partnerships appearing a little forced. Bosch or Continental would love to be supplying the complete solution, but because they don’t have the in-house capabilities of the likes of Nvidia and Intel’s Mobileye, they are forced to partner – at least until they can find a way to source their own rival silicon.

The ‘black box’ approach offered by the likes of Nvidia and Mobileye, where an automaker can’t see under the hood of the chip’s operations, has made some of these automakers nervous. They would prefer to have a system in which they have control of the process, so that they can use it to differentiate their products from rivals. After all, if everyone is using the same black box solution for a certain function, such as safety, then nobody stands out from the crowd.

But while the automakers are moving offering fully autonomous vehicles, there are a number of smaller stepping stones that will be achieved along the way. The first of these is mostly complete, with most new cars now featuring an internet connection that can be used for telematics (pulling usage data from the car and sending it to the automaker for use in business applications) and for in-vehicle-infotainment (IVI) services – that might also include things like security tracking, family use monitoring, and remote control features like defrosting or pre-ride climate control.

These services will be expanded to incorporate third-parties, with insurance firms being a particularly keen customer – hoping to use that telematics data to offer usage-based insurance (UBI), to better manage risk. Also keen are fleet management services, who offer software and hardware to customers that need a way to manage their corporate fleets of dozens, hundreds, and sometimes thousands of vehicles. Smaller fleets of specialist vehicles, such as industrial or plant equipment, are also high-value markets.

For now, the end-customers rely on third-parties to provide these services for the vehicles that they buy from the automakers – as the vehicles do not yet have enough of these hardware and software features to work from the factory. This will change over the next decade, as the automakers will look to bring that potential revenue into the fold – but there will be plenty of room for these third-party providers to move in this market.

Which brings us onto our conversation with Eitan Kirshenboim, CMO of ERM Advanced Telematics, an Israeli company set up in 1985 that has been supplying telematics devices to businesses looking to monitor vehicles. Kirshenboim said that ERM does have a fleet management software system, but that it is rare for a customer not to already have such a system of their own.

ERM mostly provides sensor-filled boxes that can track a driver’s performance, with GPS for location and a cellular connection to backhaul the data – as well as offer integrated IVI WiFi connectivity. Additional features can be added to these boxes as needed, such as immobilization, remote unlocking, stolen vehicle recovery (SVR), and fuel theft monitoring.

For fleet managers, these additional services can save a lot of time and hassle, such as instances where a driver has locked their keys inside a cab. Should a vehicle be stolen, the system can aid in its recovery. But fuel is often the largest single cost for these fleets, and being able to check that employees aren’t syphoning off fuel from tanks is also valuable.

The driver behavior monitoring lets the fleet operators check how efficiently their vehicles are being driven, and can then let them grade their drivers – to encourage better fuel economy. ERM sells to both passenger cars and commercial vehicles, and notes that taxi fleets, leasing fleets, industrial fleets, and cold chain monitoring are prominent customers.

But we challenged Kirshenboim on whether the future was bleak for smaller companies like ERM, as the automakers look to bring third-party capabilities in-house – integrated into the vehicles themselves. Would they find themselves forced out of the more mainstream applications, and into smaller-volume niches?

The CMO said that ERM was already working with the automakers to integrate its technologies into their assembly lines, and that of course the consolidation was a concern. He added that it would take the automakers several years to catch up to ERM’s capabilities, and that this gives the likes of ERM a window of opportunity to prove themselves invaluable to the automakers – something that is easier to work with, than to try and replace.

Kirshenboim added that the Tier 1 suppliers don’t yet have the necessary experience to bypass the likes of ERM, with the CMO saying that they had a lot to learn but ERM has a lot of value to offer. He added that there will always be a second-hand vehicle market to target, as well as the lucrative commercial vehicles that serve so many niches. Those user-specific applications likely won’t be served by a factory vehicle, and so the likes of ERM can look to securing a role there.

Even for the mass-market vehicles, Kirshenboim believes that the automakers will begin by offering generic fleet and telematics services, which will leave lots of room for companies like ERM. Later, the automakers might advance to differentiating their offerings based on different tiers, but the CMO stressed that each will have its own thoughts or vision of the right approach. He added that everyone wants to hold that direct customer relationship, and to this end, ERM will have things up its sleeves.

Today though, ERM continues to work with the automakers, and is exploring cooperation agreements with the Tier 1s. To that end, it has met with seven or eight Tier 1s, including Bosch, with Kirshenboim saying that such relationships could be a win-win scenario – but that it seems that the biggest Tier 1s are looking to bypass the likes of ERM and DIY the new products.

As for the current automotive supply chain model, the likes of Ford, BMW, or Honda, are generally referred to as automakers. However, they are often called OEMs, which is a little confusing, as they actually manufacturer little of their own equipment themselves. Even worse, sometimes the Tier 1s are called OEMs (which is a more fitting name for them, in fairness).

The OEMs are supplied by the Tier 1 suppliers, so-called because they deal directly with the OEM. The Tier 1s, who include the likes of Bosch, Continental, and Denso, who are in turn supplied by the Tier 2 suppliers. These companies don’t deal directly with the OEMs, but will supply parts and products that the Tier 1s bundle into larger components.

The Tier 2s include the likes of Nvidia and Mobileye, as well as companies like Sumitomo Electric Industries, Schaeffler, and Thyssenkrupp. The Tier 1s specialize in taking these Tier 2 products and bundling them into ‘automotive grade’ packages – something that a diversified Tier 2 may have no interest in doing, but will happily supply its products to the Tier 1 customer.

Tier 3 suppliers are mostly selling materials to the Tier 2s and Tier 1s, such as metal, plastic, or wiring, and because of this, there isn’t a convenient clear distinction between Tier 3 and Tier 2 – as both will supply Tier 1. Tier 3s supply materials for all manner of industries, and are not purely automotive-focused. This is a list of the top 100 suppliers by revenue. Although it is now a little out of date, it is still useful.

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