OnStar shines for GM as auto telematics becomes mainstream

EL SEGUNDO, USA: While uncertainty is swirling about the future of General Motors (GM), there’s no doubt about the success of the company’s pioneering OnStar service, which has put the automaker at the forefront of the unfolding automotive telematics revolution, according to iSuppli Corp.

GM has sold over 16 million vehicles with OnStar control units since the inception of the service more than 10 years ago. OnStar earns GM more than $1 billion in annual revenues from subscriber services from an estimated 6 million active subscribers according to iSuppli estimates.

While such a revenue stream is important to automakers, the real value of telematics services goes beyond what is realized in services revenue.

“There is a strategic value in having connectivity to the digital systems in the car,” said Phil Magney, vice president of iSuppli Automotive research at iSuppli. “While the value of this is hard to monetize precisely, automakers have the ability to reduce warranty and service costs through telematics.”

Automotive telematics is defined as the integrated use of telecommunications and informatics, allowing the sending and receiving of information. In advertisements, GM promotes OnStar’s capability to remotely detect when a car’s airbags have been deployed, allowing an operator to call for assistance.

However, telematics goes far beyond this feature. There are a variety of other telematics applications that have long-term benefits to the OEM that justify the investment in the technology.

For example, remote diagnostics -— i.e., the capability to remotely monitor vehicle conditions -— has the potential to save automakers millions of dollars over the long term. While is it difficult to estimate the total cost savings from these technologies, GM has stated that OnStar saves it more than $100 million annually through information that flows back to it from OnStar-enabled vehicles.

“For every $100 saved on warranty and recall costs, the value gained to GM increases by $250 million,” Magney said. “It is feasible that cost savings from telematics and other internal efficiency gains could potentially go much higher than this.”

Furthermore, software updates cost OEMs millions of dollars through warranty and recall costs. During the next five to 10 years, software updates will be conducted via telematics connectivity, similar to the way PC software updates are downloaded from the Internet, cutting costs significantly.

Now bundled as standard equipment, sales of OnStar-enabled vehicles in 2009 will amount to 2.5 million, down from nearly 3 million last year as overall sales of GM cars decline due to the overall drop in car sales, iSuppli estimates.

iSuppli predicts overall OnStar revenues will basically be flat during the next few years. While OnStar is seeing an increase in Average Revenue Per User (ARPU) due to improvements in its service, the volume on GM vehicles is being hurt badly by the current auto market.

As a point of reference, iSuppli has recently conducted in depth research on telematics hardware and services including a recent tear down analysis of the latest OnStar Telematics Control Unit (TCU).