Japan may be looking at another ‘Galapagos’

In the race to build cars with digitally connected services – such as ordering coffee on the dashboard display – Toyota and Nissan risk being held back by their home market.

In contrast to vehicle buyers in the US and Europe, Japanese consumers are reluctant to pay for such features.

That’s resulted in only 10 per cent of cars on Japan’s roads having embedded connectivity, compared with 49 per cent in the US, 31 per cent in Europe and 20 per cent in China, according to consultancy SBD Automotive.

The threat to the Japanese car makers – which control almost all of their home market – is that competitors pull ahead as global demand for connected services keeps increasing. Rivals, including General Motors, are betting on connectivity for new revenue streams as buyers in the US, Europe and China embrace on-board shopping, entertainment and customised coupons.

“For Japanese car makers there’s a big risk,” says Masanori Matsubara, a senior analyst at IHS Markit. “They have to compete on a global level with the Detroit Three and the Germans, which have experience and have built the ecosystem and service platform.”

Instead of choosing connectivity services built into the dashboard, Japanese drivers prefer to hook up their smartphones to the car’s systems to, for example, listen to streamed music. That means the data flows through the smartphone provider, typically Apple or Google, denying the car companies a massive opportunity.

The data generated from smarter and connected cars will create a market as big as $750 billion by 2030, according to an estimate by McKinsey & Co. SBD Automotive predicts that two-thirds of cars in the US and Europe will have connected features in 2020. In Japan, such services will be in less than a third of vehicles that year, the consultancy forecasts. “There needs to be customer pull,” says Lee Colman, an analyst heading connected-car research at SBD Automotive. “The car makers don’t want to offer those services unless they know the customers will actually tick ‘yes’ in the optional box.”

The risk is akin to what happened to mobile phones a decade ago, when Japanese brands missed an industrywide shift to smartphones. While flip phones have almost vanished elsewhere, they still have a remarkable presence in Japan as they meet basic-usage needs and are easy for elderly consumers. The phenomenon has become locally known as “Galapagos”, after the islands with distinct flora and fauna, and flip phones are also now referred to by that name.

In connected services, GM is the undisputed leader after pioneering its OnStar system in Cadillacs in 1996.

Initially designed for emergency and security purposes, OnStar now allows drivers to reserve a restaurant table and suggest discounted rates at a nearby service station through the dashboard infotainment system. GM doesn’t break out financial results for OnStar, but the unit has been profitable for a long time, according to people familiar with the matter.

In China, Lynk is among local brands touting their latest connected features at the Beijing International Automotive Exhibition that kicks off April 25. Li Shufu, the billionaire owner of Volvo Cars, unveiled the Lynk marque last year to target urban young buyers with always-on internet and instant ride-sharing with the push of a button.

The EU is making connectivity mandatory for safety purposes, requiring new cars to be equipped with technology called eCall starting in April. In the event of a serious accident, eCall automatically sends emergency services to the vehicle’s location.