GM Lures Consumers With OnStar Service

DETROIT (04/14/2000) - Conventional wisdom is that automatic transmissions and all-wheel drive are what turn tire kickers into car buyers. But now General Motors Corp. is luring consumers with in-car Internet and cellular services, hoping to spruce up the staid image of its brands and to recharge sales.

Detroit-based GM originally launched OnStar in Cadillacs in 1996 as an emergency concierge and road service. The OnStar communications system, which received a technology boost from GM's high-tech subsidiary, Hughes Electronics Corp. in El Segundo, California, combines a Global Positioning System (GPS), cellular technology and an around-the-clock service center.

OnStar fees start at $195 for an annual subscription. In a pinch, frazzled drivers can get their car doors unlocked, receive step-by-step directions or get emergency assistance from the OnStar service center. Last November, GM unveiled plans to improve the onboard cellular system and transform it into a platform for delivering Web-based e-mail and content. Earlier this month, GM added voice-activated cellular calling to its OnStar menu.

David Cooperstein, an analyst at Forrester Research Inc. in Cambridge, Massachusetts, said adding services like OnStar is something GM had to do.

"Whether or not it's true, GM's brands are considered stodgy and of low quality, and GM's market share is low for them," he said. "OnStar gives GM a way to promote their brands, which are having trouble surfacing on their own.

GM is trying to get out in front of the trend - instead of waiting for the trend to happen and then be a fast or slow follower behind it."

Indeed, GM was the first automaker to announce Web services in its vehicles.

But Dearborn, Michigan-based Ford Motor Co. also plans to introduce Web capabilities in its 2001 models this fall.

OnStar now comes standard in GM vehicles, rather than as a dealer-installed option It's one of the many "small bets" that GM President Rick Wagoner wants to wager to keep the company innovative. Although officials won't disclose the costs of developing OnStar, it's likely that the price tag was much cheaper than that of launching a $500 million new vehicle line, Wagoner told Computerworld (see story below).

GM expects to roll out 1 million vehicles with embedded OnStar systems by year's end, in 31 different models. While GM has managed to woo more than 150,000 subscribers and says it's signing up more than 5,000 new subscribers each month, the automaker has yet to win over critical Wall Street and industry analysts.

Automotive analyst Jim Hall at AutoPacific Inc. in Tustin, California, said GM's OnStar initiative presents a variety of financial hazards for the automaker: It departs from GM's core business; the price point on cellular services keeps dropping; and as Ford and other automakers follow suit, cellular services will become standard and won't be a competitive differentiator.

"A lot of OnStar's services can arguably be provided more economically by an outside supplier," Hall said. "The concierge service could be done by your cell phone supplier, and the people [providing the service] would not have to be given GM paychecks and GM benefits."

Seth Glickenhaus, a partner at New York investment firm Glickenhaus & Co., which owns nearly 293,000 GM shares, said Internet and cellular services are interesting features, but GM still is "not getting at the fundamental problem, which is the style of their cars.

"GM used to have 50 percent market share, and now they barely have 30 percent," he added. "They will end up with 20 percent if they do not sharpen up design and manufacturing and build vehicles that young people want."

To assuage critics, GM is considering spinning off the OnStar business unit and is distancing itself from Hughes, the subsidiary that provided the technology know-how to get OnStar off the ground.

GM has already announced plans to reduce its holdings in Hughes to 35 percent.

The pledge was greeted with an enthusiastic response from financial analysts like Glickenhaus, who said he believes that GM should sell its investment in Hughes.

GM acquired Hughes in 1985 but has since sold its defense business unit and its satellite launching and manufacturing business. Hughes now focuses on communications, wireless systems and its satellite broadcast company, DirecTV Inc. Even with less dependence on Hughes, Cooperstein said, OnStar will give GM an advantage over other car companies. "In order to get reward, you have to take risks," he said.

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