To increase its expertise, Mercedes has invested more than 200 million euros ($216 million) in a software hub at its tech center near Stuttgart, Germany. The automaker said $1 billion of its $150 billion global revenues in 2022 came from software-based vehicle upgrades.
The software-defined vehicle is easy to envisage but, as car companies are finding out, very difficult to execute.
Automakers hope that shifting emphasis from hardware to software will cut development costs, strengthen customer loyalty and increase revenue.
However creating a smartphone-on-wheels requires a complete rethink of vehicle development, new supplier relationships, and an overhaul of corporate culture.
Automotive News Europe has made the transition to software-defined vehicles a priority topic for 2024. For more, click here.
By 2030, digital services could generate as much as $1.5 trillion in additional revenue for the global industry, rising to $3.5 trillion, amounting to 40 percent of total automotive industry revenue by 2040, according to research by consultancy Accenture.
Meanwhile, in 2030 the market for over-the-air-delivered features and subscriptions is expected to reached $14 billion, up from $3.3 billion last year, according to data from consultancy Deloitte.
However, the transition has mostly delivered delays and missteps, most publicly at Volkswagen Group's troubled Cariad. Setbacks at the software division stalled the launch of the new full-electric Audi Q6 E-tron and the battery-electric Porsche Macan.
Other victims of the new digital arms race include two Volvo electric vehicles. The automaker's EX90 flagship SUV was delayed because of challenges while testing "mission critical" software, while deliveries of the EX30 small SUV were stalled for half a month because a crucial software update could only be performed at dealerships rather than over the air.
And none of the four models is a true software-defined vehicle.
What counts as a "true" SDV is up for debate but most agree it needs to have a centralized computer system with just a handful of powerful ECUs controlling a range of on-board functions as well as data flow to and from the cloud.
"The promise of the software-defined vehicle is going the same way as the promise of autonomous vehicles. It is difficult," said Jean-Marie Lapeyre, Capgemini's chief technology and innovation officer covering automotive.
Lapeyre referenced the Gartner "hype cycle," which represents the five key phases of a technology's path to maturity. He plots software-defined vehicles on the downward slide approaching the trough of disillusionment, the low point that follows the peak of inflated expectations as a good idea moves to difficult execution.
Renault CEO Luca de Meo wants the automaker to launch its first software-defined vehicle in 2026.
High expectations
Expectations haven't dimmed despite the recent challenges.
Stellantis, for example, predicts it will generate 20 billion euros ($21.6 billion) of incremental revenue by 2030 as customers take advantage of software to pay for additional features, upgrades and subscriptions.
Renault meanwhile hopes to knock 50 percent off the development time of vehicles by reusing software developed in the cloud and downloaded onto a new "digital chassis" created with the help of chipmaker Qualcomm and running an Android operating system. The software emphasis will also contribute toward Renault's projected 40 percent EV cost reduction, the company said.
The percentage of software-defined vehicles on the road is forecast to grow fast
2021: 2.4%
2030: More than 90%
Source: Deloitte
In 2021 just 2.4 percent of vehicles on the road could be described as software defined (mainly Tesla models), according to data from Deloitte.
By 2030 "90 percent or more" will fit that definition, the consultancy forecast in a recent report on the future of the SDV.
Renault and Qualcomm are collaborating on a centralized compute architecture for the automaker's future software-defined vehicles.
"Customers have an expectation in terms of what a consumer product is because they hold a smartphone or a tablet in their hand all the time," Qualcomm head of automotive Nakul Duggal said during a recent round table discussion led by The Financial Times.
Qualcomm has parlayed its expertise in consumer electronics as a chip supplier to the smartphone industry to become a crucial supplier to the auto industry.
Different approach
Today, the value of a smartphone's hardware is secondary to the value it generates from delivering software-based services via apps. However, the way the smartphone and automotive industries capture value is very different. Automakers still primarily make money by charging customers extra for hardware features.
"The history of the automotive industry is that the value addition has been in the plumbing of the car," Duggal said. "You do not change things that are foundational to the plumbing."
That process has led to today's electronic/electric (E/E) architectures, which can only add features if another electronic control unit is installed. As a result, there are often 100 or more ECUs in each car.
"The legacy E/E architectures of some big automakers are a nightmare," Capgemini's Lapeyre said.
The problem for automakers is that vehicles using these "distributed domain" electronic architectures are successful.
"The cash flow of the industry is still mostly coming from the old stuff that is still being sold very profitably," Alex Koster, global lead for automotive at the Boston Consulting Group, said at the Financial Times event.
"Spending all of your time and attention on the new stuff creates all types of conflicts in the industry," Koster said. "I think that explains why we have this inertia now."
Progress is being made.
Most automakers have now combined the driver display with the central touch screen in a sort of predecessor to the zonal computer architecture to create a coherent infotainment system with over-the-air updates and additional downloadable features.
Mercedes-Benz said $1 billion of its $150 billion in 2022 global revenue came from software-based vehicle upgrades.
New layer of complexity
But as is the case with most tech developments in the car industry, Tesla has a big lead in the race to create the software-defined vehicle. Chinese startups such as Nio are not far behind, similarly unconstrained by a legacy development culture.
"As a newcomer, you have the full freedom," said Siggi Dirr, vice president, head of global engineering services and technologies at Continental software unit Elektrobit.
"You can design your product, partner with any kind of player, then start right away," he told Automotive News Europe on the sidelines of CES tech show in Las Vegas last month.
The risk of making sweeping software changes within an established automaker is greater. Starting production on time is hard enough without having to chase down bugs in a new E/E architecture running new software from suppliers the automaker has never worked with before.
"If you do everything at once, you overload the development and maybe risk the schedule," Dirr said.
Those schedules are being upended because automakers know they have to take the risk if they want to transform the car into a smart device that offers seamless updates, services and data-driven intelligence.
"With the current architecture, you cannot easily implement the services everybody dreams about," Lapeyre said. "You have got to have a central compute system."
Steep learning curve
There are definite inflexibilities to the old system.
"In the past we were fully reliant on certain suppliers," Georges Massing, vice president of MB.OS, Mercedes-Benz's in-car operating system, told the FT event. "We would just write 1,000 pages of specification five years before the launch of the car and hope this will be exactly the stuff that the customer will need."
For subsequent models, Mercedes might have changed suppliers. "That meant we cannot update the [old and new generation of] cars together," Massing said.
The lack of communication between the ECUs running different electronic features resulted in vast repetition.
"In the past, we would deliver almost the same content two or three times depending on the different functional domain of the vehicle," Remco Timmer, head of technology at location services provider Here, told a panel event focused on software-defined vehicles at CES.
Earlier movers on software made mistakes.
One automaker decided to treat software as a physical part in its tracking system, not taking into account software might be updated daily rather than bi-annually.
"The system could not handle it," Lapeyre said, declining to name the automaker.
Relationship reboot
The move to SDVs has restructured the automaker-supplier relationship.
As new partnerships evolved, it became clear that software-focused suppliers had access to data and insights generated by the car's usage that was never previously available.
Volkswagen Group, for example, saw ADAS-specialist Mobileye harvest data from its market-leading EyeQ chip from VW's entire fleet to build a crowd-sourced map. This helped VW but also its rivals.
"That is why Cariad was founded, because we did not have access," Dirk Hilgenberg, the former head of Cariad, said at the 2023 CES. "We wanted to gain access and have our own data-driven development process."
While Mobileye disputes that VW didn't have access to the data, VW still decided to take the whole process in-house. The move backfired because despite hiring more than 6,000 software specialists, the scale of the task was too great for Cariad.
Last year Hilgenberg was replaced and the division was reported to be planning 2,000 job cuts.
"They tried to do everything on their own. Now they are more humble, saying, ‘OK, we need to work more with existing suppliers'," Elektrobit's Dirr said. "Software development can be very expensive if you want to do everything on your own."
Deloitte estimates that an automaker would need to spend $2.7 billion a year to have its own in-house software unit.
Managing relationships with suppliers in the software age isn't easy, though.
Transitioning to a modern software architecture in cars is "costly, painful and intense," Harman President of Automotive Christian Sobottka said.
The industry needs to move from "value chain" to "value network," said Christian Sobottka, president of automotive for the Samsung-owned infotainment specialist Harman.
"There was a period when certain automakers were trying to apply the old industry model to the new challenge. Over the last two years, some of them have struggled and failed," Sobottka, who also was CTO at the supplier Robert Bosch, told ANE at CES.
A cultural transformation is required. "The cooperation model of the past where the automaker defined everything and commanded a certain set of suppliers is not good to lead us into the future. There is a huge partnership needed," Sobottka said.
The difficulty comes when creating and combining all the software elements.
The car needs to act as a self-contained "edge computer," but also connect to the cloud to receive updates and feed all the app-driven services.
All sensors need to be connected to the centralized computer, but also operate with total security.
"Technically, it's not rocket science because other areas have done it, but the change toward a very modern, consistent software architecture is costly, painful and intense," Sobottka said.
Nio gains from having the mindset of a software company, Accenture said. One result of this is Nio's Nomi digital assistant (shown).
Seeking standardization
Providing a common language was something the smartphone industry solved over time by coalescing around two operating systems: Apple for its own phones and Android for pretty much everything else.
The car industry is not there yet.
To provide a nudge, the SDV Alliance was launched at this year's CES to push for a harmonization of standards and development methodologies.
The alliance brings together a number of industry bodies pushing for standardization of various elements of the software-defined vehicle that include Autosar, Covsea, Eclipse SDV and Soafee.
The idea is that anything developed in terms of software will then easily communicate with the middle layer and base layer of software in the car, allowing new code to be written and tested in the cloud (the "digital twin" method). This will theoretically cut months from model development time and save millions by avoiding "hardware-in-loop" bench-testing in prototype vehicles.
The industry groups were set up partly out of frustration.
Chip designer Arm created Soafee (short for scalable open architecture for embedded edge) to give the software-defined vehicle industry a much needed push. Soafee's members include Continental, Tata Motors, Geely, Qualcomm and Harman.
"The automakers were stuck. So, we created Soafee to solve some of their problems," Dipti Vachani, head of automotive at Arm, told ANE. "The more solutions, the more software defined vehicles, the better for Arm."
In this new supplier relationship, automakers can focus on the software the customer sees, allowing for brand differentiation.
Suppliers, meanwhile, can work on the layers below, allowing them to create scale by reusing software.
Independent app developers can work on car-specific services with the knowledge that they will be compatible with a range of brands because of a common "abstraction" layer.
Automakers are leaning heavily on chipmakers such as Qualcomm, Nvidia and Renesas to supply centralized systems on chips (SoCs) powerful enough to deal with the increased screens, enhanced graphics and additional data processing needed.
The investments are huge.
In 2022 Qualcomm said its pipeline of automotive orders was worth $30 billion.
Although tech companies are muscling into a space almost exclusively occupied by traditional automotive suppliers, several established players are also winning substantial business.
"The main consequence of the software-defined vehicle for us is the replacement of small ECUs that are worth 10 euros to 20 euros by large, complex computers worth several hundred euros," Valeo CEO Christophe Perillat told ANE at CES. "For us, it's a huge opportunity for growth."
Harman last year won what Sobottka described as the company's largest automotive order ever for a centralized computing system for a single company worth "multi-billion dollars," he said without naming the company.
Mobileye last year booked forward orders of $7.4 billion. After its experience with Cariad, the Intel-owned company has shifted strategy from offering a "black box" ADAS product to letting automakers tune the final product via its DXP operating system.
"When you have something so extensive, the automaker wants to own the differentiating elements," Mobileye CEO Amnon Shashua said. DXP is underpinning the "very rapid adoption" of Mobileye's advanced Supervision semi-autonomous system, Shashua said.
Whether the money pouring into software-defined vehicles will be returned remains an open question as suppliers and automakers investigate which content and services customers will be willing to pay extra for.
"What I haven't seen yet from the traditional automakers is a very compelling case," Capgemini's Lapeyre said. "We have heard announcements such as '20 percent of our revenue will come from services.' But all these enormous numbers are unachievable."
At Stellantis, subscription ideas include off-road coaching for Jeep owners or horsepower upgrades for Dodge performance cars for a time in the future when outputs are limited except in certain zones.
What won't necessarily work is asking customers to pay to unlock embedded hardware, a problem that BMW ran into recently after promising to drop its idea of a heated-seat subscription.
"If I walk into the dealership and I buy a car with a heated seat, I expect that heated seat to work, not for that to be offered as a service," Mamatha Chamarthi, chief business growth officer for software experience at Stellantis, told the FT conference.
The updatability of cars also depends on whether the hardware can cope with increasingly data-heavy upgrades.
Future-proofing a car with oversized chips is a possibility, but the desire to improve E/E architectures with the latest equipment for subsequent models will erase some of the cost-saving from repeatability.
"Nothing lasts forever," Fisker CEO Henrik Fisker told ANE. "If that was the case, you would still be running around with your first iPhone."
The improvements in ADAS and the potential for downloadable hands-free driving as promising revenue streams will drive a computer power race.
"The constant is that you need more compute. There's a direct link between the amount of compute in the car and how safe that car can be," Danny Shapiro, head of automotive at Nvidia, told the software-defined vehicle panel at CES.
However vast the problems are in creating the software-defined vehicle, the race to solve them is becoming more intense as Tesla and several Chinese startups work through the same issues without the drag of legacy cultures.
"Those newer players have now come to a scale where they really threaten the more classic players," BCG's Koster said. "You really need to get to their speed if you want to be competitive."
