A new mobility ecosystem with new profit pools is on the rise -- software-defined mobility.
According to recent analysis, digital mobility services will represent 40 percent of all automotive revenues by 2040.
This means $3.5 trillion is up for grabs. But traditional automakers aren't the only ones targeting it -- automotive startups and technology giants also have their eyes on the prize.
Many of these companies have strong digital-native capabilities well suited to a world in which software is a key automotive differentiator. In contrast, many industry executives fear their traditional R&D models are ill-prepared to build and deploy services enabled by software.
Choose where to play
It's crucial for automakers to decide where to play in the new mobility technology stack, including where to partner with other ecosystem players.
They must identify the key control points across the software stack that enable their targeted business models and capture emerging profit pools -- from the underlying physical and digital infrastructure (such as EV charging, parking and V2X communication) to vehicle and software platforms and front-end digital mobility experiences.
Some companies may target a "full stack" approach to emulate players such as Tesla.
This approach is costly and not suitable for every automaker. A more viable strategy is targeting control of critical areas of the stack. In-vehicle services, domain-specific services (such as autonomous driving) and developing white-label platforms for other players offer compelling alternatives.
The most profitable strategy will often be to partner with other providers supplying solutions outside automakers' traditional competence areas.
In operating systems and cloud frameworks, for instance, we already see evidence of leading automakers choosing to work with partners or use open-source solutions rather than build proprietary systems.
Four factors to consider
Automakers should consider the following when deciding where to compete and where to partner:
- Which profit pools and business models are we targeting? Automakers must retain control over the customer experience to monetize mobility services. But their technology partners will be looking for access to valuable customer and other data. Automakers must carefully balance these factors, most likely ending up with a mix of self-developed and external components.
- How mature are standard market solutions? Mature ones, such as Android Automotive, can significantly boost time-to-market and efficiency. However, the automaker should develop proprietary solutions where market solutions are still immature, or differentiation is key to the business model.
- Be realistic about what is feasible. In-house development requires significant software engineering capabilities. If this don't exist, partnerships are a viable option. Joint ventures can offer a strong alternative, especially where the automaker targets ownership of critical control points.
- What is the automaker's appetite for a long-term financial commitment? Recent estimates show that a car operating system can cost an automaker about $4 billion to develop and another $6 billion to maintain.
Don't forget the organizational culture
Traditionally, R&D defined the vehicle, IT defined the backend, and marketing and sales defined user services.
Software-defined vehicles, however, require automakers to become far more integrated and agile, so they can continuously develop new functionality, integrate it, and improve driver and passenger experiences.
Automakers should ensure those experiences as well as associated business models guide their technology development. They need to shorten software engineering cycles by orchestrating decoupled and scalable modular systems. And they need to bring together functional architecture, software architecture, vehicle architecture and ecosystem interfaces more effectively.
Making the shift to software-defined vehicles is a complex challenge -- but traditional automakers must take it on.
Victory will go to those adopting a deliberate, continuous total enterprise reinvention centered around a strong digital core and new ways of working.
With a carefully defined understanding of where to play in the new ecosystem, combined with new organizational agility, traditional automakers can take the driver's seat in the race to capture new mobility profit pools. But they must start today.