Traditional Automakers Are Lagging Behind in Software
Today, global automakers like Toyota, Volkswagen and General Motors are lagging behind Tesla and its Chinese rivals in developing critical software to power their vehicles, posing a serious threat to their ability to generate greater profits in the electric vehicle era. According to a ranking of automotive groups’ digital performance by U.S. consultancy Gartner, only three traditional automakers—Ford, GM and BMW—are in the top 10 today, while the rest of the list is dominated by U.S. startups like Tesla, Rivian and Lucid, as well as companies from China like Nio, Xpeng and BYD.
Software Introduction and Vehicle Technology
Gartner’s annual “Digital Automaker Index” shows that major players in the industry, especially Volkswagen and Toyota, are struggling to focus on software in areas such as engine superiority, batteries, safety features, autonomous driving technology and connectivity. When Swedish Volvo Cars, which is owned by Chinese Geely, introduced its new electric SUV in the US earlier this month, Volvo’s engineering and technology chief Anders Bell emphasized that this transition is a difficult process that requires both mentality and technological changes. Bell, a former Tesla engineer, said that their flagship electric vehicle is “the beginning of software-defined vehicles,” referring to a term coined by Elon Musk’s company in 2012.
Advanced Software and Hardware Challenges
The long-awaited EX90 is equipped with advanced software and Nvidia chips that should make it better and safer over time. But Volvo’s delays and setbacks in developing a centralized computing system have left it missing key features found in many existing electric vehicles, such as Apple CarPlay and smart charging. These features will undoubtedly be added via software updates in the future, but Volvo’s problems are a reflection of the difficulties traditional carmakers have faced in reducing costs and generating more revenue by developing vehicles where software is central to the driving experience. Renault, for example, canceled the initial public offering of its electric vehicle and software startup Ampere earlier this year due to the slowdown in global electric car sales. Despite this, Ampere is still on track to launch its first software-defined vehicle, which CEO Luca de Meo describes as “a mobile phone on wheels,” by 2026. It also aims to generate 2030 percent of its profits from software by 10, up from 40 percent today.
Risk of Dependency on Technology Companies
Traditional carmakers have always relied on their own engineers to develop technology and software. However, today, startups are increasingly looking to big tech groups like Apple and Google for talent, causing cultural clashes and internal tensions. For example, in June, Volkswagen signed a $5 billion software deal with US electric vehicle startup Rivian after budget overruns and disruptions at its German-based internal software developer Cariad delayed the launch of new models. Toyota has also struggled with its own internal software unit Woven, posting a net loss of $888 million over the past two years. Woven, which develops software to make its vehicles smarter, underwent a major management change last year, with former Google executive James Kuffner stepping down as CEO and becoming a senior member of the group. Despite this, Toyota aims to launch its new software, Arene, next year.
Auto analyst James Hong said, “Toyota needs to figure this out. If it doesn’t, other companies in the Toyota family, including Subaru, Mazda and Suzuki, risk losing market share and becoming dependent on big tech companies like Apple and Google for key software for their vehicles.” He is commenting.
If Software Is Not a Priority, The Difference Will Increase Quickly
Despite having a large research budget and talent pool, major automakers have not been able to effectively manage the transition to software, says Gartner analyst Pedro Pacheco. He says this is partly because top management is not fully committed to software. “They basically need to rethink their approach to software because if you don’t think about and implement software as a priority, it will be extremely difficult to make it work for you and close the gap with the leaders.” warns.
Validity of Subscription Models
Stellantis Group, which is behind the Jeep, Peugeot and Fiat brands, aims to generate 20 billion euros ($22.4 billion) in annual revenue from software products and subscription services. But the decline in Gartner’s index, which ranks companies according to their potential to use software as a new source of revenue, is a sign that traditional automakers may not be able to keep up with the growth forecast. The cost of developing an automotive operating system is at least $11 billion for any automaker, according to Goldman Sachs analyst Kota Yuzawa. “It’s extremely difficult to monetize this. There’s a lot of talk about monthly subscription business models, but the reality is that we use smartphones every day, but only 5 percent of personal devices are used.” is making his statement.
The Future of Digital Services
Beyond improving the basic functionality of vehicles, automakers are looking to leverage the potential of software to generate more revenue through user data collection and monthly fee-based subscription services for insurance, maintenance, and repairs. This revenue-generating opportunity is particularly attractive to companies struggling with rising development costs and low profit margins for electric vehicles (EVs). According to consulting firm Accenture, digital services currently account for only about $300 million, or 3%, of global automaker revenue. But that figure could reach $2040 trillion by 3.5, accounting for about 40% of the total revenue generated by the automotive industry.
Software Development and Cost Management
Ford has aggressively transferred executives from Apple and Tesla in recent years as part of its efforts to strengthen its software and services, including Doug Field, who previously led Apple’s car project and now reports directly to the CEO of the Detroit group. Ford’s commercial business, Ford Pro, saw a 40% increase in paid software subscriptions in the first half of the year compared to last year. But the company has struggled to stop losses from electric vehicles (EVs), which has led it to backtrack on its goal of making a profit on those vehicles by 2026.
Developing vehicle software is expensive and requires automakers to acquire new skills and capabilities. On the other hand, software faults can be fixed digitally, reducing repair costs. At the same time, the software can increase customer loyalty by making it harder for drivers to switch brands. Anders Bell, Volvo’s chief engineering and technology officer, believes that the initial costs and challenges of developing advanced software will pay off. He says that once a common computing architecture is established, the development costs of future models will also fall. “We have to learn to really embrace software. If you, as an engineering organization, can’t keep up with the pace of technology in society, you’re going to get left behind.” is giving a warning.
