Automakers Must Change to Exploit the Software-Defined Vehicle

By Susan Kuchinskas

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13th May 2021

Automakers know that software is the future but their evolution from car company to software company has just begun.

Volkswagen Group will invest around $32Bn in digitalization by 2025. In addition to the financial investment, it’s consolidating the software groups from VW, Audi and Porsche brands, as well as other subsidiaries, under the moniker CARIAD – the current iteration of the earlier concept Car.Software. CARIAD will develop one software platform that includes an operating system, a cloud and an EE architecture to be used by every brand in the group. “Having a uniform software architecture will enable Volkswagen to generate sizable economies of scale in the Group,” says spokesperson Benedikt Griffig.

Volkswagen is hardly alone in its focus on software. Nor is this a new idea. The concept of the software-defined car has been top of mind for several years. Although the benefits are clear, traditional carmaker organizational structures and supply chains have made it difficult for car makers to build their software capabilities.

SBD identifies two trends: automakers putting software development into a separate organization from the manufacturing side and shifting from reliance on suppliers for software. “The reason is product agility. OEMs want to dictate design, development and updates in a much faster way than in the past,” says Alex Oyler, head of car IT for SBD.

Critical component

Software is more important than ever, says Dominik Hepp, an associate partner in McKinsey. The consultancy has found that companies with strong software organizations enjoy three to six times the throughput and software quality of the bottom of the heap. “The difference between lead performers and the bottom is just huge, much higher than what we observed in the previous, hardware-only environment.” Yet, automakers generally lag behind those top performers, McKinsey found.

Tier 1s and suppliers

The trend of carmakers insourcing software is definitely a disruption of the supply chain, according to Oyler. He sees the mega Tier 1s as having the most to lose. However, he adds: “Most have seen the writing on the wall and started repositioning themselves as Tier 0.5s. Instead of getting handed specifications and requirements, these companies are acting like part of the OEM.”

He points to Ford’s partnership with Panasonic to develop Sync 3 as an example of this newer kind of relationship. “Panasonic worked directly with Ford, rather than working in isolation. The OEM is driving decision-making and the product roadmap rather than the Tier 1 but the Tier 1 is providing the resources.”

Hepp doesn’t see automakers wresting software development away from their supply chains. Instead, the software pie has expanded. Even if an automaker can create more than half of its code inhouse, that leaves a vast amount for Tier 1s. Hepp says: “Tier 1s need to find out where can they can play in that new architecture, and then have the right offering to the OEM and be the right partner.” That likely means acquiring new capabilities and thinking in terms of solutions rather than components. “But it’s more of an opportunity for many suppliers, rather than a threat.”

Breaching barriers

McKinsey found that only 40% of the R&D leaders that saw software as a major disruptor were prepared to make the necessary operational shifts. For carmaker, there’s no clear pathway. According to Hepp: “The first step is understanding the problem statement. We found the entry point is oftentimes a bit different for each organization.”

Some automakers need to identify exactly what role they want to play in software development or defining the architecture. Others may feel confident in the offering but don’t have the talent to make it happen. Still others may have accomplished the first two but need to improve productivity. Talent acquisition is a major concern for automotive software development. Oyler points to differences between the US and European markets, with Germany moving to inhouse development much sooner than American manufacturers. This may be owing to the United States being one of the most expensive labor markets in the world, he thinks, as well as to competition for talent with Silicon Valley’s glamorous start-ups.

Hepp says: “It’s not a silver bullet. It’s the whole arsenal.” Carmakers must get a lot right: the correct strategy, organization, requirements, management, processes and talent. Neglecting even one of these elements can reduce the competitive advantage. On the other hand, he says: “If you get the interplay of all these areas right, then you are a leading software organization.” Meanwhile, he adds: “Many have made a lot of changes but the market sets the bar higher and higher every year.”