Why creating software-defined vehicles is ‘costly, painful and intense'

The software-defined vehicle is easy to envisage but, as car companies are finding out, very difficult to execute.

Automakers hope that shifting emphasis to software from hardware 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.

By 2030, digital services could generate as much as $1.5 trillion in revenue for the global industry, rising to $3.5 trillion, amounting to 40 percent of automotive industry revenue by 2040, according to consultancy Accenture.

Meanwhile, in 2030 the market for over-the-air features and subscriptions is expected to reach $14 billion, up from $3.3 billion last year, according to consultancy Deloitte.

However, the transition has mostly delivered delays and missteps, most publicly at Volkswagen Group's 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 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.

And none of the four models is a true software-defined vehicle.

What counts as a software-defined vehicle is up for debate but most agree it needs to have a centralized computer system with just a handful of electronic control units powering a range of onboard 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.

Expectations haven't dimmed despite the challenges.

Stellantis, for example, predicts it will generate €20 billion ($21.6 billion) of incremental revenue by 2030 as customers take advantage of software to pay for features, upgrades and subscriptions.

Renault, meanwhile, hopes to knock 50 percent off vehicle development time by reusing software downloaded from the cloud 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.

In 2021, just 2.4 percent of vehicles on the road could be described as software defined (mainly Teslas), according to Deloitte data.

By 2030, "90 percent or more" will fit that definition, the consultancy forecast in a recent report on the future of the software-defined vehicle.

"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 Jan. 25 roundtable discussion led by the Financial Times.

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 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 electronic/electric architectures, which can only add features if another electronic control unit is installed. As a result, there are often 100 or more units in each car.

"The legacy E/E architectures of some big automakers are a nightmare," Capgemini's Lapeyre said.

The problem 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 Boston Consulting Group, said at the Financial Times event.

Most automakers have combined the driver display with the central touchscreen as a sort of predecessor to the zonal computer architecture to create a coherent infotainment system with over-the-air updates and downloadable features.

Mercedes-Benz said $1 billion of its $150 billion in 2022 global revenue came from software-based upgrades.

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.

"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.

The risk of making sweeping software changes within an established automaker is greater. Starting production on time is hard enough without having to chase bugs in a new electronic/electric architecture running new software from suppliers the automaker has never worked with.

Production 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."

The move to software-defined vehicles 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 advanced driver-assist 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 CES in 2023. "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, VW replaced Hilgenberg.

"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 an automaker would need to spend $2.7 billion a year to have an in-house software unit.

Managing relationships with suppliers isn't easy, though.

The industry needs to move from "value chain" to "value network," said Christian Sobottka, president of automotive for the Samsung-owned infotainment specialist Harman.

"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 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.