How suppliers expect to gain from software-defined vehicles

Continental, Valeo and other large automotive suppliers aim to capitalize on the shift to software-defined vehicles as they reset their relationships with automakers.

By 2030, Continental hopes to generate 20 to 25 percent of additional revenue from software — either directly from software or by using software to improve hardware, Gilles Mabire, the company's chief technology officer, told Automotive News Europe.

As the industry increasingly recognizes software as the next frontier, Continental is altering its relationship with automakers.

Previously, the German supplier saw its work as completed once its product was delivered to the customer. Now, Continental will have to maintain a relationship with a customer over a vehicle's lifetime, supporting the customer with new software features, functions and upgrades.

This extended customer relationship is expected to provide financial benefits.

"I see a business opportunity here, namely more functions on demand and more software as a product business to support our customers in different areas," Mabire said.

Continental currently offers 100 functions, 30 of which it considers to be "value adding," meaning they are innovative and customized. For example, the supplier's human-machine interface solutions are designed to help automakers differentiate the customer experience.

Meanwhile, French supplier Valeo is focusing its business model increasingly on software. This move is based on the expectation that by 2030, software will account for 30 percent of a typical vehicle's value.

"Our ambition is to become a software-defined company," Derek de Bono, Valeo vice president, software-defined vehicles, said in December at a presentation at the supplier's technical center in the Czech Republic. "Not to the detriment of hardware, but the software will define what hardware we need and what we can do with it."

Valeo hopes that applications, middleware — software that allows applications to communicate — and engineering services will bring it €500 million, or about $542 million, in direct software revenue in 2030.

"The main consequence of the software-defined vehicle for us is the replacement of small [electronic control units] that are worth €10 to €20 ($11 to $22) by large, complex computers worth several hundred euros," de Bono said.

The change, he added, is "a huge opportunity for growth," for the company.

As well as AnSWer, its software solutions and services-on-demand product, Valeo's core business units, namely advanced driver-assistance systems, lighting, interiors and electric propulsion/thermal management, all include software-enhanced or software-controlled products.

By 2030, the global automotive software and electronics market is expected to reach $462 billion, representing a 5.5 percent compound annual growth rate from 2019 to 2030, according to McKinsey.

Meanwhile, the overall automotive market for passenger cars and light commercial vehicles is expected to grow just 1 percent annually over the same period — from 89 million vehicles in 2019 to 102 million in 2030, according to McKinsey.

To fully take advantage of software's revenue potential, Tier 1 suppliers now need to redefine their software strategy to align with automakers' sourcing decisions.

McKinsey urges suppliers to position themselves as "thought partners" to automakers and work in tandem with them. In this way, the consultancy says suppliers can gain a "significant advantage by investing in software development and integration areas to capture a larger share of the growth."