Software Companies as part of the Automotive Value Chain

The previous post - Evolving Automotive Architectures, introduced the imperatives that OEMs or automotive players face concerning electrical/electronic (E/E) and software architecture. Faced with the high costs of developing entirely new architectures, the automotive players have started forming partnerships to co-create and perhaps share their expertise. This new practice will further consolidate and standardize the E/E architecture. Furthermore, with the advent of software-defined vehicles, the automotive value chain is up for grabs; thus, many players, including software companies, are capitalizing on the innovations enabled by the new software and E/E architecture.

Traditionally, software companies were not actively involved in the automotive stack as there was a lack of opportunities to participate.

Traditionally, software companies were not actively involved in the automotive stack as there was a lack of opportunities to participate. However, things are different now with the evolving architectures and because OEMs require the capabilities of the software companies to speed up their product development processes. The stakes for OEMs are high as they lack the necessary critical software capabilities, which could translate into budget overruns and state-of-production (SOP) delays. In addition, any software issue critical to the vehicles could lead to significant recalls - especially in the case of hacking attacks. Additionally, advanced driver assistance systems (ADAS), in-vehicle infotainment (IVI), and other onboard information systems generate much data that mandates good processing power and connectivity capabilities for further processing. Battery management also requires efficient connectivity. The demand for high-performance connectivity features will only increase as vehicles move towards higher levels of autonomous driving capabilities. The workload will demand continuous, high-speed, reliable connectivity features. These features would enable vehicles to communicate with the OEMs' infrastructure, other vehicles, and cloud services with minimal latency. The connectivity channels should also address any of the prospective cybersecurity threats. Lastly, traditionally being hardware intensive, OEMs also face a talent shortage for software development. All these requirements or challenges of the OEMs with the evolving software and E/E architectures expose the importance of software companies and the potential opportunities the automotive value chain provides them.

As the automotive industry moves ahead in creating standardized platforms, ensuring hardware and software decoupling, integrations in the form of horizontal stacks would be made accessible. This would allow OEMs to engage software companies to integrate new features such as connectivity features, AI solutions, advanced analytics, and others.

Challenges faced by Software Companies as part of the Automotive Value Chain

Incumbent software companies have been operating in the consumer electronics space; thus, they lack automotive sector experience. The practices followed in the consumer electronics space are entirely different from those observed within the automotive space. In this respect, software companies face challenges such as quality and safety requirements that demand massive verification and validation efforts, differences in the way calculations of software value are done(lack of clarity or visibility of software value in a vehicle's bill of material), substantial upfront investments, and lack of collaboration standards along the software value chain.

Unlike the automotive industry, in which pricing works from the bottom up, i.e., the software is measured in cost per piece in the bill of material. However, software companies are exposed to top-down pricing practices based on value-based pricing strategies. This requires the software companies to retain their intellectual properties, contrary to what the automotive players seek to do. Automotive players or OEMs view features pertaining to driving (e.g., driving assistance and autonomous driving) as their strategic core areas. IVI or digital maps are considered commodities by OEMs.

Opportunities for Software Companies

Note that although the above framework provides an understanding of various scenarios that can exist between software companies and automotive OEMs, the positioning of the OEMs or software companies within the quadrants depends on factors such as OEMs' commitment to creating software development capabilities and the capabilities and portfolio of the software companies.

Quadrant One (low software capabilities and low OEM capabilities)

Automotive OEMs in this quadrant source the software required from the software companies; however, they do not regard this software as the factor for their differentiation in the market. Software companies in this quadrant do not have the obligation of substantial upfront investments. They can also retain their intellectual properties, as the services or software are considered off-the-shelf products. When the sourced software is added to the vehicles by the OEMs, the software companies can benefit from data monetization and software licenses during the lifetime of the vehicles.

The software companies catering to the OEMs in this quadrant are not exclusively off-the-shelf software providers. Companies with more capable portfolios can also play within this quadrant to start with and eventually grow to partner with the OEMs to support them in their software development processes.

Quadrant Two (high software capabilities and low OEM capabilities)

This quadrant is the most important for software companies looking forward to finding opportunities within the automotive value chain. OEMs here are keen to develop their software development capabilities and scout partners to help them secure or build these capabilities. OEMs ' desire to build in-house software development capabilities typically catalyzes joint ventures, strategic partnerships, or even company acquisitions (e.g., Volkswagen's purchase of WirelessCar).

Software companies in this quadrant need to be aware of the challenges mentioned in this post to take advantage of the OEMs' opportunities fully. OEMs could shift to quadrant three or four, eventually post-building a substantial level of capabilities for software development.

Quadrant Three (low software capabilities and high OEM capabilities)

Here, the software companies are presented with the opportunity to essentially be an extension of an already capable software development team of the OEMs. In this quadrant, OEMs are looking to reallocate their teams from tasks that add less value to other tasks. Software companies can support OEMs in the process of testing, verification, and validation of software. Here, the OEMs would retain the intellectual properties to themselves.

Note that the opportunities presented to the software companies by this quadrant are expected to be relatively small compared to the other profit models.

Quadrant Four (high software capabilities and high OEM capabilities)

Potential OEM clients within this quadrant have invested substantial resources to build efficient software development capabilities. Most of the OEMs have resorted to investing substantially to build these capabilities; however, the quadrant still presents enough opportunities for the software companies. Software companies can provide strategic value to the OEMs by sharing their best practices for better organizational design and transformation required to advance software development capabilities further. Software companies can also provide software development tools catering to the automotive space.

With the evolution of the vehicles to be software-defined and the commoditization of the hardware components, opportunities for software companies are abundant within the automotive value chain. However, the automotive industry has significant challenges: entry barriers and finding the right spot in the value chain. Therefore, if software companies can set up or develop synergies with the automotive players or OEMs, the industry would benefit from their capabilities to speed up innovations.