Cars of the future: more software than hardware?

One of the main driving reasons behind my lifelong passion for cars is that I have always considered them to be one of the most sophisticated, yet complete, objects on the market. And as the years have gone by, innovators have always strived to include more features in them.

During the first 150 years of the automotive industry, we turned cars into an extension of our homes – a living room on the move. We inserted leather seats, air conditioning, audio systems, and innovations to make our vehicles safer and easier to use. Together with suppliers and other industries, we crammed all the technology possible into the 3 to 5 metres we had at our disposal.

Today, the automotive industry faces one of the most disruptive transformations ever as it shifts towards electric vehicles, digitalisation, selling kilometres rather than cars and always more sustainable businesses. The car must now go beyond the physical object. Today, it’s all about connecting it to the cloud, to the digital ecosystem, and turning it into an extension of our digital spaces.

Acknowledging and understanding the current impellent trends is crucial for any industry player seeking to stay relevant in this evolving ecosystem.

Getting to know Software Defined Vehicles (SDV)

The software and digital-oriented transformation of the auto industry has given birth to the concept of the Software Defined Vehicle (SDV). These are cars that are not solely centred around hardware anymore, instead boasting computer systems and practical software features as main selling points. The Software Defined Vehicle architecture aims to revolutionize the automotive industry by introducing a flexible and scalable solution for the integration of new technologies and advanced features and services such as charging, mobility, predictive maintenance, autonomous driving, connected vehicle, enhanced safety systems and even fintech and blockchain.

If I try to resume the main features and advantages, Software Defined Vehicles:

• Are based on a centralised electronic architecture. Which means that all vehicle computing systems are centralised into a few, high-performance computers providing more processing power and enabling the integration of more complex systems.
• Are connected to the cloud during their entire lifecycle and can therefore be updated in real time and over the air.
• Are equipped of artificial intelligence, which gives them the ability to learn constantly from their users and their habits. This increases their predictability and proactivity and passenger anticipation, making them always safer and efficient.
• Offer the opportunity of creating and working with a digital twin of the car. This virtual representation of the physical vehicle would provide real-time data collection and information, delivering valuable insights to our engineers to support the development and testing of new technologies and systems and optimise vehicle performance during usage.
• Are interconnected and integrated to a larger ecosystem. IoT (internet of Things), smart cities, charging stations, parking or even our homes. This allows a more seamless experience. Cars will for instance be able to evaluate the quality of charging stations thanks to traffic analysis or give feedback about items such as emissions, quality and safety of the roads or traffic jams.
• Allow the use of open-source software. This provides more flexibility and enables faster development and innovation and is expected to play an increasingly important role in the development of Software Defined Vehicles architecture.

In a nutshell, Software Defined Vehicles will become better and improve themselves day by day. As a result, they will be better when you sell them than when you buy them.

This represents a profound paradigm shift for our industry. We have become accustomed to cars losing almost 50% of their value after just 4 to 5 years. Yet we now face an opportunity to develop vehicles whose value increases year by year, improving their usage and residual value over time.

Our estimations say that by 2030, the Software Define Vehicles market is estimated to reach up to $30B. In the short term, due to the required development investments, this architecture might still be quite expensive. But by relying more on software than on hardware, in the long run car producers can reduce the cost of research, development, and production, as well as simplify the supply chain. This will be clearly reflected in a reduction on the purchasing and ownership cost for users. In the meanwhile, the additional benefits and services offered by SDVs such as an improved reliability, flexibility and user experience may largely justify a higher cost for some customers.?

Software takes up a larger chunk of the pie

As a result of the arrival of Software Defined Vehicles, the value and cost of a vehicle changes dramatically. Up until present, the value of a car was defined by its powertrain, design, performance, the quality of its materials, and the credibility of the brand itself. Software had a relatively small say in a car’s value. In 2022, the value of software in a car was about 20%. We expect it to at least double by 2030, reaching over 40%.

We are undergoing a Copernican revolution here, fostering our shift of priorities in terms of how we allocate our R&D budgets, focussing always more on the software than the hardware. This is clearly reflected in the automotive software and electronics market, as insights from 麦肯锡 expertly underline.?

Taking a look at the automotive software and electronics market

Market trends show that the world of car manufacturing is changing at an unprecedented speed. It is therefore prudent to take a brief look at how software will change the actual functioning of vehicles.

This is best reflected in the automotive software sector, which is estimated to more than double in size from $34 billion in 2020 to more than $80 billion in 2030, with an astonishing 9% annual growth rate.

The main drivers of this growth are advanced driver assistance systems (ADAS) and autonomous-driving (AD) sensors, which we can already see early iterations of on the market in the form of driverless vehicles.

But more immediate features driven by consumer demand, such as in-car payments, location-based services, and music streaming, are also informing this sector. Customers always value accessibility and convenience in products, proving that we must be more sensitive to their needs than ever.

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The future has arrived

Speculative visions of a sci-fi future in which computers and smart systems control our vehicles are becoming less and less fantastical. This is because the future is here now. As I have outlined above, the software-defined vehicle is very much a part of our everyday commuting lives already today.

It is more imperative than ever that we, as industry leaders, pay special attention to market dynamics to keep up with this shifting landscape. Training and recruiting the right talent, strengthening technology stacks, and fostering a horizontal and ecosystemic approach, cross-industries, is paramount to stay ahead of the game.