In an age of connectivity, automaker software strategies define their future

Over the past two decades, Big Tech has more deeply penetrated each aspect of daily life and their corresponding industries. Tech giants like Amazon, Apple, and Google not only create the products that are increasingly integrated in consumers’ health and fitness, homes, workplaces, social lives, and entertainment but also control the underlying software powering essential devices.

Through software updates or learning patterns of user behaviour, these devices improve over time, rendering software the defining feature of the products on which people most rely. One industry that has been more reluctant to embrace a software-first approach to products and user experience is the automotive sector. That is, until Tesla showed up. By bringing a software-first approach to the auto industry, Tesla changed the game—or at least altered the playing field. Now incumbents are racing to innovate their products in ways unfamiliar to the industry.

This is a race that auto developers are not used to running. Muscle cars were once the rage, but going forward, the car’s brain is going to be sexier than its brawn. To succeed on this unfamiliar course of innovation, auto developers will have to correctly choose how they invest in meeting increasing user demand for interconnected vehicles as well as avoid losing their unique position in the marketplace by becoming too dependent on Big Tech.

The operating system: to adopt or build your own?

In an auto environment that more greatly prioritises software and tech integration, perhaps the most critical and immediate decision automakers face is determining the operating system for their vehicles. As a trend, different strategic paths appear to break down along geographic lines.

American players like GM and Ford have partnered with big tech, collaborating with Microsoft or Google respectively on cloud infrastructure and other tech solutions. Conversely, major German and Japanese companies like Volkswagen and Toyota are aiming to become software companies themselves through entities and products like Cariad and Toyota Connect. Each approach carries potential benefits and challenges, though legacy auto brand paths appear behind Tesla’s pace regardless of which path they’ve chosen. A 2020 analysis revealed Tesla’s electronics technology was six years ahead of competitors like Volkswagen and Toyota.

Overall, auto companies that partner with Big Tech and adopt an existing operating system gain a head start in the race to market and access to a deep pool of product development talent compared to those building their own software. Familiarity with those systems also confers benefits to users and adoption of existing systems means fewer barriers to compatibility with the myriad other existing devices with which the vehicle may need to speak.

However, some fear that auto companies adopting Big Tech’s platforms are making deals with the devil. In exchange for immediate market advantages, those companies risk becoming excessively dependent on Big Tech and losing control of their products. This fear is further exacerbated by the lowering of barriers to enter the auto manufacturing space. The planned entry of Foxconn into auto manufacturing and the emergence of micromanufacturing sites could further unbundle the vehicle production process, rendering it that much more important to control the vehicle’s software than to produce and assemble its hardware.

Muscle cars were once the rage, but going forward, the car’s brain is going to be sexier than its brawn

In addition, Big Tech is under stricter scrutiny than ever from the public and governments alike; greater regulation is likely on the horizon, but its specifics and implications aren’t entirely predictable and could vary widely from country to country. These sorts of known unknowns are dangerous as they could alter the trajectory of Big Tech, dragging their most visible partners along through battles of both policy and public perception. Automakers bringing their tech work in house could help avoid such potential landmines. For automakers looking to retain independence, the technical challenges are significant. Vehicle software is considered among the most complex types to develop. A vehicle operating system must manage all vehicle-related user interfaces and all real time mobility-related activities simultaneously and in split seconds.

But the technical challenges are only part of the problem. Automakers also worry that developing computers in-house and moving toward ownership of those technologies, like Tesla’s model, will freeze out and decimate existing supply chains upon which they currently rely. Further, if automakers develop proprietary systems, they’ll be launching brand-new products, and unfamiliarity and barriers to compatibility are potential disincentives to adoption unto themselves. This dynamic is drawing new battlegrounds for tech talent, with recruiting and retention wars heating up between Silicon Valley and Motor City, as well as across the European and auto and tech industries.

However, if these challenges can be successfully navigated, the rewards will be huge. Auto companies would not only retain ownership and control of their industry but command a new mode of value creation. The importance of the mobility sector means other tech developers would need to partner with and develop products compatible with them. Such a development would also result in a highly valuable, reskilled workforce, which could open new avenues of expansion and collaboration.

Looking forward

The stakes of the future of connected vehicles are high and automakers are currently making decisions that could transform their brands and the entire industry, but also pose existential risk. It is premature to definitively foreclose potential paths to successfully adapt to a software-first paradigm.

However, companies aiming to ascend the industry power curve by retaining ownership and control over the increasingly critical software space within vehicle manufacturing are likely better positioned to thrive in the evolving mobility space than those looking to leverage external expertise, unless the partnership is structured to enable mutual learning and ownership. Those that build their tech competencies in-house also project to better avoid disruptions that could stem from increased regulation of Big Tech. 

About the author: Katrin Zimmermann is Managing Director at TLGG