Tesla Started a Software Battle in Cars. It’s Facing Challenges.

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Tesla Started a Software Battle in Cars. It's Facing Challenges.

In late 2012, Tesla Motors revolutionized the car industry by sending out a software update for Model S owners, adding new features through WiFi or 3G. This move showcased vehicles not just as transportation means but as evolving tech products that improve over time with software enhancements. This concept was new; traditionally, vehicle updates were limited to new models or required dealership visits.

This innovation has since spurred major car manufacturers like General Motors and Volkswagen to transform into tech-oriented companies. At the recent CES technology conference, these auto giants displayed tech-heavy features in their vehicles, such as in-car DJ apps and ChatGPT-based voice assistants, indicating a shift towards intensive software development in the automotive industry.

Tesla’s early adoption of software updates has set a trend that continues to influence the automotive world. Now, the industry is focusing more on integrating advanced technology into vehicles, turning them into platforms for the latest in software innovation, a stark shift from the traditional focus on hardware alone.

Automakers are now pursuing the concept of “software-defined vehicles” — cars that are as interactive and engaging as smartphones, capable of becoming increasingly autonomous, and can receive new features with just a tap. Essentially, car companies aim to transform into entities like Netflix or the Apple App Store, believing that income from subscription services and digital downloads will far surpass the profits from traditional car sales.

Ed Kim from AutoPacific highlighted the industry consensus that software-defined vehicles represent the future, warning that any automaker not taking this shift seriously risks being left behind.

However, transitioning to this digital-first approach comes with its challenges. The journey has been fraught with delays, technical issues, and in some cases, completely inoperable vehicles. Despite the potential for increased revenue through additional tech services and features, there’s no guarantee consumers will be willing to pay extra for these enhancements, presenting a significant hurdle for automakers aiming to boost their profits through digital innovations.

Challenges on the Digital Transformation Journey

Transforming vehicles into highly profitable, tech-driven entities akin to smartphones on wheels is an appealing but challenging goal for the auto industry, known for its tight profit margins, much tighter than those in tech sectors. Industry experts shared with InsideEVs the complexities and investments involved in this ambitious transformation.

The change underway is significant, moving away from the traditional approach where software in cars was distributed across numerous separate components, developed by various suppliers, and meant to stay the same throughout the vehicle’s lifespan.

Ford CEO Jim Farley referred to this old model as “the loose confederation of software providers,” highlighting the industry’s struggle to fully grasp the sprawling, segmented nature of vehicle software systems.

Automakers are now eager to significantly enhance their software capabilities, extending beyond familiar features like music players, smartphone connectivity, and navigation systems. The scope includes the integration of automated driving technologies, subscription-based services, new entertainment and e-commerce options, advanced battery management for electric vehicles, and the critical ability to modify nearly any aspect of a vehicle through straightforward over-the-air (OTA) software updates.

To achieve this transformation, vehicles require an entirely new software architecture that allows for easy updates and more cohesive integration across the vehicle, moving away from the fragmented approach of the past.

Ford CEO Jim Farley emphasized the novelty of this endeavor for traditional car manufacturers, stating, “Car companies have never written software like this before. We’re essentially creating the vehicle’s operational software from scratch for the first time.”

Manufacturers like Ford are considering internalizing most or their entire software development process, following the model established by Tesla and other electric vehicle startups. Alternatively, some are forming strategic partnerships with tech giants such as Nvidia to bring their digital visions to life. Regardless of the approach, all automakers are facing a significant challenge.

Aakash Arora from Boston Consulting Group’s Center for Digital in Automotive notes that while developing software in-house could lead to more unique products and efficiencies, it presents substantial obstacles for companies unaccustomed to extensive software development, describing these endeavors as potentially perilous.

Challenges Are Already Surfacing

The automotive industry’s shift towards software-centric vehicles is proving to be a complex journey. Ford has encountered obstacles in deploying over-the-air (OTA) updates to its electric vehicles, with some updates causing vehicles to become temporarily inoperable, though such incidents are rare and not unique to Ford, as Tesla has faced similar challenges.

General Motors’ latest software platform, Ultifi, has also faced hurdles, highlighted by a glitch during a test drive of the new Chevrolet Blazer EV that led GM to halt sales of the model temporarily. GM’s CEO, Mary Barra, acknowledged the disappointment caused to customers and emphasized the company’s commitment to resolving software issues, indicating a focused effort on enhancing software quality management.

Volkswagen Group, home to brands like VW, Audi, and Porsche, has had its share of software-related troubles, affecting vehicle performance, delaying launches, and even playing a role in the departure of the company’s CEO in 2022. However, improvements have been made, with Volkswagen’s software division, Cariad, addressing past issues and undergoing a strategic overhaul to streamline its operations and product offerings. These examples underscore the industry-wide challenge of integrating sophisticated software into vehicles, a transition that, while fraught with difficulties, is crucial for the future of automotive innovation.

Volvo and its electric offshoot Polestar experienced delays in launching their flagship SUVs due to unfinished software, illustrating a significant challenge facing traditional carmakers as they navigate the shift towards software-centric vehicles. This situation highlights the fundamental conflict between the conventional automotive business model and the fast-paced world of tech.

Sam Abuelsamid, a principal research analyst at Guidehouse Insights, points out that legacy automakers lack the processes and structures needed for rapid software development and frequent updates. The auto industry’s lengthy vehicle development cycles clash with the tech sector’s dynamic, continuous software rollout approach. This disparity raises questions about large automotive companies’ ability to adapt to a new operational tempo, as Aakash Arora from Boston Consulting Group notes, particularly when shifting a massive workforce to this new rhythm.

The integration of tech talent into the automotive workforce introduces additional challenges, particularly around the stringent validation processes required for vehicle software, which holds life-or-death stakes. The tech industry’s ethos of rapid iteration and risk-taking doesn’t mesh well with the meticulous safety standards in automotive manufacturing.

Even electric vehicle startups, despite starting with a clean slate and aiming to emulate tech industry practices, are encountering difficulties with software. Instances like Rivian owners dealing with malfunctioning displays and Lucid Motors facing infotainment glitches underscore the complexity of automotive software. Tesla, despite being more seasoned in deploying OTA updates, is not immune to issues, such as the recent software instability affecting backup camera functionality in 200,000 vehicles, proving that perfecting vehicle software is a daunting task for any company, regardless of its experience level or business model.

The Shift of Cars into Technology Devices

Several factors are nudging traditionally hardware-focused companies towards a fascination with software, with the emergence of electric vehicles (EVs) being a significant catalyst.

The economic landscape for EVs, compared to traditional vehicles, presents challenges primarily due to the fluctuating and high costs of lithium-ion batteries. This situation propels companies to explore additional revenue streams through on-demand services and tech-based features, as pointed out by Kim. With EVs tending to offer similar driving experiences, automakers are under pressure to innovate and differentiate their offerings, according to Arora.

Kyle Davis from S&P Global Mobility suggests that advanced software could streamline manufacturing processes. For example, automakers could produce a single model variant and later activate specific features like heated seats or enhanced performance, depending on the customer’s purchase package.

Furthermore, software updates could drastically reduce the costs associated with recalls and warranty repairs, potentially replacing numerous physical dealership visits with a single software patch, a strategy Tesla has successfully implemented multiple times. High-quality, upgradeable technology not only has the potential to increase sales and customer loyalty but also allows manufacturers to charge for new features well beyond the initial sale of the vehicle, Arora notes.

A glance at the world’s most valuable companies quickly sheds light on the driving force behind the automotive industry’s shift towards software. Leaders such as Apple, Microsoft, and Alphabet have amassed immense wealth through their hardware and high-margin software products, setting a precedent for value creation in the tech space. Tesla stands out among traditional car manufacturers for its tech-centric approach, particularly its potential to develop fully autonomous vehicles, contributing to its high market valuation. Though Tesla’s valuation is subject to debate, its significant stock price reflects Wall Street’s confidence.

The Boston Consulting Group (BCG) predicts that by 2030, the global auto industry will generate around $650 billion in revenue from electronics and software, with car manufacturers capturing $248 billion of this total. General Motors has set an ambitious target of earning $25 billion from software services by the same year, a substantial increase from its current earnings. Ford’s CEO, Jim Farley, has also announced plans to increase the company’s software revenue tenfold in the coming years, building on its already substantial nine-figure software income. This strategic pivot towards software not only highlights the sector’s potential for growth but also aligns automotive companies with the successful business models of the world’s tech giants.

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