Software-Defined Vehicles: Automakers Should Stick to their Plans

Automakers must address two questions because of the environment they are currently facing. First, will they be able to make the announced Software-Defined Vehicle investments in the timeline they were projecting, or will they need to slow down their investment pace? Second, will they face any negative implications if they delay their plans to roll out such vehicles and the monetizable services they enable?

This will be a very interesting year for the automotive industry. The world economy is expected to continue slowing down, the semiconductor shortages that have been plaguing the automotive industry are projected to continue for this year, and energy prices will remain volatile. In the last couple of years several incumbent automakers including GM and Mercedes, as well as newcomers like Lucid Motors, and Rivian announced their intent to make large, multi-year investments related to the development and scaling of electrified Software-Defined Vehicles. Vehicle sales in 2022, though better than in 2021, remained significantly lower than in 2019. Even if sales improve further in 2023 nobody expects them to recover to their 2019 level for a while.

Incumbent automakers are currently facing multiple challenges. Among the most serious are:

• The deterioration of the global economy negatively impacts their sales. The recent SAAR numbers from the US and the EU, while slightly better than those of 2021, they are significantly lower than 2019.
• The geopolitical tensions, particularly those between the West and China, impact both their sales and their supply chains. Consider that VW derives forty percent of its sales from China whereas Mercedes and BMW derive thirty percent each.
• The rising competition from newcomers that were once startups, automakers from China that are now entering the global market, and technology companies that want to control the software stack and the monetization it enables. These negatively impact current sales (even with EVs we have gone from a limited selection of models to an abundance of offerings) and the plans to monetize the customer of the Software-Defined Vehicles that incumbents plan to release. For example, Chinese automakers like MG, BYD, Nio, and others are entering the European market aggressively. They are selling BEVs that are well-built, offered at very competitive prices, and equipped with features that customers find attractive, particularly for urban driving.

These challenges are not expected to disappear soon. If anything, more EV models will be introduced in the next few quarters, and the decoupling of the supply chains that were built over the last thirty years between the West and China will accelerate further driven by recent government funding legislation, e.g., the US and EU CHIPS Acts, and the US Inflation Reduction Act. Also judging by recent announcements, the competition will intensify. Today Chinese automakers are trying to capture the European market’s low- and middle segments. They plan to target the high-end segment as a second phase.

Newcomer OEMs are facing their own challenges. Competition from incumbents is starting to impact their sales and waiting list signups. The volatility of the financial markets is impacting their ability to raise the capital needed to achieve their scale-up goals. Some, e.g., Canoo, Lordstown Motors, Faraday Future, may be left without financing alternatives, or in a very weakened position.

Incumbent OEMs must not alter their plans to develop and deploy Software-Defined Vehicles. They must at least stick to the timelines they announced if not accelerate them. Because of their position that gives them access to important financial options, they have a few advantages which they must capitalize fully, even if this means that their shareholder relations suffer in the short term.

First, they must continue selling ICE vehicles under their existing business models, work to maximize their margins from the sale of these vehicles, and use their balance sheet to fund their Software-Defined Vehicle efforts instead of distributing any profits to their shareholders. Second, if funding through the balance sheet is not sufficient, they should consider raising debt, as well as forming joint ventures with one or more partners, not unlike what Honda did with Sony.

Introducing as quickly as possible clean sheet Software-Defined Vehicles together with their version of the Flagship Experience will enable incumbent OEMs to:

1. Simplify their model lineup and offer fewer trims per model. Each such vehicle can then be personalized by every one of its owners. Today the owners of used vehicles “inherit” the options of the vehicle’s first owner without the ability to make any modifications.
2. Offer vehicles that are price-competitive even compared to those offered by the Chinese, because they will have few features initially. The features the owner will then be able to add via Over The Air (OTA) updates will provide OEMs with new customer monetization opportunities.
3. Appeal to larger customer segments rather than the high-end affluent segment as is the case today with most electric vehicles. This can be particularly important for OEMs selling vehicles in China, as European OEMs do. The sale of lower-priced Software-Defined Vehicles that can be upgraded after the sale through the Flagship Experience will allow OEMs to lower the impact of the fifteen to twenty-five percent tax the Chinese government applies today on imported vehicles.

The incumbent automakers that are willing to take the risk of sticking or even accelerating their timelines for developing Software-Defined Vehicles will be able to level the playing field and compete effectively with newcomer OEMs and Chinese OEMs that are dominating their local market and are starting to enter foreign markets with their own Software-Defined Vehicles.

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