The race to reinvent the car industry
Can carmakers catch up with Tesla and pull off the shift to software?
After a day’s work, you are not quite ready to go home. Perhaps you fancy catching a film. You could head to the cinema. Instead, you retreat into your car. A few taps on the touchscreen dashboard and the vehicle turns into a multimedia cocoon. Light trickles down the interior surfaces like a waterfall. Speakers ooze surround-sound. Augmented-reality glasses make a screen appear in front of your eyes.
This immersive experience is at the core of what Nio, a Chinese electric-vehicle (ev) company, laid out as the future of the car at a launch party last month in Berlin. The firm wants its high-end evs to be a “second living room”. Forget horsepower, acceleration and design—Nio emphasises the two dozen high-resolution cameras and transistors (of which there are 68bn, about four times as many as in the latest iPhone) in their vehicles. “We have a supercomputer in our cars,” boasts Nio’s boss, William Li.
Nio is at the forefront of a revolution in the car industry: the archetypal hardware business is becoming ever more about software. Immutable objects that do not change after they leave the factory are turning into dynamic platforms for applications and features which can be updated “over the air”. Rather than deteriorate with age, such “software-defined vehicles” can improve over the years. Brands will become defined less by handling or mechanical excellence, and more by the services they offer, from safety features and infotainment to artificially intelligent driving aids. Nio’s cars come equipped with an ai assistant called Nomi, whose circular interface sits on top of the dashboard and smiles when you ask it questions.
Like all revolutions, this one promises to usher in a new world. It will certainly benefit motorists and digitally native carmakers such as Nio or Tesla, America’s ev champion. It will also claim victims, mostly among incumbent carmakers steeped in the culture of mechanical engineering. The boss of Volkswagen, Herbert Diess, recently lost his job after botching the German giant’s software plans. For many of vw’s rivals, too, the shift is proving thornier than managing the other big transition, from the internal-combustion engine to electric power. It may also prove more consequential. Luca de Meo, boss of Renault, a French carmaker, likens the situation to the upheaval wrought on telecommunications by the smartphone. The shift will define the fate of a global industry with revenues of nearly $3trn.
Cars have been accumulating software for decades. For the most part, however, code was deeply embedded in a car’s parts, powering the “electronic control units” of such things as the ignition, brakes and steering. Most of these programs were developed by the carmakers’ suppliers and came in completed units that were then assembled into a vehicle. Car firms “were mostly integrators”, explains Klaus Schmitz of Arthur D. Little, a consultancy.
In recent years this setup has started to collapse under its own complexity. As more software was added, it became harder to make all the pieces work together, explains Andreas Boes of isf Munich, a think-tank. In June 2020 vw postponed for months the launch of the id.3, a new ev, because of software troubles. Software engineers like to untangle such messes by creating a “platform”—to equip cars with a central computer powered by an operating system (os) that comes with standardised digital plugs for additional components (application programming interfaces, or apis, in the jargon) and a connection to the computing clouds.
This technical transformation, in turn, has triggered a knotty cultural one. In the old hardware world, car companies were hierarchical, process-oriented organisations often run by big egos. Launching a new model took around four years and the focus fell on meeting the deadline for the all-important start of production. A new model was much the same as the old one, with precious little innovation, says Henrik Fisker, who once designed Aston Martin and bmw sports cars and now runs an ev startup bearing his name. In the new software world, by contrast, decentralised teams of developers focus more on problem-solving than on execution. Cars are updated in rhythms counted not in years but in days and sometimes hours. Products are never really finished.
This is second nature to newcomers such as Tesla—which was conceived as a software company that happened to make cars and is now the world’s most valuable carmaker—as well as Nio and others, whose valuations belie their current limited output (see chart). For the incumbents, it requires radical reinvention. Established carmakers are furiously recruiting chief software officers (csos), developing their own oss and holding “software days” to present digital strategy to investors. But most have yet to create an organisation capable of straddling hardware and software; to decide which pieces of software to keep firmly under their control and develop in-house and which to outsource; and to come up with a profitable business model for services made possible by all the code.
Take the organisational challenge first. The trick is to strike a balance between keeping development of software and hardware for different parts of a car in separate vertical groups and getting a “horizontal” software unit to write the programs, says Ondrej Burkacky of McKinsey, another consultancy. Cling too closely to the vertical approach and your software “will look like your org-chart”, he says—something plainly displayed on many incumbents’ car dashboards. Turn too horizontal and your software unit will get overwhelmed. That is what happened at vw, critics say, which installed its Cariad division in Ingolstadt, a six-hour drive from the group’s headquarters in Wolfsburg.
Gear shift
Other carmakers are learning from vw’s mistakes and adopting more mixed models. bmw and Stellantis (whose biggest shareholder, Exor, also part-owns The Economist’s parent company) will spread their software teams around the world, closer to where the related hardware is made. Stellantis recently launched a “Data and Software Academy” intended to retrain more than 1,000 of the firm’s existing employees per year, as well as hiring talent worldwide, with the aim of having 4,500 engineers by 2024. Mercedes-Benz has just invested €200m ($206m) in an ultramodern “Electric Software Hub”, which will one day house 1,000 programmers in the middle of its research-and-development campus in Sindelfingen, close to its headquarters in Stuttgart. “Here they can easily work with any department,” explains Magnus Östberg, the firm’s CSO.
Each of these changes—to digital technology, organisation and business models—is a big shock on its own. Together they amount to a handbrake turn for an industry characterised by inertia. Many established firms still do not seem to accept the scale of the challenge. Digitisation has yet to creep into boardrooms: more than a third of board members at the four big German carmakers are mechanical engineers, and none comes from the tech industry.
For now, though, the digital race is still to be won. Even as the car industry struggles with software, the upstarts have much to learn about getting Spaltmaßright at scale, maintaining complex supply chains and building trust in their brands. “Incumbents are not doomed like Nokia,” says Christoph Bornschein of tlgg, another consultancy, referring to a once-dominant firm caught out by the smartphone revolution. “But they have only a narrow window of opportunity to get their act together.” ■
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