Software-Defined Vehicles – A Forthcoming Industrial Evolution

Over the past few years, standardized hardware of smartphones and computers gradually reached physical limits, pushing industrial transformation from hardware upgrades to software development. The automotive industry is different from the smartphone and computer industries in terms of hardware standardization and technology. The automotive industry is not ready to replicate the exact development pattern of the smartphone or computer. However, with increasingly standardized hardware and narrowed technical gap, the automotive industry is now likely to go through a similar development process. The "software-defined vehicles" concept became increasingly prevalent in the automotive industry. The two most remarkable impacts of software-defined vehicles are: first, network functions decoupled from proprietary hardware appliances, enabling parallel physical and digital development of vehicles while software deciding differentiation; second, software becomes commercialized, maximizing the life cycle and value cycle of vehicles.


Some forward-looking OEMs have begun strategic transformation by enhancing their software capability, while some remain cautious about the software-oriented transformation due to various considerations, such as capital investment and difficulties with internal transformation. This report analyzes the origin of "software-defined vehicles", the driving forces, industry changes, transformation, and new opportunities for the industry, and provides several feasible response models and transformation strategies based on the location and capabilities of the stakeholders on the industry chain.


1. Understanding "Software-Defined Vehicles"

"Software-defined vehicles" apparently refers to the state that the quantity and value of software (including electronic hardware) in a vehicle which exceeds that of the mechanical hardware; furthermore, it reflects the gradual transformation of automobiles from highly electromechanical terminals to intelligent, expandable mobile electronic terminals that can be continuously upgraded. To become such intelligent terminals, vehicles are pre-embedded with advanced hardware before standard operating procedures (SOP)—the functions and value of the hardware will be gradually activated and enhanced via the OTA systems throughout the life cycle.


2. Driving Forces of Software-Defined Vehicles

Firstly, industry development requirements: software & algorithm— indispensable for the development of connected, autonomous, shared, and electrified automotive technologies.

Secondly, consumers expect similar behaviors and experience from vehicles as with smartphones.

Thirdly, value chain transfer, and accelerated commercialization of hardware enables higher additional value for software.


3. Gap between the Present and the Future

  • The automotive hardware and software architecture does not suit software-defined vehicles. The electrical and electronic architecture has demonstrated constraints in computing power, drawbacks in communication efficiency, and uncontrolled costs of wiring harness.
  • The traditional waterfall software development model has major limitations. Based on the above changes in technology architecture, in the context of software-defined vehicles, automobile R&D will shift from the traditional waterfall development to agile development model.
  • Organizational structure and talent supply are major shortcomings of software-oriented automotive transformation. OEMs' organizational structure will be fundamentally reshaped: from a function-oriented structure to a platform development structure.
  • Obstacles from the supply chain system. Connection between vehicle and parts enterprises changes from the tower-shaped vertical relationship to an annular flat relationship.


Changes in Supply Chain Relationship under the "Software-Defined Vehicles" Trend

Source: TF Securities, Deloitte Research, public information


4. What Are the New Opportunities

  • Industrial value chain under the "software-defined vehicles" trend

    Taking the intelligent connected vehicles as an example, in the wake of the software-oriented industrial transformation, from top to bottom, the industrial chain can be divided into the pure software layer, basic software layer, tool software, and electronic hardware stack. From the value chain perspective, the application and algorithm software as well as the software-intensive electronic hardware at both ends of the value chain have relatively high industrial added value, which is now the focus of OEMs, parts enterprises, and technology companies.


  • Prominent position of software platforms

    Through clarifying the industrial chain, we believe that three types of software and the related tool chain suppliers will play a key role in the software-oriented transformation of the automotive industry. First, operating system software. Second, middleware: the in-between software of application and operating system. Third, virtual machine hypervisor.


  • From Tier-2 to Tier-0.5

    Future vehicles will be a highly mechatronic intelligent device. Being software-oriented does not mean that hardware is negligible. On the contrary, hardware serves as an important carrier for software to perform its functions. Particularly, the software-intensive electronic hardware and semiconductor hardware will rake in greater added value and more profits on the industry chain.


Change of the Role of AI Chip Enterprises on the Intelligent Vehicle Industrial Chain Chain

Source: Deloitte Research


5. How Should Different Enterprises Respond

  • OEMs transform based on rational assessment and their capabilities. The global automotive industry began software-oriented transformation last year. Different from the past transformations, the cost and risk-sharing "alliance model" has been further broken, which is gradually replaced by the vertical integration model. In addition, the transformation is unprecedentedly deepened, extending even to product R&D process, organizational structure and supply chain network of OEMs.


Four Paths for OEM's Software-oriented Transformation

Source: Deloitte Research

  • With "oppression from both ends", parts enterprises should seek self-transformation. With the development of connected, autonomous, shared, and electrified automotive technologies, international parts giants have forayed into the software field, focusing on: 1) building more comprehensive and flexible software-hardware integration capabilities, and gradually shifting from outsourcing to self-development of core software; 2) adjusting personnel structure to better adapt to software development rhythms and cycle; 3) exploring new business models.
  • Facing both opportunities and challenges, automotive software companies shall create value based on flexible positioning. Software enterprises will have more opportunities than challenges. Taking into consideration their strength and positioning as well as the upstream demands, emerging automotive software companies/ Internet companies may focus on the following aspects to create value: full-stack software capabilities, go-to-market efficiency, and cooperation with core hardware enterprises to enter the automotive supply network.


For enterprises in the automotive industrial chain, The "software-defined vehicles" transformation will spread to every aspect of the automotive industry, covering OEMs' vehicle software and hardware architecture design, product development process, development organization framework, personnel development, as well as the supply chain system and business models of the entire industry. It may even lead to restructuring in some areas. During the transformation process towards software-defined vehicles, there will be difficulties and challenges for traditional automobile manufacturers as well as opportunities for the new automotive industry players, such as chip suppliers, software suppliers and Internet companies. The "software-defined vehicles" transformation will be an inexorable trend driving the development of the automotive industry over the next 5-10 years. All enterprises in the industrial chain should make thorough evaluation and forward planning, and find a suitable path to retain the initiative during the new industrial transformation.

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