What will the car of the future be like? Difficulties of transition.

The working day is over, you leave the office, get into your car, indicate the route, lean back on a comfortable sofa, press a few buttons on the panel and, lo and behold!, your car turns into a multimedia cinema. Light flows down the interior surfaces like a waterfall. The speakers produce surround sound. Augmented reality glasses immerse you in a fascinating virtual world.

This exciting concept is at the heart of what Nio, the Chinese electric car company, laid out as the future of the automobile at its European launch last month in Berlin. The company wants its electric cars to be "your second living room." It's not about engine power, 0-60 time, or exterior design. A NIO car is a supercomputer.

Nio is at the forefront of a revolution in the auto industry: what was once a traditional “iron horse” is increasingly becoming a computer system with complex software. The frozen form of a physical object, destined to remain unchanged once it leaves the factory, becomes a dynamic platform of applications and functions that can be updated, added and customized. Such a car will not lose its shine, novelty and relevance in a couple of years, having faded before the innovations of the model range. Now, just like your smartphone, it will be able to acquire all new qualities and functions. Manufacturers will compete less on the design and mechanical prowess of their products and more on the range of services they offer, from safety features and infotainment systems to artificial intelligence-based driving aids.

Like all revolutions, this one promises to usher in a brave new world. In this world, the new generation of automakers using digital technologies, such as Nio or Tesla, will feel like fish in water. But this new world will require incredible effort for long-time manufacturers immersed in a traditional engineering culture. After all, we are talking about the need to create a completely different product. The transition from an internal combustion engine to an electric one is complex, but it is still within the scope of manufacturing a mechanical object. The move to auto with rich software features is a fundamental effort in software development. This change can be compared to the transition from adding machines, mechanical calculators, to electronic calculators, and then personal computers and later smartphones.

The software used in cars is nothing new and has been in use for decades. However, for the most part, it is code that is integrated into parts of the car that operates the electronic control units for the ignition, brakes and steering. Most of these programs have been developed by suppliers of these vehicle components, which are supplied as complete units. Car manufacturers act as integrators, adding little to the “software” part of the product.

In recent years, this system has begun to struggle due to its own complexity. As more software was added, it became increasingly difficult to get all the pieces to work together. In June 2020, VW was forced to delay the launch of the new id.3 electric car by several months due to software problems. The solution to this problem lies in the creation of a software platform running an operating system with corresponding “digital connectors”, standard interfaces for car elements, ensuring their integration into a single system, as well as their connection to computing clouds.

At first glance, this is a purely technical transformation, affecting only the engineering departments of the company. But it turns out it also requires a complex transformation of corporate culture. In the old mechanical world, automobile companies were hierarchical, process-oriented organizations, often requiring employees to follow instructions issued from central headquarters. In contrast, the new software world features decentralized development teams more focused on solving problems than executing orders. Cars are updated in rhythms measured not in years, but in days, and sometimes hours. Products are never finished.

The corporate culture of software development companies is, in a way, a new generation of corporate structures in the modern dynamic world. It is the basis of companies like Tesla, which was originally conceived as a software company that produced cars. For traditional auto companies, the corresponding transformation of their corporate culture requires a radical rethink. Leading automotive companies are already actively recruiting experts and executives into software development departments, creating their own operating systems and presenting their digital strategy to investors. But most companies have yet to create an organization capable of bridging the worlds of hardware and software. They have to decide which software products to develop themselves and strictly control their use, and which to outsource. They also need to come up with a profitable and competitive business model for providing services.

Ondrej Burkacky, an expert at McKinsey, comments: “The challenge is finding the right balance between keeping the software and hardware development for various parts of the car in separate vertical groups while having a “horizontal” division responsible for creating the software platform.

If you take too much of a vertical approach, the software you create will end up looking like a company org chart—something clearly displayed on the dashboards of many existing companies' cars. If you give preference to a horizontal organization, then this unit will be overloaded and may not cope with its tasks.” Critics say that's exactly the problem VW faced with its id.3 model when it located its software development center in Ingolstadt, a six-hour drive from its engineering headquarters.

Other automakers are learning from VW’s mistakes and implementing more flexible organizational structures. BMW and Stellantis are locating their software development teams around the world, closer to where the hardware is made. Stellantis recently launched an “Information and Software Academy.” Its goals include retraining more than 1,000 employees a year and attracting talent from around the world. The company hopes to have 4,500 employees by 2024. Mercedes-Benz has just invested €200 million in a state-of-the-art “Software Center” in Sindelfingen, near its Stuttgart headquarters, which is expected to employ around 1,000 programmers.

Most automakers today claim to have thousands of programmers on staff. But these aren’t exactly modern specialists with expertise in the world of software platforms and cloud systems. Many of their programmers are still immersed in the old world of embedded software. “Quality of skills is more important than quantity,” says Doug Field, who previously worked at Apple and Tesla and now oversees software development at Ford. He notes that the best programmers aren’t just 20% better than average; they’re 10x better.

Premium car manufacturers such as Mercedes-Benz and BMW will always be attractive employers for star talent. Simpler companies will find it difficult to pay the high salaries expected of such specialists and maintain the free, creative work environment to which they are accustomed. “You have to accept the fact that they will show up to work at 10 o'clock in their slippers,” says Doug Field.

Moreover, getting mechanical engineers, who still dominate the auto industry, to work with software engineers will not be easy. The first are trained to achieve the ideal Spaltmaß, (a German word meaning the gap between car body panels), while the latter are comfortable with releasing half-baked beta versions of products with further refinements based on user feedback. It takes time and effort to combine these two cultures. One of the goals of initiatives such as the Stellantis Academy and the Mercedes-Benz Center is to accelerate this process.

Even with thousands of top-notch programmers, car firms cannot develop all their software in-house. For example, VW's goal in cooperation with CARIAD - making the 60% software in-house seems quite ambitious. Other automakers are racing to get closer to the 20-30%. This, in turn, means the need for collaboration between independent developers.

VW acknowledged this on October 13, 2022, when it announced that CARIAD would invest €2.4 billion in a joint venture with Chinese firm Horizon Robotics to develop software. Stellantis has formed an alliance with Amazon to create the SmartCockpit platform (an intelligent control center that provides users with a personalized driving experience through the integration of system screens, voice recognition, gesture control, HUD, DMS and ADAS, etc.). SmartCockpit technologies are an important element of differentiation for car manufacturers, as well as a way to obtain and monetize user data. BMW is working with Qualcomm to jointly develop elements of the car operating system, which Qualcomm plans to offer to other car manufacturers in the future. Mercedes-Benz is reportedly giving up more than 40% of its software revenue to Nvidia in exchange for access to its technology.

Mass market automakers can choose Android Automotive, a software package developed by Google. So on November 8, 2022, Renault announced it was deepening its relationship with Google in order to accelerate its digital transformation.

At the same time, automakers must decide whether they should develop their own fully controlled product, or abandon in-house development in favor of a platform that is familiar to users and which they will be more willing to use. At the same time, they should think about how to avoid the fate of PC manufacturers, who find themselves sandwiched between dominant processor manufacturers on the one hand and operating system developers on the other. Most automakers tend to retain the user interface (what used to be called the dashboard) and safety systems. These elements are considered to be the distinctive features of the brand.

BMW representatives believe that cooperation with external organizations should be structured in such a way that the company can control all elements of the software environment. One way to avoid dependence on technology giants is for automakers to cooperate to jointly develop a platform common to all participants, on the basis of which they could create their own differentiated products.

Until now, the industry has been dominated by competitive instincts. But still, a cooperation project to develop an open source platform within Eclipse Foundation  is gradually gaining momentum. This project was initiated ETAS , a subsidiary of Bosch, together with Microsoft. It attempts to create for the auto industry what Android is for smartphones: a platform used by many manufacturers. This will help create a European operating system for cars that could compete with counterparts from the US, Japan and China.

Even if automakers manage to create their own software platforms, they will still have to figure out how to make money from them. Many manufacturers are hoping for the golden shower that the shift to digital technology promises in the form of increased service revenues. These services can include everything from streaming entertainment and self-driving apps to personalized insurance policies and even temporary hardware features. For example, BMW recently announced a heated seat subscription service for $18 per month.

Last year, VW said it believed industry software revenue could reach 1.2 trillion euros in 2030, representing about a quarter of the total mobility market (moving people and things on wheels). Stellantis expects its software and services revenues to reach €4 billion by 2026 and €20 billion by 2030, with net profits from these services amounting to 20%, double what the premium car maker makes at the best of times .

However, some analysts are skeptical. They believe many of these services will eventually become free as competitors try to expand their customer bases. And while features like "full self-driving" (Tesla's $15,000 price tag) may be tempting, it's far from certain that car owners will be willing to part with money for services that were once available at no additional cost, e.g. , seat heating.

Each of these changes—digital adoption, changing corporate culture and organization, and new business models—is a big enough disruption in itself. Together they are similar to turning a car at full speed with the hand brake on. And this is in an industry characterized by high inertia. Many large companies still do not fully understand the scale of the problems. The situation is further complicated by the fact that digitalization has not yet penetrated boardrooms: more than a third of the board members of the four major German automakers are mechanical engineers.

Thus, the finish line of the digital race is not even visible on the horizon. The winner in it needs a lot - to reconcile mechanical engineers with a new approach to cyclical development of software products, and to introduce programmers to how to make adjustments to Spaltmaß; manage complex alliances and supply chains, and develop new services without losing trust in their brands. It will be extremely difficult for older companies with decades of experience to navigate this turnaround and maintain their position in the market. In fact, the window of opportunity is quite narrow, and they will have to work hard to avoid the fate of Nokia, which was unable to reinvent itself in time with the advent of the smartphone market.

Based on materials The Economist

 

We chose this material because it is an excellent visual illustration for several sections of our Workshop:

7.1. Growth and types of business development strategy

7.2. Organisational growth and scaling

8.1 Corporate culture and startup performance

8.3 Building a high performance team.