December 8, 2023

In the last few years, standard hardware for smartphones and computers has gradually reached its physical limits. This has pushed industrial transformation away from hardware upgrades towards software development. In terms of standardization and technology, the automotive industry differs from that of smartphone and computer industries. The automotive industry has not yet mastered the exact development patterns of smartphones or computers. The automotive industry will likely follow a similar process of development, thanks to the standardization of hardware and the narrowing technical gap. In the automotive industry, “software-defined cars” became more and more popular. Software-defined vehicles have two major impacts: First, network functions are decoupled from proprietary appliances, allowing parallel physical and digital vehicle development while software determines differentiation. Second, software is commercialized, maximizing the life cycle and value of vehicles.

Several forward-thinking OEMs have started strategic transformation through software enhancement, whereas others remain cautious due to different considerations, such as capital investments and internal transformation difficulties. This report analyses the origins of “software defined vehicles”, industry changes, transformation, and new opportunities, as well as the driving forces. It also provides possible response models and strategies depending on the location and abilities of stakeholders along the industry chain.

1. Understanding “Software Defined Vehicles

The term “software-defined vehicles” refers to a state where the amount and value of software in a car (including electronic hardware) exceeds the mechanical hardware. It also reflects the gradual transition of automobiles from highly electromechanical terminals to intelligent, expandable, mobile electronic terminals, which can be continually upgraded. In order to become smart terminals, vehicles are pre-embedded advanced hardware prior to standard operating procedures (SOP). The functions and value will be gradually activated via OTA systems during the vehicle’s lifecycle.

2. Driving Forces for Software-Defined Automobiles

First, the industry’s development requirements are software and algorithms — essential for developing connected, autonomous, shareable, and electrified technologies in automotive.

Second, consumers expect the same behavior and experience with vehicles as they do on smartphones.

Thirdly, the value chain transfer and accelerated commercialization of hardware allow for higher added value in software.

3. The Gap Between the Present and Future

  • The software and hardware architecture of automotives is not compatible with software-defined cars. Electrical and electronic architecture is limited in terms of computing power and communication efficiency. Wiring harness costs are also uncontrollable.
  • The waterfall model of software development has many limitations. In the context of software-defined vehicles, the automotive R&D model will change from traditional waterfall to agile due to the changes in technology architecture.
  • Major weaknesses in organizational structure and talent plague the software-oriented transformation of the automotive industry. The organizational structure of OEMs will undergo a fundamental reshaping: it will move from a system based on functions to one based on platform development.
  • Supply chain obstacles. The relationship between the vehicle and part enterprises has changed from a tower-shaped vertical relationship into an annular flat one.

The “Software-Defined vehicles” trend has changed the supply chain relationship

Source: TF Securities, Deloitte Research, public information

4. What are the New Opportunities?

  • The industrial value chain in the context of the “software-defined vehicle” trend
  • As an example, if we take the intelligent connected vehicle as a case, after the transformation of the industrial sector to one that is software-oriented, the industrial chain from top down can be broken into four layers: the pure software layer (also known as the tool software), the basic software layer (also known by the name “basic software”), and the electronic hardware stack. The software that is used to create the algorithms and applications, as well as software-intensive hardware, is of high value from the perspective of the value chains. This is the focus for OEMs, parts companies, and technology firms.
  • Software platforms are a prominent part of the market.
  • By clarifying the industrial chains, three types of software, as well as the tool chain suppliers related to them, will play a crucial role in the transformation of the automobile industry towards software. The first is operating system software. Middleware is the software that sits between an application and its operating system. Third, hypervisor virtual machine.
  • Future vehicles will be highly intelligent devices that are mechatronic. Hardware is not negligible just because software is a priority. Hardware is an important vehicle for software. Software-intensive hardware, such as electronic and semiconductor hardware, will generate more added value for the industry.

The Role of AI Chip Enterprises in the Intelligent Vehicle Industrial Chain Chain

5. What Should different enterprises do?

  • OEMs change based on their rational assessment and capabilities. Last year, the global automotive industry started a software-oriented transition. The “alliance” model of cost-sharing and risk-sharing has been broken down further, gradually replacing it with the vertical integration model. The transformation has also been intensified to a new level, affecting even the R&D processes, organization structure, and supply chains of OEMs.

Four paths for OEM’s software-oriented transformation

  • Parts enterprises must seek to transform themselves in the face of “oppression on both sides.” International parts giants are stepping into the software arena as connected, autonomous, and shared automotive technologies develop. They focus on 1) building a more flexible and comprehensive software-hardware interface and gradually moving from outsourcing core software to self-development; 2) adapting personnel structure to better fit software development rhythms; and 3) exploring alternative business models.
  • Automotive software companies must be able to create value by utilizing a flexible positioning. There will be more opportunities for software companies than challenges. In order to create value, new automotive software companies and Internet companies should consider their strengths and positions, as well as upstream demand.


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