Some of the biggest ‘legacy’ car manufacturers including Toyota, Volkswagen, and General Motors are finding themselves increasingly lagging behind Tesla and emerging Chinese competitors in the critical software development required for the new era of electric vehicles (EVs). This is highlighted by consultancy firm Gartner’s latest “digital automaker index,” which ranks automobile groups based on their digital performance.
According to Gartner, only three traditional automakers—Ford, GM, and BMW—made it into the top 10 list. The majority of the top spots are occupied by Chinese companies like Nio, Xpeng, and BYD, as well as American start-ups, including Tesla, Rivian, and Lucid.
“The transition is undoubtedly challenging,” stated Anders Bell, chief engineering and technology officer of Volvo Cars, which is owned by China’s Geely. Bell, a former Tesla engineer, emphasised that the shift to software-centric vehicles not only requires a change in technology but also a transformation in corporate mindset.
Earlier this month, Volvo launched its highly-anticipated EX90 electric sport utility vehicle (SUV). The SUV is equipped with sophisticated software and Nvidia chips, enabling it to improve its safety features and performance over time. However, Volvo encountered delays and glitches in developing a centralised computing system, resulting in the absence of key features like Apple CarPlay and smart charging, which are expected to be included in future updates.
The interior of the new Volvo EX90.
Legacy carmakers face significant challenges in trying to reduce costs and enhance revenues by focusing more on software for their vehicles. France’s Renault, for instance, called off plans to list shares in its new EV and software division earlier this year due to slowing global sales of battery-run cars. Nevertheless, the division, named Ampere, is on track to launch its first software-defined vehicle by 2026. Furthermore, the company aims to have 40 per cent of the car’s life cycle profit come from software by 2030, up from the current 10 per cent.
To address the growing need for expertise, carmakers are increasingly turning to external talent from start-ups and big tech companies like Apple and Google. This has led to culture clashes and internal tensions. Volkswagen, for example, partnered with US EV start-up Rivian in June for a $5 billion software collaboration. This move came after setbacks and budget overruns at Volkswagen’s in-house software unit, Cariad, delayed new model rollouts.
Toyota has also faced challenges with its internal software subsidiary, Woven, which has reported net losses totalling ¥126 billion ($888 million) over the past two years. Despite a management reshuffle with former Google executive James Kuffner stepping down as CEO, Toyota remains committed to launching its new software, Arene, next year.
“If Toyota and other associated brands like Subaru, Mazda, and Suzuki fail to make headway, they risk losing market share,” warned Macquarie auto analyst James Hong. He noted that these companies might be forced to rely on external suppliers like Apple and Google for crucial software.
Despite substantial research budgets, industry analysts argue that legacy automakers have not efficiently utilised their resources to adapt to software-first thinking. Pedro Pacheco from Gartner suggests that automakers must rethink their approach to software in order to remain competitive.
The Rivian R1S. VW and Rivian recently announced a software partnership.
The appeal of integrating software goes beyond improving basic vehicle functions; it also offers opportunities to generate additional revenue through user data collection and subscription-based services. Accenture estimates that digital services currently account for about 3 per cent of automaker revenues globally but could grow to $3.5 trillion by 2040, representing nearly 40 per cent of industry revenue.
Stellantis, which owns Jeep, Peugeot, and Fiat, aims to generate €20 billion ($22.4 billion) annually from software products and subscription services. However, the declining performance of legacy automakers in Gartner’s index raises questions about their ability to capitalise on this projected growth. Goldman Sachs analyst Kota Yuzawa estimates that developing an operating system for vehicles could cost at least $11 billion per carmaker.
Ford has been making strides by hiring executives from Apple and Tesla, including Doug Field, who led Apple’s car project. The company has seen a 40 per cent increase in its paid software subscriptions in the first half of the year compared to the previous year, particularly through its Ford Pro division focused on commercial customers. Nevertheless, Ford has struggled to make its EV division profitable, prompting it to step back from earlier targets.
Despite the challenges, manufacturers like Volvo remain optimistic. Bell believes that the upfront investment in advanced software will yield long-term benefits by improving vehicle safety and performance post-sale and reducing the development costs for future models.
“We have to really learn to embrace software,” Bell concluded. “If you can’t as an engineering organisation keep up with the general technology speed of society, then you will be left behind.”
