CEO at AEye, Inc., building intelligent, next-generation, adaptive LiDAR for vehicle autonomy, ADAS and robotic vision applications.
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It’s time to retire the conventional wisdom that a car loses value the moment someone drives it off the dealer’s lot. With today’s technological advancements, cars can actually become more valuable over time, not less. This change is driven by the growing prevalence of software within cars and the ability to upgrade that software over time in order to add new features.
In this way, cars are becoming no different than phones, smart refrigerators and every other connected device. The rising expectation from consumers is that the underlying software in everyday hardware will be regularly updated with new functionality and features, without them having to buy a new model for that privilege.
Obviously, this trend turns the traditional automotive business model on its head. Historically, many consumers replaced their vehicles every 5-7 years as automakers introduced new models with enticing new features. Moving forward, instead of buying a new model, consumers will be able to get value-added features via software.
What are some of the implications of this shift as cars resemble less a static “durable good” and more a dynamic and updateable high-end electronic?
Meet The New Business Model
First and foremost, automakers will need to put software features front and center as part of their value proposition in order to bring in more revenue and increase margins.
They’re certainly not slacking on building a software foundation. The average new car has about 100 million lines of code (paywall) underlying its operation. (By comparison, a Boeing 787 Dreamliner relies on roughly 14 million lines of code.) This puts automakers in a position to make software-based services a true focus.
Witness the strategy of Stellantis, the parent company of Chrysler. According to The New York Times, “Within a few years, Stellantis hopes to be able to offer new features 'on demand' that customers can buy to upgrade to their vehicles, such as a hands-free driving system, better performance or improved handling. It also hopes to sell communications services to enable drivers and passengers to handle more work tasks while on the road.” The automaker expects this strategy to generate €22.5 billion annually from software services and subscriptions.
Then there’s Tesla. According to Wards Auto, while traditional automakers grow their top lines at less than 3% annually on average, Tesla’s is growing at more than 60% a year. To be sure, some of this is due to having a slick-looking electric car that people want to snap up, but I've observed that services (aka software revenues) contribute mightily to the cash haul. Analysts at Morgan Stanley speculate that Tesla could make more money from software subscriptions than from the actual hardware they sell. In fact, they envision Tesla’s stock coverage will transition from traditional auto analysts toward analysts covering tech and platforms as the business evolves.
The pieces are in place for auto companies to embrace a new business model that relies on unique subscription services to drive revenues, but the model only holds water if the underlying technology enables this feature-rich experience.
Keep The Improvements Coming
It’s not hard to see where auto companies can evolve when the software underlying key hardware components allows for continuous updates. No longer will consumers flock to car lots every few years for a newer model. Instead, they will opt in to innovative, revenue-generating services and then stick around as continuing subscribers.
Many services will revolve around safety. Think of highway autopilot, which might be purchased either through a one-time or monthly fee. Or, drivers could upgrade an existing safety feature, such as adding the redundancy of lidar to an application like lane centering, something they might be particularly motivated to do if it helps them qualify for an insurance discount. As the software-defined hardware absorbs new technological advancements, the types of innovative services that can be offered expands as well.
Want automatic high-beam headlights that dim as oncoming traffic approaches? Software updates enable a piece of hardware-like headlights to become a subscription service that customers can pay for. How about the screens that now come in many new vehicles? In the past, they might have been an interface for satellite radio or GPS. Now, they’re a platform for a full range of infotainment services. From Spotify to enhanced navigation and toll processing, each of them offers a potential revenue stream for the automaker.
Innovating Onward
Apple became a trillion-dollar company by expanding beyond its hardware offerings with a roster of complementary services and subscriptions. Auto companies looking to reach similar vaunted heights now have a similar tool in their toolbox to get there.
Are there any potential pitfalls? In the days when software updates could only be delivered by bringing a car into a service center, there was valid concern that the software would be out of date the minute the car rolled off the lot and that any potential bugs or critical software patches would remain unaddressed for months at a time. In an age where software updates can be delivered to vehicles instantaneously, in the same way that they’re delivered to billions of smartphones and computers every day, I believe that this concern can be neutralized.
This is an opening for real innovation in the auto industry. OEMs can start thinking creatively about new services and features they can add on an incremental basis that will increase safety and add value. The more a consumer’s perception of value shifts from the hardware itself toward software-based features, the more that automotive companies will need to focus their efforts on this front because those features will help them differentiate and drive business growth.
In many ways, this is just the beginning. There are applications that haven’t even been imagined yet, from safety and performance to entertainment. By seeing to it that the technology they’re leveraging can continually deliver new and exciting features, automakers can ensure they’re able to seamlessly absorb new innovations as they emerge, futureproofing the new business models that increasingly define their industry.
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