The rise of software is pushing auto firms to build their businesses around data
OEMs and service providers need to update their business models quickly to capture new revenue as software reshapes the automotive industry.
Automotive companies are racing to get ahead of competitors as software redefines how cars work and who generates the most revenue from them.
Vehicle manufacturers are spending more than a third of their combined R&D budgets on software. Their annual software expenditure is set to hit €60 billion by 2030, according to consulting firm Corporate Value Associates (CVA). That’s twice the amount invested in 2022.
Software is critical to the performance of the many smart EVs, software-defined vehicles, and autonomous cars, set to arrive on Europe’s roads in the next few years. It will also drive down vehicle development and production costs and allow suppliers to upgrade and repair cars remotely.
The biggest benefit, though, is the data software generates. Whoever controls the flow of vehicle data gets a detailed picture of how drivers behave and can use that knowledge to build close customer relationships. They’ll be best placed to earn recurring revenue from services range from over-the-air vehicle upgrades and EV charging payments to personalized financing and insurance that adjust according to driver behavior and vehicle usage.
It’s not just the vehicle original equipment manufacturers (OEMs) that are hungry for data. Downstream automotive companies, such as dealers, repair shops, finance providers, insurers, leasing companies, and charging station operators, all need more access to data to compete in an industry that is being reshaped by software.
“The process of softwarization has started. We are already seeing its effect in cars today but in the coming years the impact will be much greater,” (11:15) says Markus Collet, CVA partner and head of its automobility platform. He expects the ascent of software to drive change across the automotive industry and the broader mobility ecosystem.
Collet was speaking at an online event hosted by CVA and the Qorus Mobility Community. The event, which also featured Alberto Busetto, CEO and GM at Generali Jeniot and mobility consultant Alain Ballu, examined the far-reaching effects of “softwarization” on the automotive industry.
Key takeaways:
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Shift to recurring revenue: The rise of software and new data flows allow automotive companies to build recurring revenue, lower service costs, and strengthen residual values.
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Prioritize governance: Companies need data governance in place before they can extract value from vehicle data.
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Secure partnerships: Partnerships will enable service providers to keep close to customers and gain access to new sources of revenue.
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Build cross-brand data platforms: Downstream players will benefit from building platforms that source data from multiple sources.
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Switch to dynamic pricing: Service providers such as insurers will use real-time data flows to shift from static pricing to dynamic personalized offerings.
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Encourage customer consent: Drivers will share data with third parties only when they recognize the value they can gain in return
Check out the event highlights
Nearly two thirds of the executives polled at the event believe “softwarization” will disrupt the automotive industry more than the emergence of electric vehicles. Just under a third think it will be equally disruptive and only a small fraction doubt it will match the effect of automotive electrification.
OEMs will be the biggest beneficiaries of the rising influence of software, according to most executives polled, with service providers and data companies also expected to profit.
Collet believes the increasing flows of data triggered by automotive software will create new revenue opportunities for both OEMs and companies downstream in the automotive industry.
Further opportunities include in-car payments for services such as parking and pay-as-you-go insurance, tailored risk management and financing, on-demand driving features and vehicle upgrades, battery monitoring and repairs, and connected-vehicle roadside assistance.
To capitalize on such opportunities, automotive companies need to adapt their business models and ensure ongoing access to vehicle data. Collet points out that increasing uncertainty about EV sales and after-sales margins is prompting OEMs to review their service models and look to develop new sources of “post-purchase” value. Many are likely to set up data gateways that generate revenue by streaming vehicle information to third-party service providers. Some could establish themselves as ecosystem orchestrators that use their access to vehicle data to steer customers to preferred partners such as specific insurers, finance providers, repair shops, or charging station operators.
Access to vehicle data will be essential for downstream service companies. Their new business models will depend on it. Many of these firms will likely set up data platforms that can pull vehicle data from multiple sources rather than rely on a single OEM’s feed.
Busetto, whose firm is an in-house insurtech set up by insurance giant Generali, says the era of static, predefined pricing models is coming to an end. Constant access to vehicle data will allow insurance providers to engage directly with each of their customers and assess their individual risk in near real-time.
Busetto adds that service providers need to do more than simply gain access to vehicle data. They must use the data to add value to their customer offerings.
To gain value from vehicle data, many service providers will have to become data managers. They’ll need to install systems to manage, secure, and protect that data, says Busetto.
To gain value from vehicle data, many service providers will have to become data managers. They’ll need to install systems to manage, secure, and protect that data, says Busetto.
Mobility consultant Alain Ballu warns that the change is likely to be expensive.
He adds that a comprehensive data governance framework, which addresses rising regulatory obligations, is essential.
“Otherwise, you could damage value instead of creating it.” (45:57)
Generali Jeniot’s Busetto points to two approaches for automotive data managers to generate value.
“The first is to build services that are related to data. Insurance coverage could be linked to the way the customer uses their car, how well they drive their car, where they use their car. The second way is to build partnerships with your customers and use their data to help them reduce risk and optimize insurance costs.” (35:36-36:59)
Busetto says better customer education is vital if drivers are to see the benefits of sharing their data with third parties.
“We need to work together as actors within the mobility ecosystem to better explain what the benefits could be for the customer.” (38:35)
Software is already influencing how cars perform. The race is now on for automotive firms to change their business models and secure the data, infrastructure, and partnerships that keep them close to customers and allow them to earn revenue from new services.
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