he structured and linear procurement model of the past must give way to a new collaborative approach.
Automakers need to adapt their procurement systematics and acquire new skills in order to source software successfully.
Earlier this year, Mercedes-Benz announced it would no longer be offering a proprietary automotive navigation and map system in favor of collaborating with Google. This signaled a significant change in the company’s software and procurement strategy. The German OEM was effectively announcing that developing, running, and maintaining core elements of its vehicle software stack required new supplier relationships in order to stay competitive with other car manufacturers – including collaboration with companies from non-automotive sectors.
Today, an estimated 73% of value creation in automotive R&D is hardware-related, but before long, the majority of value will be delivered by the software running on it. We can already identify some successful frontrunners today like Tesla and new entrants from China.
In recent years, OEMs have realized that they do not possess the in-house capabilities and resources to develop a full software stack including E/E architectures, underlying operating systems, and consumer-facing applications and services. BMW’s Senior Vice President of Electronics and Software Christoph Grote recently said: “It is completely unrealistic to build almost all software components yourself as a car manufacturer. Those who do so isolate themselves.”
However, the balance of power is also shifting. Large tech companies like Apple, Google, Tencent, and Huawei become essential contributors to software-defined vehicles. Driven by high customer expectations for the standardized integration of their platforms and services across car brands, the bargaining power of OEMs is steadily decreasing.
Consequently, OEMs needed to learn that while in the past, they were in the position to dictate a customer/supplier collaboration with Tier-1 and Tier-2 suppliers, this role may be subject to change in the era of the software-defined vehicle.
Pricing stands as the most potent lever for increasing profitability within the automotive sector. Consequently, it should take center stage for all Original Equipment Manufacturers (OEMs). However, it’s essential to recognize that Revenue Management extends beyond Pricing. It involves a strategic business practice adopted by companies to maximize their revenue and profitability through the optimization of product or service pricing. This discipline entails the application of diverse pricing strategies, data analysis, and forecasting techniques to make informed decisions about price setting, resource allocation, and capacity management. The primary components are depicted in the chart below. Pricing emerges as the most significant lever for enhancing profitability, making it of utmost importance for top management.
This significant role and power shift implies that OEMs will have to source key elements of their vehicle software externally while at the same time ensuring state-of-the-art integration into their vehicles in order to maintain a competitive edge. The traditional “design-bid-build” model, which is characterized by highly specified requirements, strict cost discipline, and high-volume orders, is unlikely to work in this case.
A new collaborative and flexible software procurement framework for design, development, and delivery is needed to enable co-development and partnerships. You cannot plan software development efforts years in advance. As a result, the framework must reflect the needs of the fast-moving and fast-changing nature of software projects where scope, timeline, and technology change more frequently than in classical procurement processes. This will require both internal empowerment and new evaluation criteria to assess software partners.
Figure: Software Procurement is different
Source: Berylls Strategy Advisors
In addition to internal empowerment, OEMs should consider four evaluation criteria when assessing potential software partners:
The move to software-defined vehicles is transforming the automotive procurement landscape and requires procurement professionals to adapt their practices in order to effectively source and manage software suppliers.
This means that the process and the principles of procurement must reflect the business logic of software, which is closer to signing a service contract than buying a product. To establish an innovative and future-proof software procurement organization, OEMs will need a deeper understanding of software development, supplier management, industry standards and regulations, intellectual property, and talent management. The key is self-empowerment: OEMs need to develop the necessary skillset while at the same time creating flexible and resilient organizations to manage software supplier relationships that have broken free of the “captive supplier” model and more closely resemble collaborations and joint ventures. Markdowns will not be the dominant measurement for success of procurement.
This shift will not be easy, but the software-defined automotive future demands it.