Growth in the software and components driving autonomous and electric vehicles will far outstrip the growth of the automotive sector overall, a new report from consultancy McKinsey predicts.
The consultancy says that automotive software and electrical and electronic components will see compound annual growth of 7% until 2030 in a report entitled ‘Mapping the automotive software and electronics landscape through 2030‘.
This will see the value of this sector nearly double from $238bn to $469bn.
Growth will far outstrip the 3% growth expected for the overall automotive market.
The growth will occur in the context of huge shifts in the market and the value chain – which McKinsey says will involve the greatest transformation for 100 years.
This will come about partly due to electric and autonomous vehicles, but also due to vehicle pooling and AV taxis all of which will shift vehicle users’ behaviour.
The report says: “The emerging threats, but especially opportunities, resulting from the growing software and electrical and electronic components markets and their shifting dynamics call for action from most automotive companies and those who want to enter the industry. Due to fast-paced changes, it is imperative to map out and follow a clear strategy to ensure benefits from the disruptions in automotive and not be on the side of the disrupted.
New eco-systems emerging along value chain
However, this may involve a great deal of cooperation as well as competition.
The report says: “As the complexity and costs of new software-driven functions, e.g., for automated driving or connected cars, are huge, we see increased cooperation to share costs or speed up development.”
It notes that even close competitors, such as BMW and Daimler or GM and Honda, are now working together, especially in the field of automotive driving, to share the high development costs.
For electric vehicles, Volkswagen has announced their openness to share their electric vehicle platform with other ‘original equipment manufacturers’.
In addition, it says that tier-1 suppliers and manufacturers are intensifying their cooperation and building strategic partnerships.
It also highlights the example of engineers from Daimler and Bosch working together in two locations to develop hardware and software for automated driving.
Manufacturers are also moving closer to strategically important tier-2 suppliers and tech companies and are using directed-buy mechanisms for the sourcing of key components to gain access to intellectual property, shape its development, or secure critical supply.
The consultancy sees this development occurring particularly for high-performance computing chips and other potential breakthrough technologies such as LiDAR, which projects lasers and uses sensors to measure the distance to other vehicles and obstacles much like radar.
These partnerships sometimes include financial investments by the manufacturers. For example, Ford has invested in the LiDAR company Velodyne.
In other developments, Volkswagen and Microsoft are building an automotive cloud platform together.
Besides Microsoft, Google has launched Google Automotive Services, including a partnership with and first deployment at Volvo, while Samsung has shown interest in entering the automotive space with the acquisition of Harman.
The report adds: “Not surprisingly, those companies primarily aim at infotainment and connected services with a direct link to the customer, yet they might move further down into other domains over time.”
Besides the partnerships, McKinsey believes it is also seeing the emergence of wider eco-systems involving several players within the value chain.
One example is the close collaboration of BMW, FCA, Intel, Magna, Aptiv, Continental, LiDAR supplier Innoviz, and software specialists TTTech and KPIT which are jointly developing an automated driving platform platform.
The report adds: “The traditional manufacturer-supplier relationship, especially in the fields of innovation in software and electronics, is giving way to a variety of relationship models like strategic partnerships, directed-buy initiatives, minority and majority acquisitions, and different forms of alliances and joint ventures.”
Components set to grow at different rates
The report also looks in much more detail at different categories of technology development identifying those that will grow the most rapidly until 2030.
With 15% growth per year, power electronics is the component group with the largest growth rate, primarily driven by the adoption of electric vehicles.
Automotive software will grow at 9 per cent a year; integration, validation and verification services will grow at 10%; and embedded control units (ECUs) and domain control units (DCUs) at 5%. It says that both on 2020 and 2030 electronic control units and more centralised domain control units are set to grow.
The report says: “Both in 2020 and 2030, ECUs and later DCUs compose the component group with the largest market share. The moderate growth in ECUs/DCUs is the result of two counteracting effects – a growing vehicle market and higher instance of functions based on electronics in each car versus decreasing unit costs and a cost decrease due to ECU consolidation into DCUs.”
McKinsey notes that the growth in automotive software and sensors is largely driven by the development and adoption of automated driving.
This involves complex set of needs including advanced software functionality such as object detection and classification based on neural networks, raw data sensor fusion, and environmental modelling as well as algorithms for path planning, increased functional safety, and new sensor types.
It says other components are mostly growing in line with the broader automotive market due to higher electronics demand outweighed by decreasing unit costs.
Geographically, the market will primarily be divided into the large regions of Europe, North America, and China, with regional hotspots for specific components. China, for example, is strong in terms of developing batteries and power electronics.
The firm says the insights contained in the report were generated based on closely linked qualitative and quantitative research. For the qualitative insights, it held interviews with executives in the automotive industry and combined them with the knowledge of internal key experts within its automotive practice to build a holistic view on how trends and additional drivers will influence the automotive software and market. It also built its own models for different components.