The Speed Of Software-Defined Vehicles

The Automotive Industry’s Transformation Challenge

The automotive sector is undergoing a profound transformation. Yet, many traditional OEMs still underestimate the magnitude of the change required to achieve a successful transition. At the core of this transformation lies a critical question:

How must automotive companies evolve to accelerate innovation and deliver superior customer experiences amid intense competition from digital-first challengers—companies unburdened by the traditional “combustion-engine engineering” mindset?

From Engineering Excellence to Software Intelligence

Software and AI now sit at the heart of the automotive revolution. Technological modernization without cultural transformation is insufficient. The automotive sector must cultivate a digital mindset and organizational agility that go far beyond technical upgrades.

For legacy manufacturers, the challenge is not simply about adopting digital technologies or hiring software engineers. It demands a fundamental rethinking of innovation culture and operations. This means a shift from being mechanical engineering powerhouses to becoming data-driven software organizations. 

Rethinking Control, Partnerships, and Value Creation

Traditional OEMs must decide how much of their innovation and production they actually want to control. To remain competitive, they will need to forge partnerships with new types of players, including hyperscalers, SaaS providers, AI platforms, and open-source communities, to co-develop new value propositions.

Yet, this creates a delicate tension: these same partners could ultimately capture the most lucrative parts of the value chain, relegating OEMs to the role of hardware assemblers rather than experience providers. Avoiding this outcome requires strategic clarity and a redefinition of what “ownership” and “control” mean in a platform-driven ecosystem.

Open Source vs. Proprietary: a Strategic Balancing Act

A major strategic dilemma for OEMs is how far to embrace open source versus proprietary software development. Most OEMs will adopt a hybrid approach, combining the agility and innovative potential of open source with proprietary control over key systems and differentiating capabilities.

However, this represents a profound cultural break from the traditional automotive operating model. Historically, OEM–supplier relationships have been built on strict buyer–seller dynamics and highly controlled, specification-based procurement cycles. Even software has often been developed in silos, with limited interoperability across suppliers or systems.

This fragmentation is untenable in the era of software-defined vehicles (SDVs), where platform integration and software interoperability are prerequisites for innovation, scalability, and new revenue models.

Building the Talent and Culture for a Software-Defined Future

Delivering on the SDV vision requires attracting and engaging world-class software talent, including independent and non-automotive developers. This will require new forms of collaboration, incentives, and openness, as many of these developers operate outside the traditional industry ecosystem.

Currently, many automotive players appear hesitant and uncomfortable dealing with this faster, more iterative innovation culture. Their occasional awkwardness in engaging external communities could become a barrier to closing skill gaps.

The Risk of Missing the Turn

The industry’s hesitation and underestimation of the transformation challenge carry serious risks. If traditional OEMs fail to evolve, the true opportunities for value creation—software, data services, user experience, and digital ecosystems—will be captured by non-traditional players—hyperscalers, SaaS providers, and new entrants, such as Chinese EV manufacturers, who are leapfrogging legacy constraints.

In the worst-case scenario, traditional OEMs could be reduced to assembly plants for physical vehicles, while software and digital experiences, where most of the value resides, are owned by others. This would mark the commoditization of the automotive industry, with far-reaching consequences for employment, competitiveness, and regional economies.

The Rise of Digital-Native OEMs

Meanwhile, digital-native automotive start-ups, born with a software-first mindset, are gaining momentum. Free from legacy constraints, they can collaborate seamlessly with global ecosystems of partners, accelerating innovation cycles and customer-centric value creation. Many of these new leaders will emerge from Asia and North America, while Europe risks falling behind.

Perhaps the transformation of the sector will not be as harsh as feared. Design remains a crucial differentiator—and AI can greatly enhance it. As development cycles shorten, robust digital processes become essential to maintain quality and speed. Increasing regulatory complexity will drive the need for greater automation across the industry.

Still, certain elements will remain unchanged, like the passion for driving and exciting machines. These factors might make the transition to software-defined vehicles less disruptive than it could be. After all, even Apple isn’t defined solely by software—brand and design remain central to its success. The same might hold true for the automotive sector.