Western Car Companies Are Blowing The Software Race

Western car companies are blowing a major opportunity. That’s the takeaway from a new report from consulting firm AlixPartners, which found that many traditional automakers are giving up control of their user experience to third-party companies. We already know that’s part of why they’re behind Chinese companies in the race to create compelling software-defined vehicles (SDVs). Now, though, we know what it means for the future of their businesses.

“The survey of 1,002 senior SDV executives (up to the CEO level) from automakers, Tier-1 auto suppliers and technology companies in North America, Europe, and Asia, found that Chinese automakers are the most focused on how they build and scale SDV capabilities while many Western automakers remain spread across legacy platforms, patched software stacks, and transitional architectures,” the report reads. “This leaves Western players at greater risk of dependency on outside partners at key SDV control points and makes it harder to capture full returns from their SDV investments.”

I sat down with Himanshu Khandelwal, the author of the report, to dive into why this matters. 

Volkswagen Group’s CARIAD software division has been restructured multiple times after missed deadlines and issues.

Photo by: Cariad

Why “Software-Defined” Matters

I want to focus in on one phrase that came up a lot in my conversation with Khandelwal: “control points.”

It’s important because all modern cars are already software-defined, in a literal sense. When you walk up to a normal car built in the last 10 years, it’s software that detects the key approaching. It’s software that unlocks the doors and turns on the welcome lights. A software system validates the key and enables ignition, and then once the engine is fired or the electric motor is engaged, it’s software that controls how much force actually reaches the wheels.

So creating “software-defined vehicles” isn’t actually about turning cars into a software product. Instead, it’s about owning the software in your product. It’s a process of bringing the “control points” in the system in-house, so you have full control over updating, running, and connecting the software components to other parts of your system. 

Volvo’s EX90 was the first European-designed software defined vehicle sold in the U.S. Unfortunately, software issues riddled its launch.

Photo by: Ralph Hermens

Owning these control points is why Tesla can release an over-the-air update that fixes key malfunctions in the charging controller, or choreograph special modes that make the HVAC, locking system, lightning system, and infotainment system all work together. If you don’t own them, you rely on a “patched” stack with more limitations. My personal Chevy Blazer EV has a patched stack, and the result is that—even though my panoramic roof calibration issue was a widespread software issue—I had to go to the dealer to get the firmware update. Chevy doesn’t control the whole stack, and so it can’t tweak it all over the air. In fact, most Western automakers aren’t close to the finish line on SDVs.

The survey found that 41% of Chinese OEMs primarily source their SDV components in-house, compared to 25% and 27% for American and European firms, respectively. A full 39% of Chinese brands are already using zonal architectures and centralized computers, while only 31% of American companies and 23% of European companies say they are. That means American and European companies are still patching together bits from disparate suppliers, integrating software rather than owning it. 

That limits the biggest benefit of the SDV revolution. Managing minor software fixes over the air is a huge money saver for a company like Tesla. Traditional automakers like Ford and GM haven’t been able to realize the same benefits because so many fixes require a dealer visit, which the automaker has to reimburse the dealer for.

“Even for a recall, right? If it is a software problem, more often than not, the OTAs are not necessarily the pathway for our legacy OEMs. So, you know, a Ford Explorer, I gotta take it to the dealer. Even though it’s an OTA updateable [car], it was not necessarily updated over the air, and the dealer had to go and do those things, right?” Khandelwal said. “So [with an SDV] I now have those OTA-related savings, rather than paying into the dealers. Now I’m pushing it into the vehicle and doing it. Warranty and recall are the huge expenses for our legacy OEMs, and this is where we see a lot of benefits in cost savings.” 

“Zonal” architectures use centralized computers to reduce component and wiring costs. This makes SDVs cheaper and easier to service.

Set aside the added customer benefit of not having to deal with a local car dealer—and believe me, it’s a big one. Just on a cost basis, this is huge. In 2024, over 99% of Tesla’s recalled vehicles were fixed over-the-air, according to National Highway Traffic Safety Administration data. Every car that’s fixed over the air is a service bay you don’t have to tie up, a dealer technician you don’t have to pay, a rental car you don’t have to comp, and a pain point the customer avoids.

Over a fleet of millions, this compounds. Add in the advantages of fewer wires, fewer computers, simpler wiring runs, and all of the complexity living in the digital, not physical world, and it’s no wonder that traditionally designed EVs cannot compete on price with SDVs from Tesla, BYD, Geely, and others.

There are other advantages, too. By building your software platform from the ground up, you can design it to power multiple vehicles with few changes. That means no more tiered rollouts of features that arrive in one model one year, then take five years to proliferate across the lineup. Instead, you design one family of vehicles and continue optimizing and improving with new software features and upgrades. That’s what Tesla did with the Model 3 and Model Y, and it clearly worked. The Model Y became the best-selling car in the world in 2023, and its software experience is leagues ahead of the likes of Hyundai or Ford or Chevy. 

Tesla’s software feels more sophisticated and polished than any other Western brand.

Photo by: Patrick George

That’s not just a matter of competence. It’s a matter of priorities. Tesla and many Chinese OEMs have recognized that mastering software is key to the future.

In the AlixPartners survey, 36% of Chinese automakers say they are allocating over half of their research and development budget to solving SDV problems. In the U.S., the figure is just 21%. In Europe, it’s even lower, at 19%. This is the challenge of having to sustain a business selling gas cars at the same time. It may make you money, but it doesn’t breed true leadership. It’s hard to outflank your global opponents when they are fully committed to software-defined EVs, and you, as a Western brand, still have to hedge your bets.

Selling Out The Future

To make up for their split approaches, Western automakers are leaning hard on partners. That’s why half the “new” software experiences you see launched are just heavily modified versions of Google’s Android Automotive OS.

The software platform—not to be confused with Android Auto, which is phone projection—is the basis for many of the software-oriented Western designs today. Get in a new BMW iX3, Chevrolet Equinox EV, Honda Civic Touring, Nissan Rogue, Mazda CX-5, or Polestar 3, and the tech looks quite different. Underneath, though, they’re all running the same OS. 

Many Western cars run on Google’s Android Automotive OS. That’s good for stability, but it means they’re outsourcing a lot of the user experience.

Photo by: Volvo

Is that a problem? Not for you. But for car companies, allowing Google to own the entirety of the customer experience is a dangerous path. That’s why Khandelwal says most are using this “patched stack” approach as a waypoint in their path towards a true software-defined future. Most won’t own the entirety of their software stack, but they will likely want to own the key points of contact with the customer so that they can make money off of that relationship.

“If I’m going to own everything, I’m going to own all of the value pool, right, right?” Khandelwal said. That’s the ultimate dream. But even Chinese OEMs aren’t there yet. Western firms have a long way to go.

How Do Western Companies Catch Up?

The first thing they need to do is recognize that this is a long, business-reshaping process, not a quick windfall. Western companies were early to push hard on subscription features, hoping to get effectively free revenue out of existing hardware, like BMW’s infamous heated seat debacle.

But this is precisely the wrong way to go about it, Khandelwal tells me. You can’t try to charge people for a software experience before you’ve proven that it delivers them consistent value. And you can’t expect subscriptions to save the balance sheet; that will come when you truly leverage the reusability of SDV stacks, the service improvements, the customer retention benefits, and the pace of development.

As the study puts it: “On the ground, the reality points to a broader, and potentially existential, challenge for Western automakers as well: To stay competitive in future SDV initiatives, Western automakers and suppliers need to rethink not just their business cases, but also their operating models. The challenge is no longer simply how to launch features at start-of-production; it is how to improve cost positions over the full vehicle lifecycle through better reuse, over-the-air updates efficiency, quality, warranty, and speed.”

Contact the author: Mack.Hogan@insideevs.com.