Considering the Costs of Automotive Software

“Any customer can have a car painted any color that he wants so long as it is black.”

We like to quote the man, for Henry Ford knew a thing or two about automobile production, cost control among it. The Model T came only in black to speed up the assembly line, one of many decisions leading to a car that made the dream of driving come true for millions of Americans—a reliable vehicle that was easy to maintain and that even featured some innovations, not the least among them its affordability.

In this article we will take a closer look at the financial arguments to buy software and services for the connected car from trusted partners. We have discussed the reasons to outsource complex software services in Build vs Buy: Why Outsourcing Tech Is the Future of the Automotive Industry. As we have shown, the outsourcing of software should be well considered and implemented via close and long-standing cooperations with suppliers of excellence. If this succeeds, the added value is very high.

The Math of Build vs Buy

Vehicle manufacturers are in the business of developing, manufacturing, distributing, and servicing vehicles, parts and accessories for a price that covers the cost and, hopefully, yields a profit. Automakers have more than a century of experience in keeping expenses at bay, often succeeding, sometimes failing.

Many factors are to be considered in the decision if a software solution is to be built or bought. Very sophisticated cost calculations might be drawn up, but in essence a handful of core parameters allow a proper comparison of the two options.

• The number of vehicles an OEM sells per year not only provides the foundation for calculating costs, but concurrently opens up the opportunity to consider how fleet size and the take rate (see below) can be increased with attractive features and services. 
• The cost for the hardware that is needed to implement such features and services is somewhat inflexible, but higher demand for features and services may lead to volume benefits.
• Similarly, the take rate, defined as percentage of drivers who subscribe for the services, can be increased by an interesting and convenient offering.
• The costs for connectivity and hosting add up as every MB of transmitted data counts. This is the reason Sibros offers data compression of up to 95%.
• Licensing is a cost factor per year and vehicle. 
• The initial investment for platform development can be high; by leaving this area to a connectivity platform, like Sibros’ Deep Connected Platform, the costs and risks of development can be completely outsourced.
• The maintenance and further development of the platform involve many parameters and thus considerable effort and competence. 
• Revenue from services eventually is supposed to offset all the cost points. ​​There are in fact many opportunities for services and revenue streams in the future. And again: The more enticing the features, the better the revenue prospects.

Time, more than ever, is of the essence in the automotive industry. The development cycles are shortening, in particular for software. When deciding on the best course of action, time is the most vital consideration.  

The in-house development time of a complex software solution is at least 2 years. This is rather a best-case scenario, assuming, for example, that the needed talent can be attracted and retained and that the inevitable setbacks are few.

However, when buying a solution from Sibros, the time to implementation is shortened to 6 months or less, at entirely predictable cost. This means that first revenue and cash flow can be achieved in year 1, compared to year 3 with a Build solution. The Buy option in these 2 years would also be further developed, for example, to optimize cost and enhance features. 

Our experience shows that, given the lead time of developing a solution from scratch, it is not rare that it takes 6 to 7 years to turn the overall cash flow positive. On the other hand, implementing Sibros’ solution, the year-over-year rate of return on subscription revenue may already turn profitable by the third year of service. And besides financial aspects, the parameter of product time to market could mean the difference between success and failure.

Of course, there are other cost aspects to consider. To learn more about how to lower your OPEX costs for OTA services, read our corresponding blog article.

The Sibros Offer

The Sibros Deep Connected Platform provides an end-to-end solution and covers all the costs associated with hosting, support, maintenance and upgrades.

Sibros takes care of the following areas:

• R&D and development of software and firmware
• Testing and validation, integration with legacy systems
• Industry leading data compression and edge filtering
• Safety and compliance testing, with certifications in the latest safety, security, and privacy standards (for example, ISO 26262, UNECE WP.29, GDPR, ASIL-D)
• Resilient and thoroughly documented code, with support and maintenance
• Unified platform with powerful Web Portal and APIs

The reduction in costs, together with a reliable and predictable cost calculation, and complemented by saved time and alleviated risk, paves the way for an OEM to focus on innovation and driver experience. New aspects, functions, and products can be developed, supported by data which have been extracted and filtered with help from Sibros, leveraging our deep expertise and comprehensive experience.

The Cooperation

Cost control today is as important as it was in the days of Henry Ford (maybe even more so); but since delivering a car in only one color is no longer an option, neither is a lack of convenient software updates and other important software capabilities. Another non-option is to neglect the trove of data vehicles produce when being driven out on the road.

The purchase of software involves a certain front-end-cost or subscription fee. But this will be a known expense for a product that is ready to be used and the specifications and performance of which are known. 

To build a proprietary solution, on the other hand, may seem attractive, but the history of software development and maintenance has shown that predictions of time, costs, and performance are very difficult to make. (There is a reason one of the classic books about software development is titled “The Mythical Man-Month”.)

Software services like over-the-air updates and vehicle lifecycle management, with market-leading features such as selective logging, intelligent edge data filtering and compression, present a compelling business case. To deeply cooperate with a supplier of trust and expertise, who offers a product ready to be deployed, means to reduce risk and increase ROI. Talk to us.