Certifying a vehicle was once a one-time process. A manufacturer would build the car, get it certified, and then it wouldn't need certifying again until the next generation or refresh when significant changes were made. In the wake of the software-defined vehicle era, things get a little more complex as it's easier than it's ever been for manufacturers to update the core functionality of a vehicle via an over-the-air (OTA) update.

Take Tesla, for example, any Tesla owner can choose to add self-driving capabilities to their car. All they need to do is buy the update and the new functionality will be delivered wirelessly. This fundamentally changes the functionality of the vehicle.

The challenge with software-defined vehicles

Currently, ISO and other functional-safety certifications look at the software in a vehicle, taking into account cybersecurity and safety concerns; however, the existing process doesn't match up to the complexities of modern cars. To provide new functionality and features, these vehicles go through potentially dozens of software updates during a single-vehicle generation. This has the potential to change how the vehicle works, as well as how different systems interact with one another.

While high-end electric brands such as Tesla lead the way with OTA updates, other manufacturers are catching up. These software releases are going to happen more and more frequently, especially as we move toward large-scale EV adoption. There's a challenge in safely certifying vehicles that are updated so regularly. While many of the changes may be small, there's no knowing how those small updates could affect other systems in the vehicle.

For example, a small change to the braking system doesn't just affect how the car stops during normal driving, it'll affect the ABS, the emergency braking, and even the adaptive cruise control; all these systems are intertwined. For example, Tesla rolled out an update for its Autopilot system, improving how it used regenerative braking — this had knock-on effects throughout the vehicle.

The importance of continual certification

While manufacturers are often able to show what elements of the code have changed when recertifying a vehicle, they lack deeper visibility into the impact the code has on different systems. So while an update to the braking system might need to be recertified, there needs to be a way to also look at how that affects advanced driver-assist features and other systems — especially those that could impact safety.

This is why, in this era of software-defined vehicles with dozens of systems that work together, we need to move to a process of continual certification. Running impact analysis on a change allows us to see much more deeply into what has been affected by an update. With this kind of insight, the items that need to be recertified can be, but the rest of the vehicle won't need to go through that same lengthy process.

Continually recertifying vehicles within a model year, potentially after every core functionality update, will also increase safety. There's even the potential to use technology to constantly run impact analyses and send these directly to the regulatory body. However, the current process of certifying a vehicle is lengthy and wouldn't scale to support this kind of ongoing certification.

The challenges

Currently, different regulatory bodies have different certification processes but, typically, these involve manufacturers submitting documentation detailing all the changes. There's no standard to these documents so every single OEM may submit something different. Following this, there are multiple rounds of comments, meetings, and questions to determine how significant the changes are to the vehicle and whether or not it needs to be retested. This works, to a point, but when considering continual certification for vehicles that are regularly updated, this method won't work at scale.

AI can provide a solution

There is perhaps a solution to be found in artificial intelligence, specifically Vehicle Software Intelligence. Aurora Labs has developed a tool that runs continual impact analysis on a vehicle to understand the changes that have been made. This not only shows the affected interdependencies from an update but can also flag other issues that could impact recertification -- such as superfluous code.

Aurora Labs' Auto Validate allows both manufacturers and regulatory bodies to gain a deeper understanding of any functionality changes and how they affect other systems. This not only gives developers more insight but could drastically speed up the certification process.

The future

Innovating in this way and moving to a continuous certification process isn't currently a priority for manufacturers but, as vehicles become yet more advanced, this is something that will need to be addressed. Vehicle Software Intelligence presents an opportunity to bridge the gap between OEMs and regulatory bodies while improving safety and compliance.

While the certification process is unlikely to go through any radical changes any time soon, there's an opportunity here for technology to simplify a lengthy process. The regulatory process was designed for vehicles that only change once every few years -- but things have changed. Vehicles are now complex computer systems on wheels that can be updated at the touch of a button with zero downtime for the driver. The fast-paced nature of this technology requires a new way of working that will only scale when supported by AI tools such as Vehicle Software Intelligence.

For many years, software has been an enabler for hardware, but, increasingly, it's becoming a source of revenue for automotive manufacturers. In fact, according to McKinsey, data-driven services could create up to $1.5 trillion in additional revenue for OEMs.

Profits on a new car are ridiculously tight, with many manufacturers making just 13-21% gross profit margin (GPM) on a car sale. These margins are squeezed even tighter thanks to supply chain disruption; increased steel, energy, and logistics costs; and more R&D spend. Compare this to the software industry, where the average GPM is 72.31%, and it's no wonder OEMs are turning to software to boost margins. Many are already using over-the-air (OTA) updates to deliver new features to vehicles even after the initial sale.

One of the most well-known examples of this is Tesla offering acceleration upgrades to its vehicles with a simple update -- for a fee, of course. But there's potential here for other brands to follow suit, and many already are.

Giving more to customers

Adding new vehicle features via OTA updates will not only drive revenue to manufacturers but can improve customer satisfaction too. Drivers can add new functionality to their vehicles as need dictates or if they want to customize a used vehicle to their needs. But this is so much more than updating satellite navigation or adding new infotainment features, software gives OEMs the chance to update the functionality of the car itself through firmware updates.

This often includes small upgrades to improve the performance of a car, as in the case of Tesla. The Polestar 2 is another example, however, it gained 67 horsepower from an update to the powertrain ECU, with a retail price of $1,125. This is a fantastic indication of what we can expect in the future as OEMs begin to use software as a revenue generation tool.

Tesla is used to monetizing these upgrades and does so with great success. For example, for $10,000, you can buy the full self-driving package for your car. Tesla makes this easy for customers and simply delivers these new features through an OTA update. This, essentially, activates the existing hardware enabling drivers to make use of Tesla's full suite of autonomous capabilities.

BMW is another manufacturer that's offering more to its customers through remote updates. Owners can choose to add a range of digital services to their vehicles -- either for a one-off price or a monthly subscription. You could add active cruise control, adaptive suspension, or BMW Drive Recorder -- this automatically activates in the event of an incident but can be used to record beautiful surroundings and road-trip memories at the touch of a button if you choose.

New revenue streams

It's not just BMW, Tesla, and Polestar monetizing these updates. Stellantis recently announced a strategy that will build on existing vehicle capabilities to transform how customers interact with their vehicles -- the company is predicting this strategy to generate 20 billion euros in incremental revenue by 2030.

Stellantis CEO Carlos Tavares said: "Our electrification and software strategies will support the shift to become a sustainable mobility tech company to lead the pack, leveraging the associated business growth with over-the-air features and services and delivering the best experience to our customers."

Manufacturers have plenty of options when it comes to monetizing functionality upgrades via remote updates. One-off fees add permanent features to a vehicle but the subscription model allows OEMs to create recurring revenue streams. General Motors is already using this to add new functionality to older models. Owners of around 900,000 vehicles built from 2018 can add navigation to their infotainment system for just $15 a month.

The opportunities are endless here, especially as manufacturers look beyond their infotainment systems and to the firmware of a vehicle. Updating the features of a car -- such as safety systems, performance, or self-driving capabilities -- is where the real money lies.

OEMs aren't shy about their plans to make money from these additional features. Markus Schafer, head of research for Mercedes cars, told CAR magazine: "We're aiming for an additional 1bn euro by 2025 to be added from packages and services that we're selling over the air. Of course, we want to provide features and new experiences to our customers, but also ultimately to do additional business in the future after we've sold the vehicle. That's going to be more and more important."

For consumers, OTA updates mean personalization for their cars, allowing them to add all the features they require to an otherwise standard used car. Adding these functionalities enables OEMs to continue earning from older vehicles while promoting brand loyalty among used car buyers. While software-defined vehicle manufacturers are leading the way, legacy OEMs are catching up. In fact, more than 20% of industry experts expect software sales to account for at least 10% of carmakers' sales as early as 2027. The road may not be as smooth as some may hope but it's the early adopters that will reap the rewards in the years to come.

Read Part 2 of this series here

Before software started to dominate vehicle production, the balance in the automotive ecosystem was clear and well known: Tier-1s supply parts, mechanics, hardware and software, whereas OEMs own the design, assembly and marketing. Today, and looking forward, as software is starting to supersede mechanics in vehicles, and the core of the vehicle is changing from internal combustion to electric, the balance in the automotive ecosystem is also changing.

The shakeup in roles does not necessarily mean some parties become obsolete, but rather that all parties have the opportunity to collaborate for mutual growth.

Let's take a look at trends in key players of the automotive ecosystem:

Chipset providers are showing signs of growing their offering from hardware only to include software and services. For example, Mobileye's acquisition of Moovit is a clear move to a full robotaxi service. Qualcomm's recent acquisition of Veoneer signals the next phase of their complete software and chip platform for driver-assistance systems.

Tier 1 suppliers are displaying leadership in software development and innovation to continuously bring value and skills to OEMs. Examples include Continental's purchase of Argus Cyber Security in order to strengthen and enhance its capabilities in automotive cyber security and LG's similar venture with the acquisition of Cybellum.

Aurora Labs recently collaborated with Strategy Insights to conduct an Automotive Software survey where we polled over 150 industry leaders for insights on trends in automotive software. Based on the results from this survey, OEMs are estimated to move between 10-25% of software development in-house by 2025. (See complete survey report for more details)

This shift is very logical - as software becomes a differentiator and an integral piece of the vehicle, car makers must have competencies and transparency into the code they deploy in their vehicles.

Car manufacturers can opt to move in two directions: the 'Apple' or 'Tesla' method of complete end-to-end vertical integration and control, or for a collaborative ecosystem. It is our belief that the industry will move towards the latter.

If we look at the mobile phone industry example, although Apple has shown tremendous success with its vertical integration strategy, other companies such as Samsung have also experienced great profits through a thriving ecosystem by utilizing Android operating systems and multiple hardware suppliers.

Based on the 2021 Automotive Software Survey, there is no decisive answer as to which player today has the most influence over software development, a trend that signals a period of upcoming changes.

Cooperation and collaboration within an ecosystem drive greater innovation, lowering of costs and increase in revenue. The automotive industry currently stands at the brink of such growth, which will be driven by all participants. The new mode of operation has room for each party to evolve and work in cooperation, rather than compete with each other.

Naturally, there may be a period of unrest during the transition to the new era, with each player in the ecosystem attempting to own a bigger piece of the value chain, but this is expected to settle as the new lines are drawn.

This evolution will require more than collaboration, but will also be driven by regulation and technological advancements. Standardization and validation throughout complex and interrelated systems are being worked on around the globe. And close to our hearts at Aurora Labs, AI-powered software intelligence technologies will be the enablers for transparency, evidence, authentication, testing and updating of systems supplied by different players in the ecosystem.

To learn more about trends in the automotive software industry, read the 2021 Automotive Software Survey Report.