Musk Says One Thing Is Central to the Future of the Car

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The connected car, the electric car, the autonomous car: The future of the automobile has often been publicly debated in these terms for several years now.

Automakers have used this trio of concepts to describe the colossal investment challenges of the next decade.

Elon Musk, who disrupted the automotive industry with electric-vehicle maker Tesla, (TSLA) – Get Tesla Inc. Report has just weighed in on the matter, saying that the car of the future combines the three.

“Self-driving electric cars will be all that matters,” the Tesla chief executive said on Twitter on July 24. “Gas car without autonomy will be like riding a horse & using a flip phone. That still happens, but it’s niche.”

A Computer on Four Wheels

The connected car, the autonomous car and the electric car have a largely underestimated point in common: the software, the system that controls the car’s equipment and functions.

The automotive value chain will be centered in the software and no longer in the hardware, experts say. The car will become a computer on four wheels.

Musk echoes other auto-industry executives in saying that software sits at the center of the car’s future.

“Software is the key to the future,” Musk said on July 24, when he was asked about the unexpected departure of Volkswagen (VLKAF) CEO Herbert Diess. The company is one of Tesla’s (TSLA) – Get Tesla Inc. Report major competitors.

In addition to tensions with the unions, media reports say, Diess’s tenure was hurt by failures at Cariad, a Volkswagen unit responsible for coding software at the heart of the company’s electric and connected efforts. He had inherited the supervision of Cariad earlier this year, after losing control over Volkswagen’s operations in China following an internal power struggle, reports say.

It’s because of the slow progress Cariad was making that Porsche, the flagship of Volkswagen, recently decided to break the partnership with the unit and develop its own software solutions. The decision was made by Diess’s successor, Oliver Blume, who has been leading Porsche since 2015.

Original-equipment manufacturers “still see software as a cosmetic cost center to be shrink-wrapped around the vehicle design,” said Brett Winton, director of Research at ARKInvest. “It will be their death.”

He adds: “Software is now the key performance differentiator. Every vehicle (and the entire product strategy) needs to enable and empower the software at its core.”

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New Services, New Revenues

Until now, a car was considered complete when it was delivered. But software has changed that since Tesla, under Musk’s leadership, implemented a strategy of delivering over-the-air software updates to its vehicles.

The method enables the carmaker to improve its vehicles throughout their lives. Adjusting the seat automatically, loading the vehicle, triggering the airbag or listening to the radio: Software is integrated into almost all vehicle functions.

The automated updates are similar to what the cellphone makers do to bring fixes and new functions to their handsets.

In 2017, Tesla, with the Model 3, took another step forward: Four electronic cards drive most of the vehicle’s computers. Thus, most functions can be programmed and reconfigured remotely.

This architecture is unlike that of its competitors, but experts say it will gradually be adopted by all vehicle manufacturers. The car truly becomes a computer on wheels, so car design is largely evolving in line with software development.

This car-as-computer also produces thousands of data points, thanks to the many sensors, radars and other cameras on board. The centralized architecture and connectivity enable upload to the cloud of these massive volumes of data, which will help with vehicle design.

Tesla is already using data from its customers’ vehicles to develop its automatic driving algorithms. The cars will thus be able to learn from their own data, improve their performance and personalize it by knowing its drivers’ habits better.

The software in turn opens up new economic opportunities for car manufacturers. Indeed, they can launch subscription services to boost revenue. On demand from individual drivers, they can provide options like navigation services, satellite radio, extra horsepower and more.

Car manufacturers can also personalize maintenance, insurance and financing services, based on their knowledge of the actual use of vehicles.

“Software will improve our business model, disconnecting hardware from software … shifting the center of gravity of our business,” Stellantis (STLA) – Get Stellantis N.V. Report CEO Carlos Tavares said last December during the company’s Software Day.

The parent of Jeep and Chrysler plans to generate about $22.5 billion in incremental annual revenue from software services and subscriptions by 2030. Other automakers have announced similar measures.