McKinseyCompanyAutomotive softwareand electronics 2030Mapping the sector's future landscapeAutomotive softwareand electronics 2030Mapping the sector's future landscapeAuthorsOndrej Burkacky,MunichJohannes Deichmann,StuttgartJan Paul Stein,MunichAcknowledgementsThis study was conducted byMcKinsey &Company,Inc.We wishto express our appreciation andgratitude toGSA and its members fortheircontinued support andvaluablecontributionsTable of contentsIntroduction and key insights1.Software and electronics will outgrow the automotive market1.1 The software and electronics architecture in vehicles will see a major evolution101.2 ACES trends and the architecture evolution will result in significant growth in theautomotive electronics and software market122.Key drivers of the automotive sector's changing landscape152.1 Software:the global automotive software market will show dynamic growth2.2 Electronic control units/domain control units:convergence of electroniccontrol units will open up a new market for domain controllers2.3 Sensors:autonomous driving will be the primary trigger for sensor demand2.4 Power electronics and harnesses:transition to EVs will enable the formationof anew market3.Disruptive trends along theindustry's long-established value chains3.1 New technologies are breaking up the"power dynamic"of traditionalrelationships between OEMs and tier-1suppliers303.2 Separation of hardware and software is leading to new sourcing models313.3 New companies are entering the playing field in nontraditional andautomotive areas313.4 New partnerships and cooperation models are emerging-primarily forsoftware-and electronics-related topics344.Building blocks for mapping your automotive software and electronics strategy354.1 Strategic considerations for each automotive player archetype364.2 First steps for all players in navigating the changing landscape38Appendix39Key aspects of the market models39List of abbreviations41Definitions42Important notice43Contacts and authors44Introduction andkey insights动运动脉运营动脉运动运营动运营动运营动脉运营动脉运营动脉运营动脉运营动脉运营动运营动脉运营动脉运营动运动运动运动Automotive software and electronics 2030Autonomous driving (AD),connected vehicles,electrification of the powertrain,and sharedmobility(ACES)are mutually reinforcing developments in the automotive industry.Combined,they are not only disrupting the automotive value chain and impacting all stake-holders involved but are also asignificant driver of theexpected 7 percent compound annualgrowth rate(CAGR)in the automotive software(SW)and electrical and electronic components(E/E)market,i.e.,from USD 238 billion to USD 469 billion,between 2020 and 2030.At this rate,the SW and E/E market is expected to vastly outpacegrowth in the overallautomotive market,which is estimated to grow at 3 percent CAGR in the same timespan.As aconsequence,SW and electronics have become the focus of most automotive companies andtheir executives.In this context and based on our extensive research and analyses (Text box 1),we offer aperspective on three key questions:-What are the specific trends and drivers of the automotive sector's SW and E/E growthdynamics and the changing landscape towards 2030?How arethese drivers going to affect theautomotive industry's long-established valuechains?How can players in and outside of theindustry optimally prepare for the upcoming marketdevelopments?In the following three paragraphs,we provide ashort answer to these questions while theremainder of this report will go into detail.Text box1The insights of this report were generated based on closely linked qualitative andHow we derive insightsquantitative research.For the qualitative insights,we held interviews with executives infor this reportthe automotive industry and combined them with the knowledge of internal key expertswithin our automotive practice to build a holistic view on how ACEStrends and additionaldrivers will influence the automotive SW and E/E market.For our quantitative market insights,we built bottom-up market models foreach of thecore components within the automotive SW and E/E market:SWdevelopment,integration,verification,and validationElectronic control units(ECUs)/domain control units(DCUs)SensorsPower electronicsOther components(harnesses,controls,switches,displays).At the highest level,these models(excluding SW)calculate the market size following thesame logic.Market size is the product of the number of a certain component per vehicle,itsaverage selling price(ASP),and the number of vehicles produced in agiven year.Toachievethe proper granularity of each model,wedistinguish the key automotive domains(e.g.,advanced driverassistance systems(ADAS),body,infotainment)as well as characteristicssuch as vehicle segment,original equipment manufacturer (OEM)type,or SAE AVlevel.The number of vehicles produced each year is provided by a separate model in which weincorporate data from latest McKinsey insights.The size of the automotive SW market iscalculated based on the workforce across the supply chain involved in SW topics and thenumber of vehicle platforms and variants across OEMsand tiers and their changeover time.Further details on the market models and their derivation are provided in the Appendix.The SW and E/E components market will grow rapidly withsignificant segment-level variation driven by disparate impact of theACES trendsThe move towards a more centralized SWand E/E architecture is an overall trend and a keydriver of the market's expected growth(7 percent CAGR)by 2030.Significant variation isexpected across the market's various segments.Power electronics is expected to occupythe high end of the market's growth at 15 percent CAGR.Growth in the SW and sensorssegments,expected to be at 9 and 8 percent,respectively,will be fueled by AD.The ECUs/DCUs segment will continue to hold the largest share of the market,but growth here is likelyto be relatively low,at 5 percent.While ECUs/DCUs will be used increasingly in the applicationof AD,price decreases from efficiency gains will counter-balance growth in the segment.Electric vehicle(EV)platforms will be a new market for high-voltage(HV)harnesses,whilethe demand for low-voltage(LV)harnesses is expected to shrink,resulting in the harnesssegment growing at the slowest rateA separation of hardware(HW)and SW would fundamentally changethe dynamics of the automotive industry's player and value landscapeThe days of OEMs comprehensively defining specifications and suppliers delivering on themmay be nearing an end.Neither OEMs nor traditional suppliers are in a position to fully definethe technology requirements of new systems.Codevelopment between OEMs and suppliersis expected to become not just prevalent but necessary.In addition,tech-native companiesare expected to more boldly enter the space.This will be made easier as HW and SW sourcingbecome more separate.This separation would breakup established value pools,reducingbarriers to entry.For OEMs,the separation would also make both sourcing more competitiveand scaling less complex and allow for a standardized platform for application SW whilemaintaining competition on the HWside.Both archetype-specific and cross-player strategies can positioncompanies for success in the future landscapeThe set of strategic actions for OEMs includes a plan to keep the cost of ever-growing HWand SW development under control and establish a more agile cross-functional developmentorganization.Cross-functionality would benefit tier-1suppliers,too,as would activelypartnering with OEMs to define their E/E architecture.Tier-2 suppliers will want to furtherspecialize and scale within an attractive niche to thrive even as many components becomecommodity.All players will benefit from building their SW delivery and E/E architecturecapabilities,embracing latest technology innovation(including Ul,UX,analytics),andabandoning absolutistic notions of competition while analyzing the benefits of a partnershipwithin an emerging ecosystem.Automotive software and electronics 20301.Software andelectronics willoutgrow theautomotive marketIn the next decade,the automotive industry will face amagnitude of change that has not been seen in a century.Thischange will be driven primarily by four mutually reinforcingtrends,i.e.,autonomous,connected,electric,and shared(ACES)vehicles.These will result in different user behaviorsand mobility preferences,shifting value pools,innovativebusiness models,and new entrants into automotive.All ofthese trends are enabled by the advancement of technologyin electronics and SW and thus have a substantialimpact on the automotive electronics and SW market.91.1 The software and electronics architecture in vehicles will see amajor evolutionAs shown in Exhibit 1,the overall trend is atransition from adecentralized architecture(components connected by a central gateway in the 3rd generation of E/Earchitectures),inwhich functions are running on dedicated ECUs with high SW-to-HW integration,towardsmore centralized systems with dedicated domain controllers(4th generation).Finally,thearchitecture is expected to evolve into virtual domains(5th generation),in which one controlunit runs functions or (micro-)servicesof different domains(e.g.infotainment and body control).The centralization will go along with a separation of HW and SW,leading to vehicle systemsbeing built as a layered architecture with clear abstraction points at operating system(OS)andmiddleware layers.While this evolution will occur across domains over time,infotainment anddriving assistance areexpected to be the forerunners,as areas of high performance and/or lowsafetyor latency criticality are easier and/or more beneficial totransform.The architecture evolution will impact multiple component markets:-DCUs will become a new market segmentwith high-performance computing units beingdeployed in vehides,especially for ADAS,and with higherautonomousvehicle (AV)levels,i.e.,AD.ECUs will no longer be fully tied to the sourcing/development of SW functions.The changein business model is made possible by the separation of HW and SW.Automotive sensors,as amarket,will be distinguished between smart sensors,which have a highdegree of(pre-)processing capabilities versus raw sensors,which send data into a central DCU.Sensors,harnesses,ECUs,and other HW components will become increasinglystandardized and commoditized with the transition towards SW-defined functions,i.e.,functionality will berealized through SW instead of additional HW(e.g.,ADAS functionsenabled on-demand based on a standardized set of sensors).10Automotive software and electronics 2030Exhibit1The E/E architecture is evolving from independent,function-specific ECUs towardsa centralized architectureE/E architecture GenerationHigh-level architectureMain featuresVehicleInfotainmentcentralizedVirtual domainCentral gatewayLimited dedicated HW5thEthernet backbone-Complex functions,highperfor mance computingDomaincentralizedCentral gatewayDomaincontrollerCentral domain controller4th-Ability to handle more complex functionsConsolidation of functions(costoptimization)DistributedTodayStronger collaboration via central gateway3rdCross-functional connection-Ability to handle complex functions,e.g.,adaptive cruise controlPowertrainCollaboration of ECUs within one domainDomains:body/comfort,chassis,2ndpowertrain,and infotainment3-4 independent networksLimited communication between domainsInfotainmentIndependent ECUsIsolated functions-Each function has its ECU(1:1 connection)1.2 ACES trends and the architecture evolution will result insignificant growth in the automotive electronics and software marketThe effect of the ACES trends and the architecture evolution is a significantly growing automotiveelectronics and SW market.While the global automotive market is expected to grow fromUSD2,755 billion in 2020 to USD 3,800 billion at a rate of-3 percent p.a.SW and E/E will growat a rate of-7percent p.a.from a total market size of-USD 238 billion to-USD 469 billion(excluding battery cells).Exhibit 2 shows the overall market figures as well as the breakdown bycomponent and region.Both in 2020 and 2030,ECUs and later DCUs compose the component group with the largesti.e.,a growing vehicle market and higher instance of functions based on electronics in each carversusdecreasing unit costsand a cost decrease due to ECU consolidation into DCUs.With arate of~17percent p.a.power electronics is the component group with the largest growth rate,primarily driven by EV adoption.Growth in SW and sensors is largely driven by thedevelopmentand adoption of AD,requiring advanced SW functionality(e.g.,object detection andclassifica-tion based on neural networks,raw data sensor fusion,and environmental modeling as well asalgorithms for path planning),increased functional safety,and new sensor types (especially lightdetection andranging,LiDAR).Other components are mostlygrowing in line with the automotivemarket due to higher electronics demand outweighed by decreasing unit costs.Geographically,the marketwill primarily be divided into the large regionsof Europe,North America,and China,withregional hotspots for specific components,e.g.Chinafor developing batteries and power electronics.While growth of the total E/E market is expected to be stronger than that of the automotivemarket as a whole,the individual content of electronics and SW per car will differ hugelyby segment,powertrain type,and SAE AV level.This is illustrated by three example vehicleconfigurations-a traditional SAE AV Level1 volume car in the B segment(with an internalcombustion engine,ICE),robotaxis(SAE AV Level 4 to 5 volume car in the C segment withbattery electric vehicle(BEV)technology),and a premium SAE AV Level 3 vehicle with plug-inhybrid electric vehicle(PHEV)technology-see Exhibit 3.pull completed on November6,2018Exhibit 2Automotive SW and E/E market with a CAGR of 7%p.a.until 2030,largely driven bypower electronics,SW,and ECUs/DCUsAutomotive SW and E/E marketCAGRUSD billionsComponents2020-30469Total+7%Total electronics and SW50SW(functions,OS,middleware)+9%by geography in 20301234Integration,verification,and validation services +10%362China37US25156ECUs/DCUs+59%Canada68238Korea20501363Sensors+8%78924481Power electronics (excl.battery cells)+15%Total469305020Automotive salesOther electronic components+39%USD billions637685(harnesses,controls,switches,displays)20202025203020202520302,7553.0273,800CAGR2020-30+39%pull completed on November 6,201812Automotive software and electronics 2030Exhibit3Automotive SW and E/E content per car■2025■2030USDSegmentBE/FVolume car,Purpose-built robotaxiPremium car withL1 with ICE powertrain(L5)as BEVL3 function and PHEV14818,1642,888SW2762,2751,7328948,5083,371ECU/DCU8226,2273,1483372,6143,654Sensors3992,0513,1281052,0271,812Power electronics1622,1811,7645197022,063Other electronics5266712,130216,2831,574Battery256,0471,086Total2.02338.29715,3612,21019,45312,987SOURCE McKinsey analysis13Traditional SAE AVLevel 1volume cars in the B segmentThe electronics content of these cars will only change marginally.While more functionswill expand into the mass market,commoditization of electronics and SW functions due tostandardization of the architecture and scale effects will lead to decreasing prices,keepingcontent per vehicle stable.RobotaxisElectronic and SW costs for robotaxis will be significantly higher in 2025,driven primarilyby high costs for sensors as well as a low vehicle base,across which the significant SWcosts for SAE AV Level 4 to 5 can be distributed.With increasing numbers of robotaxis andcommoditization of sensor technology(especially LiDAR),robotaxis will see asignificant dropin SW and electronics costs by 2030,improving the business case for them.Premium SAE AV Level 3 vehicles with PHEV powertrainElectronics components in these cars will slightly devalue between 2025 and 2030 dueto scaleeffects.The largest drop in individual contribution to cost will happen in SW asstandardization and application of SWon alarger vehicle base at nearly zero marginal costsallows for better distribution of initial development costs.Thus,market growth can be strongly attributed to the increasing penetration of vehicleswith higher SAEAV levels and electric drive vehicles(xEVs).The production numbers of carsequipped with SAEAV Level 3 are expected to grow from somewhere on the order of 100,000Level 4 to 5vehicles produced per year will surpass-5 million in 2030.Finally,the worldwideshare of EVs-hybrid electricvehicles(HEVs),PHEVs,and BEVs-produced islikely to growfromless than 4 percent in 2020 to more than 20 percent in 2030The growing base of cars equipped with ADsystems or electrified powertrains highly relyingon SW and electronics will drive market growth and open opportunities for companies in thissphere.In the following chapter,we will explain the trends and drivers of growth in each of thecomponent groups shown in Exhibit 2 in further detail.14Automotive software and electronics 20302.Key drivers ofthe automotivesector's changinglandscape010011100011000001010While the overall market growth offers significant upsideacross all components,factors like AV penetration andpowertrain distribution will impact component groupsdifferently.Yet most of the components show strongsensitivity to those factors as well as the total numberof produced cars.Our detailed bottom-up model of theautomotive SW and E/E market allows us to identify andquantify the impact that the core drivers (i.e.,ACES trends)will have on the market dynamics described above.We will explain these drivers in the following chapter.2.1 Software:the global automotive software market will showdynamic growthOur analysis of the automotive SW market combines a functional grouping of SW functionalitywith avalue chain perspective.From a functional point of view,the market can be divided intoseveral SW domains along the technology stack.The OS and middleware are the low-levelSW components that enable HW/SW separation and implement low-level functions.TheSWfunctions running on ECUs,DCUs,or smart sensors can be grouped according to theirfunctional domain:powertrain,chassis,energy,body,ADAS/AD,infotainment,middleware,OS,connectivity and security,and connected services.For each domain we have analyzedhow the SWdevelopment effort will evolve by 2030,depending on the complexity of the SWfunctions and influence of ACES trends.From a value chain perspective,there are three main phases of the SWdevelopment processto be considered:implementation of core functions(including adaptation of functionality forspecific vehicle platforms),validation and verification of intended functionality,and systemintegration of SW modules.Our analysis has considered how the ratios between these phasesvary depending on the functional domain-e.g.,safety-related functions contain a highershare of validation and verification in the total development effort.Some domains likely to grow strongly due to ACES trends,others to remain mostlyconstant or hit a plateauExhibit4 shows the breakdown of the automotive SW development efforts by the dif ferentdomains and tech-stack elements.Overall marketsize is expected to reach-USD84billion by2030 and therefore more than double over the ten-year period from 2020when the market sizeisestimated at-USD34 billion.While overallSWdevelopment is expected to increase,thiswillprobably not be the case for all vehicle SW functions.Particularly,development related toICEpowertrains is likelyto increase at only 1.5 percent year over year,and the market for chassis-related SW is expected to stay almost flat until2030.If the effect of a labor cost increase iscontrolled for,development effort for the chassisdomain isexpected to decrease by-2 percentyear over year as fewer ICE vehicle platforms are developed and the focus shifts to BEVs.Exhibit 4Breakdown of SW development efforts into domainsUSD billionsCAGR2020-3084Total+9%8OS and middleware+119%9Body and energy+10%636Powertrain and chassis618Infotainment,connectivity,security,+99%5connected services34438ADAS and AD+119%32152020252030SOURCE McKinsey analysis16Automotive software and electronics 2030In turn,boosted by ACES trends such as increased connectivity,the pursuit of AVs,andelectrification,other domains are expected to grow significantly.Functions in areas likeAD,connected services,energy,or infotainment will gain complexity,as well as becomeincreasingly relevant for a broader share of vehicle platforms.OS and middleware represent a particularly interesting battleground.Specifically,establishedautomotive tier-1 suppliers will compete in these areas with tech players who have experiencein developing OSs in the consumer space.OS development efforts are focused on 3 OS types:event-driven,time-driven,and time-and-event driven,the last one being necessary for AD.We expect the market to converge towards asmall number of alternatives for each type,whichwill in turn limit the size and growth of this market niche.As already mentioned,developing the core SWfunctionality is only the first step in thedevelopment process.The important subsequent processes are customization for thespecificvehicle platform,followed by validation,verification,and integration.After start ofproduction(SOP)there is the maintenance of the SW,which is becoming more and moreimportant and for our analysis has been treated as part of the normal development process.Combined,all of these stages increase SW development costs well beyond base costs forfunction development,as depicted in Exhibit 5.Increasing software complexity and broader deployment of vehicle platforms tounderpin growth of software market until 2030Three key factors contribute to the strong overall growth of the SW market:increase in SWcomplexity in the domains most influenced by ACES trends,customization effort for integratingfunctions ina growing number of platforms,and growing labor costs for SW developers.In the upcoming years,SWwill become one of the strategic development areas for the auto-motive sector.This is because the continuous expansion of vehicle functionality-becomingmore connected,managing the electric powertrain,AD-is enabled by increasingly powerfulSWjust as much as by HW.These developments are mutually reinforcing.Take the domainsof infotainment and connected services as an example:once vehicles are able to driveExhibit5Split of SW market into SW development,integration,and validation/verificationUSD billionsCAGR2020-3084Total+9%10Integration+99%6224Validation and verification+10%873441050Function development+10%37212020252030SOURCE McKinsey analysis