Automotive Unbundling

There is a hierarchy in the automotive industry that has come to be over the years. The brands that actually sell vehicles to customers are known as the OEMs(Original equipment manufacturers). As vehicles became more and more complicated, OEMs began to outsource development and manufacturing for specific components to specialists. They are known as Tier 1 suppliers. Who in turn have arrays of suppliers delivering to them. Usually, they are all clubbed as Tier 2 suppliers from the OEM's point of view.

Today, the automotive industry is on the cusp of unbundling to allow even smaller and more bespoke players to enter the playing field. Unbundling refers to the practice of breaking down a complex product or service into its constituent parts, allowing companies to specialize and focus on specific areas of expertise. In the context of the automotive industry, this means that startups and other companies can offer highly specialized services, such as battery management or data analytics, rather than trying to compete with OEMs on every front. Software is not in the first nature for most OEMs and that is where these startups have an advantage. Existing suppliers are heavily dependent on OEM projects, which means they are more likely to be a lagging indicator of a trend than to be the pioneers themselves. But startups on the other hand have a chance to break that.

As more and more vehicles become connected and autonomous, the software that drives them will become increasingly important. The amount of software that is in an average vehicle is exponentially growing. The unit economics of software is what makes all this even remotely possible. It is the same forces that were behind Netflix disrupting cable TV.

Manufacturers are rushing to introduce their own app ecosystem to their vehicles. The main reason cited by most manufacturers is to control the experience of their users and to create additional touchpoints for their brand. Especially, with all the conglomerates choosing a strategy of using common platform for vehicles, cars are beginning to look even more similar. We will begin to see automotive-first apps. Apps that are designed and built around the vehicle as the primary device. Currently all the apps that we see in the modern vehicle are apps that you would see in a smartphone adapted for the vehicle.

Moreover, the shift towards electric vehicles is creating new and niche use cases for software, which are yet to be explored fully. Startups are already emerging in this space, targeting areas such as charging infrastructure(ChargePoint), battery management, and fleet management(AutoFleet).

With the advent of new technologies, such as electric vehicles and autonomous driving, there has been a surge in funding and attention on this sector, leading to new business models and ideas that promise to transform the way we think about transportation. In the recent years, venture funding has been on the rise in the automotive industry. VC's have identified that there is potential for startups to actually compete for a piece of the business.

Large tech companies have shown a lot of interest too in the automotive business and they are using two key strategies to expand their business. Either to build an in-house sub-company or to acquire (Apple acquiring drive.ai, Waymo acquiring LatentLogic) a company in a niche that is strategically valuable to the parent company. The latter is not uncommon and is helping drive up valuations of early stage startups in the automotive space.

Unbundling in the automotive space is not just about having apps in vehicles or having more SW vendors. It is the shear increase in the number of players in the industry and the economics of a completely different SaaS industry coalescing with that of traditional automotive companies.