Tier One automotive suppliers have gradually lost their unique value proposition as integrators due to the ongoing decoupling of hardware and software in the automotive industry and the advent of open software platforms with pre-built automation extensions, such as Android Automotive OS. After Aptive and Bosch, Harman is the lasted Tier One supplier to reposition by establishing the "Consumer Experiences: Automotive Grade" approach.
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Harman's Automotive-Grade Consumer Experience
Harman, an audio electronics company, is repositioning its role in the automotive industry, launching the Automotive-Grade Consumer Experience line, consisting of 'ready' cockpit and sound platforms to help carmakers decrease time to market while delivering cutting-edge user experience. The aim is to provide off-the-self infotainment to carmakers that do not have the resources or cannot afford long development cycles of in-house software development. The initial focus seems to be Electric Vehicle (EV) startups, especially in China, who have lean product lines, and hence do not require high customization, and face fierce competition from players offering high-end infotainment systems at short development cycles of eight-twelve months. Harman's ultimate goal is to leverage Samsung's (its parent company) expertise to deliver the innovation and agile structure from the consumer electronics industry to the automotive industry.
The Impact of Digitalization on Tier One Automotive Suppliers
The traditional role of Tier One suppliers was to integrate software and hardware from Tier Two suppliers into a "silver box", i.e., Electronic Control Unit (ECU), supplied directly to carmakers. Nevertheless, this unique value proposition is gradually fading with carmakers' ongoing adoption of software-defined vehicle architecture that decouples hardware from software. Moreover, with the advent of open software platforms with pre-built automotive extensions and Application Program Interfaces (APIs, e.g., Android Automotive OS, TomTom IndiGO), Tier Two suppliers can develop software and hardware that are easily integrated and can be supplied to carmakers directly.
The once unique role of Tier Ones is being threatened by chipmakers and software players engaging in direct relationships with Original Equipment Manufacturers (OEMs), OEMs developing software-stack in-house, and tech players with aggressive automotive strategies.
While the role of Tier Ones as integrators will not be entirely sidelined, their hardware platforms are becoming more commoditized. This opens up opportunities for tech players such as AWS, which has recently announced a direct collaboration with Stellantis to develop the company's STLA SmartCockpit, assuming some of the functions traditionally performed by Tier One suppliers. Silicon players and traditional Tier Two software providers are other winners of this trend as OEMs are starting to source hardware separately from the software. This is exemplified by the now frequent announcements of partnerships between carmakers and chipset players, such as Qualcomm's public collaborations with Renault, Stellantis, GM, Ferrari, Honda, and Volvo. Traditional embedded software suppliers are also reporting higher Requests for Quotes (RFQs) coming directly from carmakers without the intermediation of Tier Ones.
Therefore, to maintain their relevance in the value chain and profitability, Tier One suppliers must embrace the digital transformation in the automotive industry and carve out a new role for themselves. Software is becoming the central element of vehicles, and hence carmakers are looking for partners to support them in this digital transition. Tier Ones are especially well-positioned to become this partner due to their industry experience and deep knowledge of automotive applications and customers' needs. However, to become the transformational partner for carmakers, they must improve their software competencies and adapt their organizational process.
Aptiv is an example of a Tier One that quickly identified the disruptions in the market. The company heavily invested in software and redefined its organizational structure to accelerate time to market while reducing development risks, which enabled it to deliver the world's first automotive infotainment system based on Android Automotive Operating System (AAOS) with built-in Google Automotive Services. Bosch created the Cross-Domain Computing Solutions (CDCC), consolidating 17,000 employees from the company's automotive software and electronics areas into a single division exclusively focusing on the software-intensive systems that will power future vehicle architectures.
It is not clear yet how customizable Harman's new solutions are, whether they are developed in partnership with third-party solutions, or which part of the value chain Harman expects to compete. What is clear is that new products are just part of the new company mission, which will also encompass an organizational change to implement an agile, network-like structure that enables faster development cycles. Moreover, Samsung is expected to have a more active role in Harmans' activities. The company will share more information on these developments later in 2022.