The forces disrupting the automotive industry—known collectively as ACES (autonomous driving [AD], connected vehicles, the electrification of the powertrain, and shared mobility)—have gained significant momentum. The COVID-19 pandemic and its aftermath have accelerated the future of mobility, with profound effects on customer preferences, technology adoption, and regulation. New participants continue to enter the electric-vehicle (EV) market, and many have higher valuations than incumbent OEMs. Automotive companies and their suppliers are investing heavily in software and electrification.
These disruptions are enabled by and contribute to the rapid growth of automotive software and electronics. By 2030, the global automotive software and electronics market is expected to reach $462 billion, representing a 5.5 percent CAGR from 2019 to 2030. In contrast, the overall automotive market for passenger cars and light commercial vehicles (LCVs) is projected to grow at a compound annual rate of 1 percent in the same period—from 89 million units in 2019 to just 102 million units in 2030. This reality reflects a significant shift in the future of mobility, propelled by the expansion of urban-access restrictions (such as bans on internal combustion engine [ICE] vehicles), higher adoption of nonownership models (including car sharing and micromobility), and disruptive technologies (such as urban AD). In this environment, automotive companies are looking to software and electronics as the next frontier to transform the industry.
Building on our previous report,1 our latest research provides an updated perspective on the trajectory of the automotive software and electrical and electronic components (E/E) market through 2030 (see sidebar, “How we derived our insights”).
The adoption of driver assistance systems and AD will be fueled by changing customer preferences; regulations that prioritize safety and allow higher levels of autonomous driving; and technology breakthroughs, such as the availability of high-performance computers, advanced software, or light detection and ranging (LiDAR) sensors. For example, we expect strong annual growth of up to 30 percent for Level 2 advanced driver assistance systems (ADAS) through 2025, largely driven by regulations that require new vehicles to have these sensors. By 2030, we estimate that 12 percent of vehicles will be equipped with Levels 3 and 4 AD capabilities, compared with only 1 percent in 2025.
While passenger car and LCV sales will increase slightly from 89 million vehicles in 2019 to 102 million in 2030 (just higher than 1 percent CAGR), the automotive software and electronics market is projected to grow at nearly four times that rate during the same period. Making up the largest share of the market, electronic control unit (ECU) and domain control unit (DCU) sales are expected to reach $144 billion by 2030. The second-largest share of the market will be software development (including integration, verification, and validation), with a revenue potential of $83 billion by 2030. Power electronics is by far the fastest-growing component market, with EV adoption fueling an expected CAGR of 23 percent through 2030. Sensors are projected to grow at a compound annual rate of 6 percent, driven by AD/ADAS sensors.
The automotive software market is projected to more than double in size from $31 billion in 2019 to roughly $80 billion in 2030—a CAGR of more than 9 percent. ADAS and AD software will account for much of this growth and make up almost half the software market by 2030. Timing also plays a role: the development of software for higher-level autonomous driving (for example, urban AD) will precede market introduction by several years.
Infotainment, connectivity, security, and connected services will also grow at pace with the overall software market, becoming the second-largest software market by 2030. This growth is driven by a high share of connected vehicles and demand for features such as in-car payments, location-based services, and music streaming. The market for body and energy software will exhibit a CAGR of 10 percent as a result of increasingly stringent energy management requirements for EVs and an increasing number of premium comfort features in lower vehicle segments.
The ECU/DCU market is projected to grow to $144 billion by 2030 and is mostly driven by growth in DCUs. In 2019, DCUs made up less than 1 percent of the combined ECU/DCU market. We expect this share will increase to 16 percent by 2025 and to 43 percent by 2030. However, ECU/DCU market growth will be cut back by decreasing unit costs in some domain types and the consolidation of ECUs into DCUs.
The centralization of the E/E architecture will continue to drive demand for more complex and powerful DCUs at the expense of traditional ECUs. DCU adoption will be highest within the infotainment and AD domains—both of which are expected to exceed 70 percent adoption by 2030.
We expect the automotive sensor market to grow from $23 billion in 2019 to $46 billion in 2030, primarily driven by growing demand for ADAS and AD sensors—specifically for LiDAR, cameras, and radars. Traditional powertrain sensors will experience a slight decline during this period, in line with the ICE automotive market. Growth in new sensors for electric drives will not be able to offset the decreasing demand for sensors in ICE vehicles, which have higher sensor content per vehicle. Body sensors represent a growing market due to new comfort features and higher demand for existing comfort features—especially in smaller vehicle segments and at nonpremium OEMs.
The future is here for automotive software and electronics. As the software-defined vehicle becomes reality, automotive companies across the value chain must act quickly and decisively to harness its potential. With a clearer outlook on market dynamics, automotive players can take a number of strategic and operational actions to adapt to the future landscape.2
Automotive OEMs must develop and refine their strategic perspective based on their resources, capabilities, and industry positions. In response to increasing per-vehicle hardware and software costs, OEMs can consider partnering with other OEMs to create economies of scale, making software reusable across platforms, and simplifying the E/E architecture. Automakers should also strengthen their software development capabilities by hiring and developing the right talent and building their competencies along the full technology stack (including middleware, the operating system, the hardware abstraction layer, and cloud computing). Breaking down silos and creating a cross-functional development organization can improve efficiency and speed up time to market.
Tier-one suppliers will need to redefine their software and E/E strategy to respond to the new capabilities and sourcing decisions of OEMs. By positioning themselves as thought partners to OEMs, they can work in tandem to define the future E/E architecture and shape the requirements. Suppliers can gain a significant advantage by investing in software development and integration areas to capture a larger share of the growth. And similar to OEMs, tier-one suppliers will need to break down domain silos and encourage cross-functional collaboration to stay competitive and respond to their customers’ changing needs.
ABOUT THE AUTHORS
Ondrej Burkacky is a senior partner in McKinsey’s Munich office, where Michael Guggenheimer and Martin Kellner are associate partners; and Johannes Deichmann is a partner in the Stuttgart office.
Mapping the automotive software-and-electronics landscape through 2030
By Ondrej Burkacky, Johannes Deichmann, and Jan Paul Stein
The market for automotive software and for electrical and electronic components is expected to grow strongly in the next decade. What must companies know to succeed?
Autonomous driving, connected vehicles, the electrification of the powertrain, and shared mobility (also called the ACES trends) are mutually reinforcing developments in the automotive sector. Combined, they are disrupting the automotive value chain and affecting all its stakeholders. Moreover, they are also significant drivers of the expected 7 percent compound annual growth rate in the market for automotive software and for electrical and electronic components (E/E), which is projected to grow to $469 billion, from $238 billion, between 2020 and 2030. At this rate, the software and E/E market is expected to outpace growth vastly in the overall automotive market, which is estimated to grow at a compound rate of 3 percent in the same time frame. Software and electronics have therefore become the focus of most automotive companies and their executives.
In this context, we offer a perspective based on our extensive research and analyses (see sidebar, “How we derived our insights”) on three crucial questions:
- What are the specific forces behind the automotive sector’s software and E/E growth dynamics and changing landscape through 2030?
- How will these forces affect the automotive industry’s long-established value chains?
- How can players inside and outside the industry optimally prepare for upcoming market developments?
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Our new report, Automotive software and electronics 2030, looks closely at these issues. The remainder of this excerpt outlines some high-level findings.
The automotive software and E/E component market will grow rapidly, with significant segment-level variation driven by the disparate impact of the ACES trends.
The overall trend toward a more centralized software and E/E architecture will drive the market’s expected expansion through 2030 (projected at a 7 percent compound annual growth rate). Significant variation is expected across the market’s segments (exhibit).
Power electronics is expected to occupy the high end of the market’s growth, at an annual rate of 15 percent. Autonomous driving will fuel growth in the software and sensors segments, expected to reach 9 percent and 8 percent, respectively. The segment that includes electronic control units (ECUs) and domain control units (DCUs) will continue to hold the largest share of the market, but growth here is likely to be relatively low, at 5 percent. While ECUs and DCUs will be used increasingly in autonomous-driving applications, price decreases from efficiency gains will counterbalance growth in the segment. Electric-vehicle platforms will be a new market for high-voltage harnesses, but the demand for low-voltage ones is expected to shrink, so the harness segment will grow at the slowest rate.
A separation of hardware and software would fundamentally change the dynamics of the automotive sector’s landscape of players and value.
The days when OEMs comprehensively defined specifications and suppliers delivered them may be nearing an end. Neither OEMs nor traditional suppliers can fully define the technology requirements of new systems. Codevelopment between OEMs and suppliers is expected to become not just prevalent but also necessary. In addition, tech-native companies are expected to enter the space more boldly—something that will become easier as hardware and software sourcing become more separate. This separation would break up established value pools, reducing barriers to entry. For OEMs, the separation would also make sourcing more competitive and scaling less complex, and it would provide a standardized platform for application software while maintaining competition on the hardware side.
Both archetype-specific and cross-player strategies can position companies for success in the future landscape.
The strategic moves for OEMs include plans to keep the ever-growing cost of hardware and software development under control and to establish more agile cross-functional development organizations. Cross-functionality would benefit tier-one suppliers too, and so would actively partnering with OEMs to define their E/E architectures. Tier-two suppliers will want to specialize further and scale within an attractive niche to thrive even as many components become commodities. All players will benefit from building their software-delivery and E/E-architecture capabilities, embracing the latest technological innovations (including those related to the user interface, the user experience, and analytics), and abandoning absolutist notions of competition while analyzing the benefits of partnership within an emerging ecosystem.
Download Automotive software and electronics 2030, the full report on which this article is based (PDF–6MB).
