Background
Tesla China will be rolling out an over-the-air software update for over 435,000 vehicles to address a “recall” connected to the Model 3 and Model Y’s position lights. Yet this recall process does not require offline interactions between engineers and consumers, rather it will be conducted virtually through over-the-air (OTA) technology, which greatly saves time and improves efficiency.
Currently, the automobile industry has witnessed a growing number of intelligent vehicles, of which OTA has been the ground technology. Automotive OTA technology makes it possible to improve user experience through constant updates of in-vehicle software.
Introduction
Over-The-Air (OTA) is a remote wireless upgrade technology. For automobiles, the OTA configuration comprises of three key components: device management systems, cloud service, and embedded devices on vehicles. Generally, automotive OTA can be divided into SOTA (Software Over-The-Air) and FOTA (Firmware Over-The-Air) based on the differences in upgrading objects. SOTA technologies enable automotive manufacturers to fix, maintain and improve vehicles through remote software updates downloaded to the vehicle from a cloud-based server. FOTA, however, facilitates wireless firmware upgrades on in-vehicle electronic control units (ECUs) that control the underlying hardware.
Market Size
Automobiles have been projected to be the next generation's intelligent consumer interfaces which incorporate both software and hardware components, after mobile phones. Consequently, the market size for automotive OTA products based on Internet of Things (IoT) is experiencing significant growth. China's OTA installation rate has thus been increasing due to the development of smart vehicles.
From January to May 2022, 3.12 million passenger cars in China were equipped with OTA, hitting an installation rate of 44.6% with a year-on-year increase of 16.2%. This showed an increase compared to 2020's passenger car installation rate of 22% and 2021's figure of 38%. By 2026, the OTA installation rate of Chinese passenger cars is expected to reach 88%, that is, 21.937 million passenger cars will boast OTA.
Driving Forces
OTA brings practicality, realizability and required agility for software-defined vehicles (SDVs).
Under the intelligence trend of vehicles, SDVs have created an opportunity for OEMs to mitigate risks and differentiate in the customer experience space with brand loyalty, novel business models, features, and experiences – all primarily enabled by software. The thriving of the automotive OTA market has been primarily driven by this intelligence trend, since OTA performs as a tunnel for realizing intelligent functions, and OEMs are actively seeking collaborations with OTA providers to enhance OEMs' manufacturing capabilities.
For OEMs, several questions can be addressed through applying OTA technology. From the product side,the traditional recall process is time-consuming and costly since it contains both complex online and offline procedures to be completed. Besides, algorithms and map information which are built inside vehicle hardware need constant technical escalations with the development of autonomous driving technology, an upgrading that relies on automotive OTA.
Moreover, OEMs' downstream consumers demand better product experience, which requires OEMs to perform continuous iterative development towards their products via OTA technology. For OEMs, with the increasing amount of in-vehicle software numbers and rising maintenance costs, these companies can no longer sustain their profits only through regular sales activities in the future, forcing them to search for new revenue streams which may possibly include charging options for software development and upgrading.
Technological advancements serve as the underlying basis for automotive OTA's development.
Centralized electrical/electronic (E/E) architectures, which ensure the complexity of future vehicle systems stays manageable, are becoming a future trend in replacement of today’s domain-specific E/E architecture in automobiles. This change results in 20% fewer embedded control units and 10% less material costs for newly-produced vehicles, providing a better implementation environment for performing OTA upgrades. In terms of data transmission, the application of 5G technology in vehicles has greatly increased the speed and quality, consequently improving OTA service capabilities.
Industry Chain
The upstream of the automotive OTA industry contains third-party OTA solutions providers, connected vehicles & automotive IoT solutions providers and content providers, whereas the midstream mainly consists of OEMs and the downstream primarily comprises of end consumers.
Applications of Automotive OTA
After SOTA, FOTA has been paid more attention to in today's automotive OTA applications.
Mr. Yu Ding, vice president and chief investment officer from ABUP, claimed that, the automotive OTA industry has gone through three development stages. At the initial stage, SOTA can easily achieve software upgrades, and numerous OEMs are equipped with such technology. Then in the second stage, through various upgrades of automotive firmware, FOTA can continuously improve a vehicle's in-car entertainment system, domain controller and chassis with a high technological barrier.
SOTA technology has appeared in the automotive market ever since 2012. Back then, SOTA was primarily for updating T-box, an intelligent in-vehicle interconnection terminal, or entertainment systems on a spare parts level for automobiles. Compared with SOTA, FOTA has a higher technological barrier, focusing on constant upgrades of automobiles' powertrain system, operating systems and vehicle safety via hardware refresh, a process which involves updates of the second and even third tier of automotive software architecture.
Enterprise-level OTA solutions have been proposed, reshaping OEMs' business models.
ABUP mentioned that currently in the third development stage, enterprise-level OTA, which refers to connecting and realizing each process of OEM production, from R&D, manufacturing to sales and after-sales customer service with the support of vehicle service platform (VSP) has been realized. Mr. Ding told us ABUP currently has three key pillars of business incorporating software product development (SOTA, FOTA, DOTA, VSP), services including OTA testing, operations as well as consultations, and content ecosystem establishment for vehicles.
One specific OTA application is DOTA, an intelligent cloud diagnostic service launched by ABUP, solves software problems through performing OTA updates on electric vehicles. In dealing with hardware issues, DOTA saves time and improves efficiency via scheduling appointments and spare parts needed by consumers in advance. In a word, DOTA will be a must-have feature for all vehicles in the new business model.
For OEMs, thanks to the emergence of enterprise-level OTA, SAAS will become an important income source for major companies in the future. Business models of automakers are changing, and the mode of hardware costization plus software profit continues to penetrate into the intelligent car market. Many companies thus have pre-embedded hardware in new models, and subsequently open functions through OTA updates, so as to obtain commercial profits.
Future growth potential lies in providing customized content, achieving industrial-level OTA.
As projected to be the future business growth focus point, providing customized in-vehicle content for consumers is becoming more and more important. Mr. Ding claimed that the core mission for ABUP is to bring the latest and customized content to clients and consumers; content, therefore, has been a key resource for the company. Upon reaching a strategic cooperation with Tencent Smart Transportation, ABUP has started expanding its business area to bridging OEMs' demands with content and IP providers ever since the second half of 2022.
From the perspective of future industrial development, industrial-level OTA will be achieved and implemented, ultimately forming an OTA ecosystem and connecting each party along the automotive industry chain, from tier 1, OEMs to consumers via providing software services in different OEM scenarios.
Competitve Landscape
The market is highly centralized, yet OEMs are self-developing OTA technology to compete.
Looking at the market structure, 20% of the companies choose to self-develop OTA, whereas 80% partner up with third-party OTA providers. The primary reason for OEMs who self-develop OTA, including Nio, Xpeng, Li Auto and Tesla, is the lack of mature suppliers back when they entered this market. Yet newcomers all choose to cooperate with third-party OTA providers.
Compared with OEMs' self-development of OTA technology, third-party OTA solutions providers possess several key advantages which help them stand out and secure a majority of market share.
First and foremost, Mr. Xi Gong, investment director and head of automotive industry of Jinbang Capital stated in an exclusive interview with EqualOcean, one key advantage is third-party providers' superior software development capabilities compared to traditional OEMs. Relying on stable supply chain configurations, traditional OEMs find it difficult to integrate different Tier 1 suppliers' software and ECUs, posing severe challenges for automobile safety.
Mr. Gong mentioned that another key advantage for third-party OTA providers is that, as an underlying technology which contributes little to realizing differentiation of user experiences, OTA technology is regarded with less emphasis by OEMs in the short term. At present, major attention from OEMs has been captured by supply chain issues, excavating consumer needs and so on. This leaves third-party OTA providers many opportunities.
Opportunities and Challenges
Software hardware decoupling draws on rising status of OTA solutions providers.
The industry has seen a major trend of software hardware decoupling, which transforms the original business collaboration pattern between both Tier 1 suppliers and OEMs. When decoupling has not been a worth-noticing phenomenon, hardware Tier 1 suppliers accounts for the largest portion in terms of value added, since traditional automobile ECUs are composed of automotive microcontrollers (MCUs) with fewer application scenarios in software development.
Yet with the inevitable trends of electrification and intelligence of vehicles, software Tier 1 suppliers has witnessed an increasing proportion of value added. Software no longer needs to rely on hardware, because a certain level of computing power can be attained via integration of ECUs and computing platforms, causing software hardware decoupling to happen. OEMs have thus gained larger bargain power along the chain, seeking directly for software Tier 1 suppliers instead of hardware Tier 1 suppliers, resulting in a drastic change in OEMs' supply chain settings. Therefore, software Tier 1 companies including OTA solutions providers will have higher status in the industry and huge potential.
Safety issues are still the major concern for the automotive OTA industry.
Vehicle safety is critical to OTA tech companies, and realizing automobile safety across products requires practical experience accumulation in the long run. Performing OTA updates on automobiles is prone to arising vehicle safety issues, for SOTA updates contain risks of information leakage and FOTA updates include dysfunctioning possibilities of vehicle hardware.
Moreover, with the increasing future emphasis on content providing for consumers, the problem of data privacy for consumers has also occurred. Mr. Ding told us that user data is sensitive in this industry, so companies typically will get consumers' consent before retrieving user data through terminals, before utilizing user data to see and determine future iterative development directions.
Conclusion
The market for OTA will continuously grow under the intelligence trend of automobiles and technological advancements, and OTA applications have thus been on the market, going through the initial SOTA stage, to the current FOTA and enterprise-level OTA development, hoping to achieve the future industrial-level OTA phase. Yet while with emerging opportunities for OTA tech companies, risks still exist. With OTA being a relatively newly-introduced concept, OTA tech companies need to seek new business collaboration models with OEMs, tackle possible challenges, and embrace industrial opportunties, ultimately facilitating their future development and growth.