Software Growth Sector for Auto Electronics Suppliers

Electronics are quickly penetrating the automotive industry as never before. Motor vehicles are being packed with modern infotainment systems, blindspot detection systems, cruise control and even self-driving systems such as automatic parking.

By 2030, it is estimated automakers could be spending as much as 50% of the total industry's input costs on electronics. The emerging autonomous-vehicle segment is sure to add to this trend.

Electronics-related industries account for a relatively small share of the total costs for automotive manufacturers, although automakers are among the top buyers for electronics producers.

For instance, 18% of all B2B television and radio receivers and sound and video recording devices in the U.S. in value terms are bought by the automotive industry, as well as 8% of all electronic components, valves and tubes.

In addition, a significant share of electrics/electronics used by automakers is produced inside the industry as secondary, or intermediate, production, as well as by Tier 1 and Tier 2 parts producers that then supply automakers with semi-assembled components.

The emergence of autonomous vehicles is likely to be slow and steady, both due to limited technological advancements and high prices. Autonomous vehicles initially are set to come into use as utility vehicles, such as taxis, trucks, commercial machines and the like, possibly operating in limited areas such as highways and in off-road applications such as mining.

Therefore, a sharp increase in electronics usage by automakers in terms of self-driving vehicles is unlikely to take place, although the growth is to be of a significant amount. This leaves plenty of time for electronics companies to decide whether they want to pursue success in the segment, eventually leading to competition in price and quantity terms, just like in other segments today, such as parking sensors or other automotive products.

The trend toward increasing levels of automation in the driving experience already is evident, with automotive spending on electronic components, valves and tubes soaring. Over the past decade, spending on electronic components was seen primarily in developed countries’ industries, which pushed the innovations forward and whose buyers were willing to pay extra for such upgrades.

In Japan, for instance, electronic components use increased by 26% in value terms from 2005-2015 while the industry itself recorded value growth of just 4% over the same period. This clearly shows that for electronics producers the automotive industry is becoming ever more important, while the emergence of autonomous vehicles is sure to strengthen these ties even more.

Although electronics hardware demand is growing in the automotive industry, the real battle to be fought will be on the software front. As was noted in the first part of the series, major tech companies already are testing software for autonomous vehicles. Having reliable software is the biggest challenge automakers have in order to be able to launch commercially viable self-driving vehicles, with the hardware already developed to an extent.

Among all technological advancements, sensor and communications systems are the most important. While the former is being tested by the tech companies, the latter is yet to appear. Communications in autonomous vehicles are expected to be rendered over the fifth-generation (5G) internet, thanks to up to three times faster speed and five times lower latency compared to the legacy 4G network. All this is crucial for autonomous-vehicle communication.

The first 5G network is expected to launch in 2018, although for common and wider use the network is unlikely to go live before 2020. Communication-products firms already are setting their sights on 5G usability in autonomous vehicles. Since 2015, for instance, Finland-based Ericsson, one of front-runners in the 5G development process, has partnered with automaker Volvo in the segment, focusing on machinery systems such as those used in mining.

All in all, we expect to see increasing electronics penetration in the automotive industry, as autonomous vehicles grow in relevance in the market. Although there are few signals the emergence of autonomous vehicles will start a new era for electronics companies, in today's slowing consumer-electronics production environment, it should become an appealing segment.

Autonomous-driving software is set to see large-scale funding channeled into it, and will provide the most added value to producers in the foreseeable future.

Justinas Lasinskas is an industry analyst at U.K.-based Euromonitor International.