Mercedes enlists Google’s help in hunt for software billions

BLOOMBERG

Mercedes-Benz AG has tapped Google to assist with a reboot of software-based features it’s expecting to generate just under €10 billion ($10.6 billion) of additional revenue by the end of the decade.
The new operating system, to debut around 2025, will go into models spanning Mercedes’s entire lineup and keep vehicles updated throughout their lifespan, the luxury-car maker said. Mercedes is working with select partners including Alphabet Inc., Nvidia Corp. and Luminar Technologies Inc., but said it plans to keep a tight grip on technology to guard against revenue slipping away to tech competitors.
“When you build a software house, you don’t have to lay every single brick yourself or put up every single tile in the bathroom,” Chief Executive Officer Ola Källenius said in an interview with Bloomberg Television in Sunnyvale, California. “You’ve got to be in control as the architect, but leverage tech partnerships and make sure you work with the best.”
Carmakers have tripped up on developing their own software functions that are outside of their decades-old hardware expertise. Last year, Volkswagen AG delayed new electric Audi and Porsche models because it couldn’t get an accompanying operating system to work in time. The jury remains out on who will profit most from the transformation into rolling computers. Software-enabled automotive revenue will reach around $700 billion by 2030, UBS Group AG estimated last year.
Jefferies analysts welcomed Mercedes’s move, saying in a note that the carmaker’s competitive edge in software would help it offset a profit squeeze from the costly transition to electric vehicles.
Mercedes expects to spend 25% of its research and development budget on software by 2025. Last year, the company generated more than €1 billion in revenue from software-based offerings such as navigation and live-traffic services. The carmaker forecast that this revenue will be in the high single-digit billion-euro range by the end of the decade. It’s cooperating with Nvidia on software and chips as well as Luminar on laser-based radar systems for driver-assistance features, the company said.
Mercedes is also hiring more software talent, and is close to reaching a target of adding about 3,000 new engineers, Källenius said.
Nearer-term, Mercedes sees €1 billion in earnings before interest and taxes on software sales by 2025, Chief Financial Officer Harald Wilhelm said. That is split across existing infotainment and early offerings for autonomous driving. Mercedes disclosed that its agreement with Nvidia sees the chipmaker take half of net sales for autonomous software going forward.
“This is a combined risk and reward partnership that we think, not only technologically, but economically will is going to work really well for both parties,” Källenius told Bloomberg.
To keep margins strong through the EV and software transitions, Mercedes has shifted focus to its top-end vehicles like the G-Wagon sport utility vehicle. While this has paid dividends in the form of huge pricing gains, substantial discounts to flagship electric vehicles in China late last year suggest the company may have run up against limits to this strategy.
Aside from co-designing navigation with Google, which will be done via a licensing deal, drivers will have access to the YouTube app and hands-free driving in urban environments where regulation allows. The company is also continuing to work on automated driving for speeds of up to 130 kilometers per hour (81 miles per hour). Mercedes last month said it plans to offer its automated-driving features in the US for certain vehicles by the end of the year.
Executives said the carmaker will continue to talk and work with other tech companies that offer similar automotive software and products to those Mercedes is developing, Chief Technology Officer Markus Schaefer told reporters at the event. That includes Amazon.com Inc. and Apple Inc., which has nascent plans to build a car of its own, Bloomberg News previously reported.