Volkswagen spends 215 billion on R & D software, and Stellantis expects 140 billion profit for car companies to make money instead of selling cars?

After a bigger management change than ever before, Volkswagen group CEO Herbert Deiss (Herbert Diess) has been retained and will be in charge of CARIAD, the software division, from January 1, 2022.

CARIAD is a software company announced by Volkswagen on March 30 this year. Its predecessor is Car.Software-Organisation (CSO), the software division of Volkswagen Group, which was founded in 2020. The acronym of the new name comes from Car. I Am Digital (car, I am digital), according to the plan, by 2025, CARIAD will launch a software platform suitable for all brands and models of Volkswagen Group.

Although it seems to the outside world that being in charge of such a new company is something of a downfall for Deiss, Dees enjoys it. "I have never lost my motivation because the group is so important to me." After completing the management reshuffle of Volkswagen Group on December 9, Deiss expressed his attitude through the group's official Twitter.

Deiss's certainty is well-founded. Of the investment in the 70th round of plans for the next five years announced on the same day, 89 billion euros were invested in electric vehicles and digitization, accounting for 56 per cent of Volkswagen's future investment of 159 billion euros. Among them, the cost of products including self-driving and the company's digital transformation reached 30 billion yuan (215 billion yuan), an increase of 10 percent over the previous plan, accounting for nearly 1/3 of the 89 billion euros invested in new technology.

The reason why Volkswagen, or Deiss, throws so much weight on digitization lies not only in the car digital experience that has been criticized after the launch of Volkswagen's first smart electric car, ID.3, but also in Deiss's own recognition of its future main competitor, Tesla.

For Volkswagen management as a whole, maintaining a high sales scale and sustained profitability is a responsibility to the shareholders of Volkswagen Group, and Tesla's profit model has taught Deiss and his colleagues a good lesson.

In the third quarter of this year, after deducting carbon points trading income, Tesla's gross profit margin was close to 29%, which is nearly 10 percentage points higher than Toyota's gross profit margin of 19% in the same period. Mark Delaney (Mark Delaney), an analyst at Goldman Sachs in the United States, commented that "do not rely on points, only rely on cars to create new profits, is expected to maintain strong profitability in the future."

Tesla's gross profit margin is much higher than that of traditional cars, and a large part of it comes from Tesla's "software fees". The software revenue mainly includes OTA, which controls online software upgrades (Tesla has made a profit ahead of other car companies), as well as improving the self-driving system of vehicles, so as to get the corresponding monthly fees paid by customers.

The marginal cost of the software is close to zero, which allows Tesla, who insists on self-research on the software from the beginning, to walk out of a profit model that is very different from that of the traditional car companies.

This point has also been recognized by Qin Lihong, president of Lulai Automobile. "(Tesla) the gross profit margin for the third quarter has reached about 30%, and the gross profit margin has gone up, indicating that the systematic cost advantages brought about by its previous self-research and industrial layout are beginning to show." Qin is not shy about it. "I think this is something we should learn from."

It's not just Deiss that focuses on software self-research. Volkswagen's plan to invest 30 billion euros in software comes a day after Stellantis, the world's fourth-largest automaker, made the same decision. Stellantis announced at the Group Software Strategy launch Day on December 7 that it plans to invest more than 30 billion euros in software and electrification transformation by the end of 2025.

Corresponding to this huge investment plan, Stellantis expects the annual revenue from its "software enabling products and subscription services" business to receive about 4 billion euros in 2026 and about 20 billion euros (about 140 billion yuan) in 2030.

"our electrification and software strategy will support the transformation of the Group into an industry-leading sustainable mobile travel technology company, and the Group will take full advantage of the related business growth brought about by OTA's remote online upgrade features and services to provide our customers with the best experience." In the view of Tang Weishi (Carlos Tavares), CEO of Stellantis Group, OTA, based on software technology will become an important source of income for the group in the future.

Monitoring data from the Gao Gong Intelligent Automobile Research Institute show that from January to October this year, the number of new cars carrying OTA in China was 5.8831 million, an increase of 77.03% over the same period last year, and the front loading rate was 35.71%, an increase of more than 12 percentage points over the same period last year. Among them, 3.3263 million of the 2021 new cars are loaded with OTA, accounting for more than 50 per cent.

According to Volkswagen's latest plan, nearly 1/3 of its global mobile market revenue is expected to come from software-based services by 2030. Obviously, for software services including vehicle OTA, the future is not only a breakthrough for car companies to seek business model innovation, but also a "heavy asset" burden.