How Daimler becomes a software and service company
“This digital transformation is in full swing at Mercedes-Benz. We are transitioning from car manufacturer to networked mobility provider, whereby the focus is always on the individual – as customer and employee. This is how we will continue to develop the company and thereby ensure our future competitiveness.” (Dieter Zetsche, CEO Daimler, 2015)
History of Daimler
In 1885, Carl Benz released the Benz Patent Motor Car, which is considered to be the world’s first roadworthy automotive. Around 130 years later, Daimler is today one of the largest and most successful car manufacturers. Over 280,000 employees built around 2.85mn vehicles in 2015, including cars, vans, buses and trucks .
While for years the focus of car manufacturers like Daimler was on selling the cars as a product itself, the market is shifting towards a service-oriented business that leverages todays’ digital possibilities.
From cars to software and services
Figure 1 shows the evolution of the Mercedes E-Class over the last 80 years. It changed a lot in terms of design, technology, and security features. For many years those product characteristics were the sole competitive advantage among the car manufacturers and the reason for customers to buy them.
In 1977, General Motors Oldsmobile released the Toronado, the first production car that incorporated embedded software. It had an electronic control unit (ECU) that managed electronic spark timing. Just 4 years later in 1981, GM had deployed about 50,000 lines of engine control software code across their entire domestic passenger car line. Other auto manufacturers followed the trend and developed similar software for their models. Also Daimler cars like the Mercedes-Benz S-class depend today on millions of lines of code running up to 100 networked ECUs throughout the body of the car which control and monitor everything from the powertrain to the airbag system . Even more advanced is the model applied by Tesla. After enabling autonomous driving as revolutionary feature via a software update, Elon Musk just announced that another update in December will improve the off-the-line acceleration of both the Model S and Model X .
After adding features and improving traditional car characteristics like acceleration through software, how does the future look in terms of car digitization?
Digitization initiatives at Daimler
Daimler is digitizing its operating model on two frontiers: internally (i.e. car production) and externally (i.e. towards the customer).
Especially for the design of cars, Daimler is leveraging digital tools. Long before a prototype of a car is built and tested in the wind tunnel, comprehensive Big Data models combined with computer aided design solutions are used to create and evaluate digital prototypes. Afterwards, augmented reality devices, such as the google glass, help employees in manufacturing to built the cars in a more effective and secure manner. Both examples show how the traditional production process at Daimler has been disrupted through digitization and will further change with future technologies.
A more visible change to the operating model and the value for the costumer happens to the cars themselves as figure 2 visualizes. The shown concept car combines autonomous driving and an electric engine. Furthermore, through networking technologies, future cars like the shown one will communicate with each other and make the driving experience more efficient and secure.
Also the business model of the car industry is affected by digitization. Mercedes introduced the concept of the digital showroom. Customers can either from home or at any local vendor use virtual reality glasses to drive different cars without actually sitting in one. This helps to experience specific configurations and encourage an actual purchase. Another idea is to equip every car with every possible feature, but use software to unlock only the ones the customer paid for. The business model could change completely if customers would only pay for a feature (e.g., seat heating) while they are using it .
While all those innovations seem to have a positive impact on operating and business models of car manufacturers, it is important to keep the customer behavior in mind. Many car drivers, particularly in Europe, value traditional features of a car (e.g., engine, chassis etc.). This especially applies to fans of motorsport. Therefore, the manufactures need to manage the pace of new innovations to ensure that customers can slowly adapt.
 Charette, R. N. (2009). This car runs on code. IEEE spectrum, 46(3), 3.
Student comments on How Daimler becomes a software and service company
Thank you Fabian, great post. I personally find this a really interesting, albeit complex topic. Certainly, in the near- to medium-term digitization has mostly positive effects for auto manufacturers, as they – as you described – improve their operating model (by enhancing the design and the development process) as well as their business model (providing the safest, best performing and most convenient cars to their customers at any given price point).
Having said that, however, I think car experts are not entirely sure yet what digitization will mean for OEMs in the longer-term (5-10 years). One obvious question mark is around how autonomous driving will impact the buying behavior or premium car brands such as Daimler. Some voices argue that when the task of driving gets “taken away” from the driver, the emotional bond between the car and the driver/owner gets diminished. This becomes most apparent when thinking about performance cars: who would shell out $200,000 for a self-driving Ferrari that coasts along the highway and within the city at the tightly regulated speed limits that the autonomous cars of the future will likely have to follow? On the other hand though Daimler with its strong focus on not only performance, but also on safety and interior feel might fare better in this shift than Ferrari. But then again it raises the question what consumer will be really willing to pay for in the future. Nicely designed cabins with fancy leathers (which in theory many firms can produce) or world class machine algorithms and sensor integration which makes cars safer? The latter is much more likely to come from a Google for example than from Daimler.
But I think there is still hope for a bright future for large-scale premium OEMs:
First, even though the “Uber-ization” of transportation – further accelerated through autonomous vehicles as cost/mile will decrease significantly – will likely result in a strong decrease of economic car ownership in general, premium OEMs might benefit from the remaining buyers in the market as they trade up. These buyers will likely be families with 3 or more people in one household that will rely on only one self-driving to shoulder the majority of the family’s trips as the car can go back and forth between various locations during the day. Since only one car will need to be bought instead of 3 or more, buyers are likely going to trade up to the premium brands for more safety and a nicer passenger experience.
Second, European OEMs have – through the acquisition of mapping provider Nokia Here in 2015 – started to develop a shared platform around mapping data and software development required for autonomous driving. The autonomous driving capabilities coming out of this partnership will hopefully be able play on eye-level with similar solutions offered by the tech-giants, enabling Daimler, Audi and BMW (the acquirers) to continue to offer differentiated products to their customer and extracting appropriate margins for those in return.
(Sorry for the long reply)
I’m glad to see all of the car makers transforming quickly to become software experts to not only innovate internally for production but also into self driving, as you wrote about. I think the safety of the self-driving capabilities will become a key differentiator for auto makers over the coming years. I’m hopeful that instead of a winner-take-all, sole operating system arising, key players such as Daimler will be able to implement unique systems that are safe and compatible with others. I also agree that some driving will continue to be “manned” for pleasure and certain consumers, but when self-driving cars exhibit much more safety that may become either illegal, prohibitively expensive, or available only in limited zones.
In the short run a physically different car will provide a marketing differentiator and warn other drivers. While the Figure 2 concept design is interesting, for the medium-run a typical e-class is likely to be the more popular style. In the long run I could see the form evolving to enable new experiences such as sitting around a table in the car or laying flat to catch some sleep on the way to work. Toyota already exhibited this with their hybrid models. They started with a differentiated model so it was obvious when a consumer selected the green option, but then they seamlessly integrated into the traditional models like Camry’s and Corrola’s. Other makers have followed suit.