Mercedes enlists Google’s help in hunt for software billions

Mercedes-Benz has tapped Google to assist with a reboot of software-based features it’s expecting to generate just under €10bn (R193.6bn) 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 line-up and keep vehicles updated throughout their lifespan, the luxury-car maker said Wednesday. Mercedes is working with select partners including Alphabet, Nvidia and Luminar, 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,” CEO Ola Källenius said on Wednesday 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 their decades-old hardware expertise. Last year, Volkswagen 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 $700bn (R12.7-trillion) by 2030, UBS Group estimated last year.

Mercedes expects to spend 25% of its research & development budget on software by 2025. Last year, the company generated more than €1bn (R19.3bn) 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 co-operating with Nvidia on software and chips as well as Luminar on laser-based radar systems for driver-assistance features, the company said Wednesday.

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 €1bn (R19.3bn) in earnings before interest and taxes on software sales by 2025, CFO Harald Wilhelm said at the Wednesday event. 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 130km/h. 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 and Apple, which has nascent plans to build a car of its own, Bloomberg News previously reported.

“We don’t have an antagonistic relationship with any one of these tech players,” Källenius added in the interview. “We work with them to take their valuable digital assets and put it into our system, so this is really a win-win.”

A precursor version of the new operating system will feature in the company’s revamped E-Class sedan that goes on sale later this year. 

More stories like this are available on bloomberg.com