Volkswagen revives struggling tech unit crucial to its future

Just two years ago Volkswagen staff feared the death of their internal software unit Cariad, with its struggles denounced by group chief executive Oliver Blume as “one of the most pressing issues” at Europe’s largest carmaker.

But after a “complete reset” of its software strategy with new partners and a restructured internal team, the German group is betting it can be nimble enough to take on Tesla and newer players from China with affordable electric vehicles that will get smarter and better over time.

“We did our homework,” Blume said at a recent Financial Times event in Munich. “Now, having defined a clear software strategy . . . we are coming to a great cost positioning” with scale advantage, he added. 

The new strategy comes as software and computer systems displace the engine as the defining feature of modern vehicles — and a key source of revenues.

Following disastrous initial efforts to develop software on its own, Volkswagen turned to partnerships with Xpeng in China and Rivian in the US. The new all-electric Porsche Macan and the Audi Q6 e-tron, whose releases were two years late because of delays at Cariad, are now equipped with the unit’s latest software architecture.

Cariad has survived and is now tasked with maintaining and updating VW’s existing software platforms and integrating new ones to be developed by Rivian across its sprawling brands.

It is also in charge of developing core technologies such as autonomous driving, infotainment systems and cloud computing services that are crucial to obtaining customer data. 

Cariad chief executive Peter Bosch told the FT the unit was “increasingly better” at bringing different skills and people together within a sprawling organisation to centralise its software efforts. 

“I’m a bit relieved we managed to achieve this within two years, because it’s quite a massive transformation,” he said. 

The shift from a “make strategy” to a plan to “buy” the new software architecture was orchestrated by Blume, who took over as chief executive in 2022 after predecessor Herbert Diess was ousted, partly as a result of persistent problems at Cariad that led to product delays and cost overruns. 

A major overhaul of the software unit, which became one of Blume’s biggest priorities, continued until early this year, when Volkswagen booked a €400mn charge largely as a result of restructuring at Audi and Cariad. 

Meanwhile, the Cariad team initially tasked by Blume with developing its own architecture for software-defined vehicles has largely been dissolved after being told to merge with the Rivian team.

Chief software engineer Sanjay Lal, hired from Rivian in 2023, left the company as did many of his 200-strong team, according to one person with direct knowledge of the matter. 

Analysts say Volkswagen’s claims for technology supremacy will be further tested as it launches a new vehicle in China using Xpeng software next year and a €20,000 electric car powered by Rivian’s technology in 2027. 

Even if Cariad was no longer developing the software platform on its own, Michael Tyndall, senior global autos analyst at HSBC, said there was a case for Cariad’s continuing existence as a “gatekeeper, integrator and architect” of the technologies to be made by VW’s outside partners. 

However, he added that “it’s not clear to me at all where Cariad begins and Rivian ends, and vice versa”, noting that Rivian was originally supposed to be in charge of infotainment systems, not Cariad. 

HSBC expects Cariad to remain lossmaking, with some improvement in its financial performance from next year because of a reduced headcount and cost base at Cariad as well as a “modest” increase in revenue from maintaining and updating Cariad’s software in ID3 electric vehicles as well as the new electric Porsche and Audi models. 

The partnership model also leaves VW highly dependent on Rivian, which it has pledged more than $5bn. “What happens when you outsource your core technology and you can’t pivot?” warned one person close to Cariad. 

Their first priority is developing the architecture for Rivian’s R2 sport utility vehicle, due to start production next year, after which it will turn its attention to Volkswagen.

Work at the California-based joint venture, whose workforce has swollen to more than 1,300 from 900 when founded last year and which is set to open an office in Berlin, was “making significant strides”, Volkswagen told the FT.

Rivian also has ambitions to sell its software to other carmakers. 

“We really believe that what we’re building together with the VW Group can become a reference technology platform for the entire industry, not just for Rivian and VW,” Wassym Bensaid, Rivian’s chief software officer and co-CEO of its joint venture with VW, said at the FT event.

While the early software troubles came as VW struggled to adapt quickly enough to the advent of electric cars, the group is also grappling with slower uptake than anticipated. 

The company last month said it would take a €5.1bn hit to its profits from Porsche’s decision to push back the release of new electric cars and extend the lifetime of its combustion engine models. 

New software developed by Rivian will need to be adapted for petrol and hybrid cars, as has been done by rivals including BMW and Mercedes-Benz, especially in the wake of a slower than anticipated shift to electric vehicles in the US. 

“What the JV will offer will be far more attractive to other carmakers if it was to be agnostic to power train,” Tyndall said.

A successful rollout of the software architecture developed with Rivian would be a “significant opportunity” for Volkswagen, said Bank of America auto analyst Horst Schneider, but previous promises of a big leap in software have not always been borne out.

“Ahead of these launches people always think maybe this time it works . . . I hope this comes true,” he added.