The automotive industry is witnessing a significant shift in software procurement, with technology companies increasingly securing contracts directly from vehicle manufacturers as Tier-1 suppliers reduce engineering expenditure.
According to Tata Elxsi executives, supplier-side automotive revenues have faced considerable pressure over the past six quarters, driven by inflation, electrification costs and uncertainty surrounding vehicle production volumes.
Automakers Take Greater Control of Software Development
Original equipment manufacturers (OEMs) are increasingly bypassing traditional component suppliers to gain greater control over vehicle software, digital architecture and intellectual property.
The growing adoption of software-defined vehicles (SDVs) and cloud-connected technologies is accelerating this transition.
Key factors driving direct OEM procurement include:
- Greater software control: Automakers want direct ownership of digital architectures and intellectual property.
- Cost optimisation: Reducing intermediaries can improve coordination and manage engineering expenditure.
- Faster development: Direct collaboration can simplify software integration and development cycles.
- Connected vehicle capabilities: Over-the-air updates and cloud telematics require closer integration between automakers and technology partners.
Tata Elxsi Sees Growth from Direct OEM Contracts
Tata Elxsi’s leadership highlighted that growth in its transportation business has increasingly come from direct engagements with automotive OEMs.
Managing Director and CEO Manoj Raghavan pointed to strong momentum among non-group automakers in North America and India.
These direct relationships are helping technology service providers offset declining business from Tier-1 suppliers and establish more predictable revenue streams through longer-term contracts.
What This Means for Tier-1 Suppliers
The procurement shift could reshape the traditional automotive supply chain. Tier-1 suppliers, which historically bundled hardware and software solutions, may face growing pressure to redefine their value propositions.
Going forward, suppliers will need to strengthen software capabilities, demonstrate differentiated engineering expertise and establish closer partnerships with OEMs.
The Road Ahead
The move towards direct OEM procurement reflects a broader transformation in automotive development. As vehicles become increasingly software-driven, companies that combine advanced engineering capabilities with direct automaker relationships could gain a competitive advantage.
For the automotive industry, software ownership, integration efficiency and digital innovation are becoming as important as traditional component manufacturing.
