Is Qualcomm Building a New Operating System for Cars?

Qualcomm (QCOM 0.90%) outbid auto supplier Magna (MGA 0.71%) to acquire small outfit Veoneer (VNE), but Qualcomm intends to leave the hardware segment of Veoneer behind with private equity firm SSW Partners. It's the software that Qualcomm is really after here. In this Motley Fool Live segment from "Wheeling & Dealing" recorded Oct. 15, Fool.com contributors Toby Bordelon, Brian Withers, and Nicholas Rossolillo discuss why Qualcomm might be using this deal to start building an operating system for cars.

Brian Withers: Are they trying to build an operating system for the car? I think like Roku is the operating system for your smart TV. They've sold that and they've been able to replicate that over a number of different hardware makers. Even if your TV is a smart TV, just plug in their device and then all of a sudden you have access to this smart TV operating system. Is that where they're going?

Nicholas Rossolillo: I think so. That's probably a good analogy, Brian. There are all these new parts. Thinking about that slide that Veoneer put out, all of the different components that are involved with the Driver Assist System, it's really mind-boggling how much work has gone into this. But you need a central hub, an operating system to pull all of that data from various systems of the car and make sense of it. Qualcomm has the chip that can control all of it. But you still need to have the software that can interface with all the different disparate pieces. Obviously, the car is mission-critical stuff too, you can't have anything go wrong.

Toby Bordelon: We've seen this in terms of the entertainment systems. Where you've got companies like Apple, like Alphabet and BlackBerry, who take their mobile OS and make an automotive version of that, and automakers can either tie into that, can implement that, or in the case of BlackBerry is more common, you take that as your base and then skin on top of it wherever you want to go with it. The automakers aren't from scratch creating these entertainment systems. They're taking what's out there then building on top of it. You're right, that's not their expertise to build software operating systems to the extent they can buy it and build on it as they desire.

Let's say where we're going to go, and you can see with what Qualcomm is maybe doing here, is you can take this software and maybe you can use it for full self-driving systems for some vehicles, or you can use it just for driver-enhanced systems like it's already out there so you can take it at different levels depending on how you want to want to roll with it. I think that's where we're going. I think this could be interesting.

The other thing I think you should take away from this is that you talked about self-driving. Tesla is a big name. We talked about Tesla. Then you start talking about other automakers like GM's got it. What are they doing? What's Ford doing? But there are a lot of companies working on the different pieces of this. There are a lot of companies out there, both in the software and the hardware standpoint, working on automotive self-driving systems in some form. There are a whole lot of ways to invest in this industry, in this technology, besides just Tesla that people may not be aware of. This is one way that Qualcomm gets you in there. If you're interested in that.

Withers: I'm thinking too of that picture you showed in the beginning, Nick, where they had all of these sensors all over the cars. I don't know how much silicon is in each of those different data points in those different systems, and separated could Qualcomm centralize that into one chip, and then just have cheap sensors at the points where it needs them. The only reason I think they're not getting the hardware is they have something up their sleeves. They have a better mousetrap, and so they need the software to make it work.

Rossolillo: Yeah, it is interesting that they are just leaving the hardware business behind, but I think you're right, Brian, they have something up their sleeves. Even though the bulk of Veoneer stays behind, they get the Arriver software business. There's probably going to be some deals cut there like if Veoneer makes a sale of some hardware. Hey, by the way, we've got the software package with our partners over at Qualcomm that plugs into the system real easily. I think there's something going on there.

Withers: I don't see what's in it for Veoneer though, other than maybe having their software be more ubiquitous.

Bordelon: There's 4.5 billion for them, but beyond there you're right. I'm not sure.

Withers: It feels like they're selling their long-term golden goose, right?

Rossolillo: Yeah, but they have struggled since they got spun-off in 2018. They have struggled because they also have some of these legacy hardware systems, restraint control systems as it's called, basically like controls for the airbag system. If there's an impact that is not really useful to an autonomous car because the point of an ADAS system is to avoid an impact in the first place. That's not really useful to Qualcomm. After an accident happens, they want to deal with avoiding one in the first place.

But yeah, Veoneer's business has really struggled as a result, I think. This is a nice cash-out for shareholders and premium for a business that has struggled to gain some positive traction since 2018. I think the disparate pieces might be more valuable long-term, and to Toby's point, there are a lot of players dealing with these systems, and NVIDIA (NVDA 3.71%) is another one, and that's an interesting one too because NVIDIA's take on it is not the hardware, it's software. They're dealing with software, the software end of the spectrum. Qualcomm's got some catching up to do in this department, so I think the deal for that makes sense, and thus the premium that they were willing to offer over the initial bid that Magna made.