> turning instead to software to handle functions that had historically been done in hardware
That generally means doing things less efficiently. Devices will get slower and battery lifetimes shorter.
> There’s room for new startups and new ways of doing things. More of the car’s features are accessed using a touchscreen as opposed to a knob or button, for example, which turns components that once were hardware into a software program.
This has got to be one of the worst times to do a hardware startup. Doing R&D at an established company is already painful, between skyrocketing costs and 6 month plus lead times on standard microcontrollers (not to mention more specialized ICs). If you're just starting out instead of "only" facing trouble keeping production going you're going have to hope that the chips you're prototyping with will be available when you go into production. If things keep going the way they have this year, that's a very risky bet no matter what components you select.
> And now, in light of the chip shortage, suppliers to the automotive industry are going to be looking for more ways to turn something that used to be an electronic part into software.
Not in the automotive field but from what I've heard it's the exact opposite issue, the [lack of] processors they'd like to use in those fancy touchscreen infotainment systems are a big part of their problem.
The central thesis is that the shortage will lead to innovation, but in my experience it has put a HUGE strain on everyone doing R&D. I suspect it'll instead lead to rising costs and stagnation as people wait for supplies. This is already basically what we have in the consumer hardware market, where last year's consoles still aren't consistently on store shelves.