Revenues from automotive design and engineering offshoring are expected to cross one billion dollars by 2010, from $270–$300 million in 2005, according to a report by research firm ValueNotes. The report also estimates that in India alone, about 12,000 people are employed in providing these services, which is likely to see 30% growth every year for the next three years.
The automobile industry, especially in the U.S.A. and Europe is facing intense competitive pressures — rising labour costs, shorter product cycles, dropping profitability and rapid growth in emerging markets. This has created a set of enabling factors or drivers that are forcing Original Equipment Manufacturers (OEM) and auto ancillaries to explore outsourcing and offshoring options.
This has led to all sorts of offshoring options being tried out. In India, while a few automobile majors like GM, Delphi and Ford have set up their captive design units, many Indian auto and auto-component makers have also joined the bandwagon. Indian automobile companies like Mahindra, Hero Group and Eicher have all started their offshore-services arms. Indian talent and low cost have also attracted independent engineering design firms such as Plexion, DC Design and Neilsoft. And not the ones to be left out, Indian IT-services firms such as TCS, Wipro, Infosys and HCL have also joined the fray.
Of these vendor groups, apart from the captives, subsidiaries of Indian auto OEMs are best positioned to offer end-to-end design and engineering services, says the ValueNotes report. This, it says, is on account of their domain knowledge and financial muscle to invest in organic and inorganic growth to build capabilities. Rather than piecemeal subcontracting of design, engineering and manufacturing jobs, auto companies would prefer vendors offering end-to-end services or complete solutions in future. This provides an entry point for more Indian auto ancillaries to move from pure manufacturing to providing the complete range of solutions — from design to manufacturing and delivery.
“IT firms will gain, too, as they will be well poised to marry their expertise in embedded systems with the rising share of electronics in auto. However, it will become imperative for Indian service providers to move up the value chain because other countries such as China will provide tough competition for low-end services,” say the analysts.
Independent engineering and design firms will be hot targets for mergers and acquisitions as companies with greater financial strength, primarily IT firms, subsidiaries of Indian OEMs and ancillaries look to acquire capabilities and clients.
