Automotive manufacturers now have to deal with an all-time-high of technology complexity, driving engineering spend and creating the necessity to have a clearly defined strategy regarding core competences and outsourcing of engineering services.
Four areas in particular have seen an increasing demand for skills and capacity:
- Powertrain electrification technologies, requiring new competences for energy storage technologies and electric drives;
- Connectivity solutions, making the car part of the Internet of Things, and creating the need to combine automotive safety and quality requirements with agile development principles, especially in infotainment;
- Advanced driver assistance systems (ADAS) and moves towards piloted or autonomous driving, which again increase complexity significantly, especially around sensor, map and object data fusion;
- Lightweight materials, especially with regards to competences around carbon composites and the respective production and assembly technologies.
Powertrain and powertrain electrification account for a major proportion of the engineering services market, driven mainly by legislation enacted in Europe and China. In Europe, all OEMs will need to reduce their CO2 emissions by 25-30% by 2021. In China, there will also be major regulations to be faced – especially if the nation opts to introduce a fleet-based emissions standard.
By the same token, OEMs will also strive to increase their use of weight reduction technologies. The relative importance of weight reduction technologies varies greatly in the two markets, with very high importance being attached to it in the EU, whereas in China it is not yet relevant. All major OEMs plan to realise about 3-4g/km in CO2 emissions savings through lightweight design.
In-vehicle infotainment (IVI) and onboard connectivity solutions are already increasing in complexity, with a growing number of products and features using driver interaction and control of data becoming available. At same time, connectivity boxes are being integrated into head-units and instrument clusters – as shown by Audi in its virtual cockpit at the International CES in Las Vegas. The development costs for the different solutions vary widely, however: HMI, specific functional software, and system integration are often seen as OEM core competences and thus are major outsourcing opportunities for engineering service providers (ESPs).
Auto ESO in figures
In 2012, the worldwide automotive engineering service outsourcing (ESO) market was worth around €10.7bn (US$14.7bn). However, growth in recent years has been slowing down, mainly due to the fact that the peak of new model introduction has nearly been reached. With a worth of almost €6bn (US$8.2bn), Europe is by far the biggest automotive ESO region: almost five times as big as the Chinese market, with a volume of about €1.3bn (US$1.5bn). However this size and the relation to the European ESO market will change within the next years.
While global passenger and light commercial vehicle production will increase by about 4% per annum until 2020, global automotive R&D expenditure is expected to grow at 6%-7% each year in the same period, thanks to a more complex technology portfolio and higher R&D share in emerging markets. Outsourced share is expected to slightly decrease at the same time due to regulatory issues – especially in Germany – but increasing share of modular kits for cars and subsystems will make outsourcing of complete work packages harder than before.
The global automotive ESO market will grow by 5-6% per annum until 2020, totaling at around €16.5bn (US$22.6bn). The reason for this development can be found in captive engineering centres, which will increasingly be used to develop subsystems and vehicle derivatives, significantly lowering the growth in the ESO market, especially in Europe.
The European ESO market will stand at circa €7.4bn (US$10.1bn) in 2020, an annual growth rate of around 3% from 2012 onwards. The Chinese market will grow at a faster rate of 12% from 2012 on, and reach €3.2bn (US$4.4bn) by 2020, almost half the size of the European ESO market alone.
The highest share, with approx. 30% of outsourced work in Europe, will remain in electrical and electronics (E/E), which also includes connectivity/in-vehicle infotainment, resulting in a total volume of c.€2.5bn (US$3.4bn) by 2020 – equivalent to a total increase of around 50% compared to 2012. The share of powertrain-related work will stay around 15% in Europe, growing absolutely by around 10% from 2012 to c.€1.1bn (US$1.5bn) in 2020.
In China, however, the breakdown of domains differs greatly: the highest share, with approx. 25%, is in powertrain in general and electrification of powertrain, doubling the volume in 2012 from €400bn (US$550bn) to roughly €850bn (US$1.16trn) in 2020. High growth can also be found in the E/E domain which will grow to more than three times its 2012 size of c.€150bn (US$206bn), to a volume of c.€500bn (US$687bn) in 2020.
The difference between Europe and China in the weighting of the powertrain domain is mainly due to the fact that core powertrain know-how has been built up by western OEMs, which rely less on external knowledge in this area. Chinese OEMs, on the other hand, still need to close the gap in both ICE and electrified powertrains. The high increase in the E/E domain in Europe and China is mainly due to the significant impact of connectivity and in-vehicle-infotainment solutions in both countries.
Regarding the form of contracting, in general, the expert-on-demand as a pure resource based service is becoming less important, whereas project-based work and longer term contracts with clearly defined work packages will increase. This shift will however be stronger in Europe than in China due to contractual regulations – especially in Germany – which make expert-on-demand type work challenging for OEMs from a compliance perspective.
Implications for OEMs
Taking into account the different trends and impact drivers of the ESO market, as well as its overall global development, there are some clear implications which can be given for OEMs and ESPs.
OEMs need to be organised in such a way that the outsourcing of all engineering services is as efficiently structured as possible in terms of resources, coordination and location – which must also be taken into consideration in terms of the contract design. Especially in the case of German OEMs, there is a need to reorganise in such a way that engineering services can be outsourced using service contracts, instead of leasing staff from ESPs in a compliant way.
For the providers of engineering services, the main challenge will be to have a best-cost-country footprint (for example, with a hub in China or India) in order to stay competitive in terms of cost structure. Project-based service contracts will allow for this more easily, but at the same time provide an opportunity, in particular to large Indian players, which are making a big push to enter the European market.
Dr Wolfgang Bernhart is Partner, and Dr Stefan Gutberlet is a Senior Consultant, at Roland Berger Strategy Consultants.
