Roland Berger market study: Engineering service outsourcing (ESO) offers flexibility and cost-saving potential for both original equipment manufacturers (OEMs) and original equipment suppliers (OESs) in the automotive industry
Munich, April 2010: The pressure on original equipment manufacturers (OEMs) and original equipment suppliers (OESs) is growing steadily. Engineering service outsourcing (ESO) offers flexibility and cost-saving potential for OEMs and OESs. Both must reduce development costs and leverage engineering outsourcing to benefit from gains in flexibility and efficiency. Emerging market players in particular provide the right assets, in terms of both a low-cost engineering workforce and superior low-budget vehicle design concepts. Due to a steep learning curve, they increasingly advance into the high-end segment, urging established market players to engage in low-cost engineering. Roland Berger Strategy Consulting has conducted a market survey among leading automotive managers to unveil major trends and successful business practices in engineering outsourcing. Based on their findings, the experts have formulated comprehensive insights and recommendations for both the OEMs/OESs as well as the engineering service providers.
"There is no doubt that OEMs in the automotive sector will increasingly have to agree on closer market cooperation and industry standards when it comes to basic technologies in order to cope with excessive development costs," says Roland Berger Partner and author of the market study, Dr. Wolfgang Bernhart. "This is where engineering outsourcing emerges as one lever to manage excessive R&D spend." Even though OEMs have been trying to insource some of their R&D in response to the market downturn, they will need external engineering competence and resources to cope with an increasing number of models and derivatives and handle the complexity involved in new technologies.
Compared to outsourcing IT and other business processes, ESO on a global scale is a relatively recent trend in the automotive industry. But it will grow steadily in importance: Overall in 2008, the automotive engineering service outsourcing market accounted for only a relatively small share of total automotive R&D spend, slightly below 10%. Given the pressures on the automotive industry, this share will rise slowly but steadily to about 12% by 2013, thus growing at 4-5% p.a., while the captive R&D spend will decline slightly at -0.1% p.a. While certain domains (e.g. body/interior) will not see major growth rates, powertrain and electronics/electric are the fastest-growing segments for outsourcing.
"There are three main benefits of engineering outsourcing: cost reductions, increased flexibility and access to complementary competencies," says Norbert Dressler, Partner in Roland Berger's Automotive Competence Center. "In the short term, cost reductions are perceived as the most important advantage of engineering outsourcing. Cooperating with an ESO provider enables clients to reduce their own fixed R&D costs as some – typically less complex – tasks are completed by external engineers who usually work for lower salaries." Adding associated process and coordination costs, total savings for properly implemented R&D offshoring can reach up to 25-35% of comparable in-house costs. "Nevertheless, the engineers freed from tasks through outsourcing often do not necessarily leave the company," adds András Tóth, Senior Consultant at the Automotive Competence Center. "Instead, these resources can be shifted to other projects that are of high importance or require highly qualified, in-house engineering." This reflects the second major benefit of ESO: flexibility. It provides companies with access to a large pool of engineering resources and enables them to quickly build up, reduce or refocus their resources.
Similarly, cooperation with an ESO company can provide clients with access to additional competencies. The current trend toward powertrain electrification is an excellent example. Powertrain electrification is a major challenge for automotive companies and requires them to build up significant additional engineering resources. They must accomplish their "regular" workload of program development besides handling the additional R&D for electrification. Cooperating with an ESO provider can solve this challenge.
OEMs and suppliers must define their individual strategic approach to ESO
ESO must be managed properly, since the described benefits are threatened by a number of downsides: for example, the potential loss of know-how or the neutralization of cost benefits because of duplicated R&D efforts and hidden costs. To achieve successful outsourcing and offshoring of R&D activities, companies must carefully calibrate their individual approach. Dressler: "Most importantly, vehicle manufacturers and suppliers must determine the best answer to the questions of what to outsource, where to outsource, which provider to cooperate with and what the timeframe for realizing tangible benefits should be."
The Roland Berger study describes a set of ten actions to be taken as part of a successful ESO strategy. These include developing a clear and future-oriented R&D strategy (before thinking about outsourcing larger shares of the engineering workload) as well as defining and implementing a global R&D footprint once the strategy has been developed. Also, internal R&D processes need to be streamlined and clearly defined first, before engaging a third party and increasing complexity even further.
Engineering service providers should continuously expand their domain expertise
The study also examined the market from the point of view of engineering service providers (ESPs). Bernhart: "The increasing standardization of non-core components and basic technologies opens a huge window of opportunity for ESPs to support automotive manufacturers in mastering the challenges resulting from growing complexity and the multitude of vehicle variants." But ESPs, too, must take steps to be successful in their business. For example, ESPs should try to establish a clear competitive advantage over other market players by fostering cutting-edge technological know-how in certain domains requested by OEMs. Just claiming end-to-end vehicle competency with no clear domain specialization is not perceived as compelling by most OEMs – in fact, they tend to regard it with suspicion. ESPs need to define a clear and comprehensive value proposition for automotive OEMs and suppliers and a go-to-market strategy based on proven domain expertise. Bernhart: "As well as their clients, ESPs have to define their own global R&D footprint to best serve the increasingly global demand for engineering services."
"There is no doubt that OEMs in the automotive sector will increasingly have to agree on closer market cooperation and industry standards when it comes to basic technologies in order to cope with excessive development costs," says Roland Berger Partner and author of the market study, Dr. Wolfgang Bernhart. "This is where engineering outsourcing emerges as one lever to manage excessive R&D spend." Even though OEMs have been trying to insource some of their R&D in response to the market downturn, they will need external engineering competence and resources to cope with an increasing number of models and derivatives and handle the complexity involved in new technologies.
Compared to outsourcing IT and other business processes, ESO on a global scale is a relatively recent trend in the automotive industry. But it will grow steadily in importance: Overall in 2008, the automotive engineering service outsourcing market accounted for only a relatively small share of total automotive R&D spend, slightly below 10%. Given the pressures on the automotive industry, this share will rise slowly but steadily to about 12% by 2013, thus growing at 4-5% p.a., while the captive R&D spend will decline slightly at -0.1% p.a. While certain domains (e.g. body/interior) will not see major growth rates, powertrain and electronics/electric are the fastest-growing segments for outsourcing.
"There are three main benefits of engineering outsourcing: cost reductions, increased flexibility and access to complementary competencies," says Norbert Dressler, Partner in Roland Berger's Automotive Competence Center. "In the short term, cost reductions are perceived as the most important advantage of engineering outsourcing. Cooperating with an ESO provider enables clients to reduce their own fixed R&D costs as some – typically less complex – tasks are completed by external engineers who usually work for lower salaries." Adding associated process and coordination costs, total savings for properly implemented R&D offshoring can reach up to 25-35% of comparable in-house costs. "Nevertheless, the engineers freed from tasks through outsourcing often do not necessarily leave the company," adds András Tóth, Senior Consultant at the Automotive Competence Center. "Instead, these resources can be shifted to other projects that are of high importance or require highly qualified, in-house engineering." This reflects the second major benefit of ESO: flexibility. It provides companies with access to a large pool of engineering resources and enables them to quickly build up, reduce or refocus their resources.
Similarly, cooperation with an ESO company can provide clients with access to additional competencies. The current trend toward powertrain electrification is an excellent example. Powertrain electrification is a major challenge for automotive companies and requires them to build up significant additional engineering resources. They must accomplish their "regular" workload of program development besides handling the additional R&D for electrification. Cooperating with an ESO provider can solve this challenge.
OEMs and suppliers must define their individual strategic approach to ESO
ESO must be managed properly, since the described benefits are threatened by a number of downsides: for example, the potential loss of know-how or the neutralization of cost benefits because of duplicated R&D efforts and hidden costs. To achieve successful outsourcing and offshoring of R&D activities, companies must carefully calibrate their individual approach. Dressler: "Most importantly, vehicle manufacturers and suppliers must determine the best answer to the questions of what to outsource, where to outsource, which provider to cooperate with and what the timeframe for realizing tangible benefits should be."
The Roland Berger study describes a set of ten actions to be taken as part of a successful ESO strategy. These include developing a clear and future-oriented R&D strategy (before thinking about outsourcing larger shares of the engineering workload) as well as defining and implementing a global R&D footprint once the strategy has been developed. Also, internal R&D processes need to be streamlined and clearly defined first, before engaging a third party and increasing complexity even further.
Engineering service providers should continuously expand their domain expertise
The study also examined the market from the point of view of engineering service providers (ESPs). Bernhart: "The increasing standardization of non-core components and basic technologies opens a huge window of opportunity for ESPs to support automotive manufacturers in mastering the challenges resulting from growing complexity and the multitude of vehicle variants." But ESPs, too, must take steps to be successful in their business. For example, ESPs should try to establish a clear competitive advantage over other market players by fostering cutting-edge technological know-how in certain domains requested by OEMs. Just claiming end-to-end vehicle competency with no clear domain specialization is not perceived as compelling by most OEMs – in fact, they tend to regard it with suspicion. ESPs need to define a clear and comprehensive value proposition for automotive OEMs and suppliers and a go-to-market strategy based on proven domain expertise. Bernhart: "As well as their clients, ESPs have to define their own global R&D footprint to best serve the increasingly global demand for engineering services."
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