Why do Automotive Firms Need to Step Up Their Partnerships with ESPs?

Saying that automotive firms are facing challenges is an understatement. In fact, automotive firms are facing disruption on multiple fronts, as shown in Exhibit 1. The good news is that automotive firms can take lessons from telecom firms which faced similar challenges in the last few years and leveraged their partnerships with engineering services providers in overcoming these challenges.

Exhibit 1: Challenges Faced by Automotive Firms 

Source: HfS Research, 2018

• Technology Change: Automotive firms need to invest in three technology tracks simultaneously. These are autonomous vehicles (AV), electric vehicles (EV), and connected cars. Apart from investment in new technologies, automotive firms need to continue to support existing internal combustion engine-based vehicles for at least a couple of decades.
• High R&D Spending: Automotive firms typically spend about 3-7 percent of their revenue on R&D. In contrast, Tesla spends about 17 percent of its revenue on R&D. Automotive firms need to increase their R&D spending substantially to compete in new technologies with the likes of Tesla.
• Business Model Disruption: Shared mobility with the likes of Uber, Lyft, Grab, and Ola is disrupting the automotive market and can potentially reduce the overall new car market, especially in the high-volume budget car segment. It can transform the B2C car market to a B2B market with bargaining and pricing power in the hands of a few large firms.
• Entry of Technology Companies: The entry of technology companies such as Google and Apple with deep pockets, the R&D culture, and big aspirations can complicate the automotive market dynamics even further. Both OEMs and tier-1s will face competition such as they have never faced before, and the bottom line is that they need to spend more money to survive.
• Threat of Chinese Competitors: Chinese automotive OEMs, such as BYD and BAIC already have the largest share in the EV market by volume. Some of other Chinese automotive OEMs, such as Geely, have global ambitions. Geely is spreading its presence globally by acquisitions. It acquired Volvo in Sweden, Lotus Motors in the UK, Proton in Malaysia, and recently acquired Terrafugia, an American maker of flying cars. Chinese firms are known for their deep pockets, state support, and their strategy to leverage pricing to gain market share. The competition from Chinese OEMs could be a challenge to automotive OEMs.

These challenges mean automotive firms need to invest in partnerships with engineering service providers which will enable them to:

• Invest in new technologies while continuing to support legacy technologies: By partnering with engineering service providers, automotive firms can free their resources to focus on new technologies and let engineering service providers take care of the sustenance of existing and legacy technologies.
• Increase R&D productivity: Engineering service providers can help increase R&D productivity of automotive firms by creating more output per dollar invested in R&D by leveraging their global footprint, especially in low-cost countries.
• Acquire new capabilities: A car today is a data center on wheels. Traditional automotive OEMs and tier 1s must develop expertise in software, embedded, IoT, and so on. Also, new technologies such as 3D printing, augmented reality (AR), and blockchain are entering the automotive space. Some of these technologies, both new and old, are being deployed in other industries as well, and many engineering service providers have either developed or are in the process of developing capabilities in these technologies, which automotive firms can leverage.
• Increase localization: The automotive OEMs can leverage engineering service providers to develop local products for different markets with different requirements and price points. This can be alterations of global products for local markets to develop altogether new products. Engineering service providers, with their presence in different emerging markets, can help automotive firms in increasing localization of their vehicles.

The above solution approach of engineering service providers can solve all the major challenges of automotive firms, as shown in Exhibit 2.

Exhibit 2: How Engineering Services Providers Can Help Automotive Firms Navigate Challenges

Source: HfS Research, 2018

Comparing Automotive Industry with Telecom Industry

There is a similarity between the challenges faced by automotive firms and telecom firms. The exhibit below summarizes the similarity of challenges between automotive and telecom firms. Telecom firms effectively used partnerships with engineering service providers to navigate these challenges.

Exhibit 3: Similarity of Automotive and Telecom Challenges and Value of Partnerships with Engineering Service Providers

Source: HfS Research, 2018

The corollary to this is that telecom became the largest vertical for Indian engineering service providers, as shown in the exhibit 4. Most of the $50M-plus engineering services outsourcing deals announced in the last few years were in the telecom sector. One such deal is Alcatel (now Nokia)–HCL, announced in 2014.

Exhibit 4: Engineering Outsourcing Revenue of Indian Service Providers by Verticals

Source: HfS Research, 2018

The Bottom Line: Automotive Firms can Navigate Their Challenges by Stepping Up Their Partnership with Engineering Service Providers

The disruption in automotive is very similar to the disruption in telecom. If automotive firms step up their partnerships with engineering service providers, there could be a windfall in automotive outsourcing deals. Engineering service providers need to step up as well and restructure the partnership and deals for a win-win situation. We believe automotive will be soon become the largest pie for Indian engineering service providers. These are interesting times, and we are stepping up our automotive coverage as well. We will publish our inaugural Automotive Engineering Services Blueprint in this quarter. Keep watching this space.