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The India Story Stiff competition in domestic automotive market is forcing OEMs and automotive component manufacturers in North America and Western Europe to outsource and offshore their engineering requirements to low-cost countries.

Omer Ahmed Siddiqui Assistant Editor Auto Focus Asia

Cut-throat competition in the US and European automotive markets coupled with rising labour costs and shorter product cycles are drastically impacting the profitability of automotive manufacturers. Automotive manufacturers who are able to maintain the shortest "concept-to-market product cycle" at the lowest production cost will emerge as market leaders. In an attempt to lower production costs and streamline production lifecycles, OEMs and component manufacturers in the US and Europe are adapting offshoring and outsourcing of engineering services such as designing.

Why outsource?
The time taken to design new cars has shrunk from five years a decade ago to 10 months now. Increasingly, engineering drawings are becoming more complex as vehicle manufacturers introduce niche vehicles across various segments to meet changing consumer preferences. In order to keep product development costs low without affecting product life cycles, more of the design work is being outsourced to low-cost destinations. By outsourcing the design work to low-cost countries like India, US automotive manufacturers can save between 10-30 per cent of their production costs. Aravind Melligeri, President of Quest Engineering & Software Technologies, a developer of passenger cars in the US notes that, in 2004 a typical US automotive manufacturer could get engineering drawings developed in India for approximately US$ 1 million, whereas the same would cost thrice as much in the US.

In addition, matured domestic markets are forcing the European and US automotive manufacturers to gain a foothold and expand their reach in developing markets. Compared to the OEMs, component manufacturers are way ahead in outsourcing their operations such as component designing due to their lean business structure and the pressure from OEMs to keep production costs down.

Reasons for outsourcing vary. General Motors outsources a part of its operations to cut costs, while Toyota considers outsourcing as a tool to develop new markets and to use the diversified talent pool around the globe to enhance its output and quality.

Outsourcing scenario in India - Industry analysis

Outsourcing in industries such as information technology started much earlier than the automotive industry. In the automotive domain, a constraint was the need to share product-specific information, which is intellectual property of the company and requires development of trust among the business partners.

In the initial phase, engineering services outsourced to India were limited to drawing and converting 2D images to 3D images. Today, Indian companies have moved up the value chain and are handling critical tasks such as development of designs for automotive machinery and tools, patented products, and conversion of engineered drawings from paper to CAD. They are developing chip designs and designing electronic circui ts that are finding increasing use in modern automotives.

Categories of engineering service providers in India

Captives These are the business units of foreign OEMs such as GM, Delphi, Renault and Ford. Renault operates its automotive designing centre named "Design India" in Mumbai to design vehicles for the Indian and other regional markets. In order to explore various car design cultures, Renault in partnership with Autocar magazine conducts 'IndDesign,' a car design competition.

Subsidiaries of Indian OEMs Some of the Indian OEMs such as Mahindra, Hero and Eicher belong to this category. For example, in July 2003, Mahindra and Mahindra established a subsidiary named Mahindra Engineering Services that operates through an in-house design team. The subsidiary provides design and product development services for the automotive industry and also develops other industrial products.

Independent engineering design firms These include companies such as Plexicon, DC Design and Neilsoft. For instance, Neilsoft offers design and detailed engineering services such as design modelling, design validation and design automation across the entire vehicle development programme.

IT service providers This category includes companies such as TCS, Satyam, Wipro, Infosys, etc. These Indian IT giants are entering the engineering service outsourcing industry which is still in its nascent stage in India. Companies like TCS that

already offer software solutions for engineering companies can easily expand their range of services to include product design and development.

Major automotive companies including General Motors, Ford, Toyota and BMW outsource their engineering operations to either third party vendors or captive centres established in India. For example, in 2005, TCS won a major IT and engineering service contract from Scuderia Ferrari for IT and engineering services for its Formula 1 car. Daimler Chrysler established its Daimler Chrysler Research Center (DMRC) in Bangalore to conduct research in the areas of encryption, image signal processing, telematics, fuel-cell modelling, CAD, CAM, CAE and PDM for the company's global requirements. The company has also tied up with TCS for its CAE requirements.

IT giants such as Intel, Motorola and TI have gained international reputation in chip -design. For example, Intel has been developing engine control electronics such as microcontrollers since 1983. The company's 8061 microcontrollers were first introduced in the 1983 Ford EEC-IV. Intel continues to develop innovative and highly integrated microcontrollers to help automotive manufacturers with evolving powertrain applications. These factors leverage India's position as a preferred destination for engineering service outsourcing. Equipped with technological expertise and availability of cheap finance, Indian companies are poised to offer complete solutions from design to manufacturing for firms outsourcing work to India.

Market analysis In September 2006, CIOL reported that automotive engineering service outsourcing market in India was valued at US$ 342 million. According to ValueNotes, Automotive design and engineering outsourcing market in India was valued at US$ 270-300 million in 2005, and is projected to cross US$ 1 billion by 2010. Foreign companies save approximately 20-40 per cent on their design and engineering cost by outsourcing. Considering the comparative cost advantage, investment in R&D to produce a new vehicle is estimated at US$ 150 million in India, as compared to US$ 600-800 million in the US. According to data published by A.T. Kearney, India holds a major share of the global automotive design outsourcing industry, which was valued at approximately US$ 9 billion in May 2007.

SWOT Analysis
STRENGTHS Major strengths of Indian engineering outsourcing industry include huge availability of engineering talent, strategic expertise and the comparative advantage of outsourcing over developing captive centres.

Talent pool Among developing countries, India has the largest engineering talent pool required to take up outsourced jobs. The Indian workforce is fluent in English, flexible to work in shifts, dedicated, and can work under pressure to meet project deadlines. However, there is a perceived need to develop proper infrastructure and impart domain-specific specialised training to this talent pool to enable them meet the outsourcing requirements of multinational OEM and

component manufacturers. Dilip Chhabria, a renowned car designer has chalked up plans to establish a car design institute in Pune, India by 2009. Renault Design is the industry partner for this institute, which can train up to 1500 students.

Strategic expertise Indian companies have great expertise in forging long-term partnerships with international organisations; they adapt quickly to changing global trends and business models to improve the value proposition to their clients. In order to highlight the 'quality' aspect of services offered in India, Indian companies are achieving quality certifications such as SEI CMM Level 5, COPC, PCMM, ISO 9001:2000. These advantages position India ahead of other developing economies such as China in the list of outsourcing destinations.

Outsourcing Vs establishing captive centres As compared to establishing captive centres, outsourcing is a more feasible option for foreign OEMs who prefer to get their engineering operations done by a third party. Establishing captive centres requires diversion of management attention and investment in infrastructure; there is also the risk of managing a workforce in a multicultural environment. Outsourcing can help tide over these problems.

WEAKNESSES Major weaknesses in the engineering service outsourcing sector in India include poor infrastructure development, lack of domain expertise among workers or companies, lack of initiatives taken on the R&D front and poor regulatory support.

Infrastructure and domain expertise While India produces a large number of engineering graduates each year, the number of candidates possessing the required skill sets is not increasing at par with the demand in the engineering outsourcing sector. India also needs to strengthen its engineering and physical infrastructure to cope with the demands of the industry. Infrastructure development in other low-cost countries such as China, Thailand, Malaysia, Mexico and Brazil is far ahead of that in India. To stay competitive, India needs to make huge investments in infrastructure, which will give a boost to the outsourcing industry.

Lack of impetus in R&D Indian OEMs need to gear up their research and development activities. The Boston Consulting Group found that R&D centres of Indian automotive manufacturers are not utilising their full potential and have l ess operational autonomy compared to their counterparts in the West. The R&D staff in a typical automotive company in India comprises about 3 per cent of its total workforce. According to Priyadarshi Thakur, Secretary, Ministry of Heavy Industries & Public Enterprises, Government of India, R&D expenditure in the Indian automotive industry is below the global norms and averages.

Regulatory support The Indian automotive engineering outsourcing sector lacks full-fledged governmental support notes Vikas Sehgal, Principal and Director, India business at Booz Allen Hamilton. Though engineering services are critical to the growth and development of the automotive sector, the Indian government has done little in terms of formulating policies to attract outsourced work to India. In contrast, the Chinese government offers an array of incentives and is implementing aggressive policies to vantage engineering offshoring opportunities.

OPPORTUNITIES At present, the Indian engineering outsourcing market has many opportunities. These include growth potential for Indian service providers in the global scenario, creating a privileged position for India as preferred outsourcing destination, and scope for Indian service providers to develop as global players.

Growth potential Global spending on engineering service outsourcing is on the rise and accounts for approximately 2 per cent of global GDP, as reported by Booz Allen Hamilton. M. K. Padmanabhan, President and co -founder of Plexion Technologies (India) Pvt. Ltd observes that the global engineering outsourcing market was valued at US$ 7 billion in December 2007, and the automotive market accounted for 68 per cent of this market. In 2007, 20 per cent of these engineering services were outsourced to low-cost destinations and this per centage is projected to increase to 50 per cent by 2010.

Privileged position of India A survey conducted by A.T. Kearney regarding the preferred destination of American automotive executives for engineering outsourcing found that they ranked India well above China, Mexico and Brazil. The survey also revealed that 39 per cent of the respondents preferred India for engineering and technical service (including engineering and design) outsourcing which was valued at approximately US$ 2 billion in May 2007.

A.T. Kearney survey (May 2007) - Preferred engineering outsourcing destination by US companies

Developmental scope In order to upgrade the quality of services offered, Indian companies operating in the outsourcing domain can gain access to the latest technologies, develop prototyping skills and testing facilities by collaborating with global OEMs. While other countries offering outsourcing services capitalise on low-value and high-volume services, Indian service providers can capture the high-value and low-volume segment.

Considering the pace of development in the global automotive industry, the activities that are c onsidered core to the OEM manufacturer now, will become non-core in the next five years. Thus, Indian services providers can initially sign up contracts with global OEMs to provide low-end services for their core operations (such as design and development services for new and legacy products) and gradually take on full responsibility for those activities as they become non-core to the OEM.

THREATS Threats to the Indian engineering service outsourcing industry include rising wage levels, competition from other developing economies, competition resulting from market concentration, information safety issues, and decreasing value of the dollar.

Rising wage levels Wages for highly skilled workers in India are rising as the economy develops. This is reducing the gap between the wages paid to professionals in developed economies and those in India, which can severely curb the economic advantage that India has as a low-cost outsourcing destination.

Competition from other economies India faces stiff competition from developing economies such as China and Malaysia. The automotive market in China is growing at a faster pace than in India. Hence, Chinese automakers are expected to pose stiff competition to their Indian counterparts in the struggle to capture greater share of the automotive engineering outsourcing market. However, A.T. Kearney reports that issues such as intellectual property piracy and political red tape can negatively impact the image of China as a reliable service provider.

Malaysia is fast emerging as a serious contender against India and China in the outsourcing domain. Political stability, strong governmental support and infrastructure development in Malaysia is better than it is in India or China. The Malaysian government is striving to position the country as the hub for technology and services innovation; this has caught the eye of multinational organisations willing to outsource their operations to reliable but low-cost destinations.

Competition resulting from market concentration Considering the immense potential in the engineering service outsourcing market in India, many foreign design / CAD service providers are setting their foothold. Global OEMs are also expanding their R&D operations to low cost destinations, which will result in market concentration and increased competition.

Information safety issues Few European OEM manufacturers feel threatened that if outsourced, their product designs would be copied by other manufacturers. In order to convince global OEMs regarding their intellectual property security, Indian service providers can sign non-disclosure agreements or proprietary information agreements with the client. Indian companies can take safety measures like developing client-approved firewalls to restrict access to critical product information.

Rising value of the rupee CIO reports that while the rise in the value of rupee against the dollar is a sign of prosperity for the Indian economy, it is considered a setback for the outsourcing industry in India. For example, the value of one US dollar on October 1, 2007 was Rs. 39.65, which is 10 per cent lesser than its value a year ago. Since, all the outsourcing service transactions are made in dollars, a rise in the value of the Rupee against the Dollar can severely hamper profit margins. This is particularly detrimental to the engineering service outsourcing in automotive sector which is still in the nascent stage. To cope with this situation, Indian companies such as Wipro, Satyam and Infosys are passing on the burden of the rising value of the rupee to the customer even as smaller companies contin ue to be adversely affected.

The road ahead

Automotive product lifecycles are getting shorter worldwide due to which automotive manufacturers are under pressure to launch new models at shorter time intervals while curbing development costs. As a consequence, in future more of automotive designing work is expected to be outsourced to low-cost destinations like India. The automotive design and engineering outsourcing market in India is expected to witness a double -digit growth. ValueNotes reported in July 2006 that the outsourcing market is projected to grow at an annual rate of 30 per cent for the next three years.

OEMs would prefer to outsource the entire process that ranges from design to engineering to a single company, rather than outsource each operation to a separate service provider. To this purpose, it is important that Indian OEMs enhance their capability to offer end-to-end services. As the Indian outsourcing market expands, companies offering specialised services would be the main target for mergers and acquisitions. Bigger companies would target them for acquiring their capabilities and to access their client base.

At present, global automotive manufacturers leverage electronics to provide an array of in-car interactive services to customers, to distinguish their offerings from that of competitors and win customer loyalty. The use of

electronics in cars is increasing day by day, which in turn makes the automotive designing and production process more complex. To differentiate itself from other low-cost destinations such as China - which also undertake automotive component designing work at lower costs - Indian companies need to gain in domain knowledge and move up the value chain faster to offer a whole range of services.

In order to capture larger segment of the global engineering outsourcing market, India needs to increase awareness at the global level of Indian engineering expertise. Developing a separate trade organisation can add impetus for promoting engineering service outsourcing to India. For example, in 2005, NASSCOM formed an engineering service forum with 15 member companies and also conducted road shows to promote engineering service outsourcing. The main idea was to provide engineering service outsourcing a separate identity within the BPO sector. All the stakeholders including government, academic institutions, service providers and trade bodies such as Nasscom need to chalk out a strategy to develop a strong 'Engineered in India' brand by investing in infrastructure, workforce and expertise.

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