Automotive Design Offshoring to India

The intense competitive pressures in the automobile industry, especially in the US and Europe, have created a set of enabling factors, or drivers that are forcing OEMs and ancillaries to explore outsourcing and offshoring options.

  • Rising costs. Increasing labor costs, especially in North America, are resulting in a surge in overall costs.
  • Shorter product cycles. Growing pressure on auto companies to launch new models and variants within a short span of time.
  • Dropping profitability. New and emerging players are adding fresh capacity, which is, in turn, leading to price competition and hence affecting profitability of companies.
  • Expansion of capabilities and winning non-domestic business. Stagnant growth in home markets is forcing players to focus on expanding capacities and capabilities in emerging markets. Given the cost advantages, many of these centers are being leveraged to serve other markets.

This article, excerpted from the ValueNotes report, “Offshoring of Automotive Design & Engineering Services to India,” explores the role that India is playing in the growing practice of offshoring automotive design and engineering.

The Offshoring Chain

Various automotive original equipment manufacturers (OEMs) and Tier I suppliers have started offshoring design and engineering services to India. Typically, OEMs outsource design and manufacturing of certain components or systems to their Tier I suppliers. Both, OEMs and ancillaries, establish offshore captive centers, some of whom are involved in high-end design and engineering services. In addition, the OEMs and Tier I suppliers tend to offshore low-end services to third party providers initially, before moving up to high-end services. The typical offshoring chain is shown in Figure 1.

Figure 1: The offshoring chain in automotive outsourcing.
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Figure 1. The offshoring chain

Source: ValueNotes Research

Design Services Offshored to India

The design and engineering services offshored to India are mainly of the mechanical type. These mechanical design services include data, analysis/validation and manufacturing engineering services. Electronics design services, which include embedded systems, are not so easily offshored. However, with the electronics content increasing in vehicles, this area offers significant growth potential for vendors with the requisite capabilities. The major mechanical design services offshored are shown in Figure 2.

 Figure 2: Automotive services offshored.
Figure 2. Services offshored.

Source: ValueNotes Research

Automotive design and engineering services currently offshored to India are estimated to be in the range of USD$270 to $300 million in 2005. Data services are most commonly offshored, followed by analysis and manufacturing engineering services. In the case of analysis, meshing is more easily offshored than the analysis for structure, noise, vibrations, harshness, heat and impact. Very little work in concept design (styling/surfacing and mock-ups) or in electronics design (embedded systems) is currently offshored to India.

 Figure 3: Automotive design services offshored to India.
Figure 3. Automotive design services offshored to India.

Source: ValueNotes Research

Concept design is the core intellectual property of OEMs and ancillaries. IPR concerns prevent them from offshoring concept design. In addition to this, India has almost no experience in designing new vehicles or systems or components. Concept design requires close interactions and involves numerous iterations. As such, concept design work is rarely offshored and design centers physically close to the companies are preferred.

Companies from the United States, Europe and Japan offshore design and engineering services to India. The US is the largest contributor, accounting for about 75% of the total services offshored, followed by Europe. Germany, UK, France and Italy are the major destination countries in Europe.

 Figure 4: Regions offshoring automotive work to India.
Figure 4. Regions offshoring to India.

Source: ValueNotes Research

Japanese auto majors are much more conservative when it comes to offshoring. The small amount of work they offshore is either to their own centers or a dedicated partner. They rarely work with third-party vendors.

India Advantages

Reduced Cost

The cost savings resulting from offshoring auto design and engineering services to India are as high as 40% to 50%, primarily due to the significantly lower cost of engineers. Typically, the design and engineering firms in the US and Europe specialize in a few niche areas and have a small but highly specialized employee base. Expertise in select niches makes such firms expensive, and auto companies tend to outsource high-end work to these firms. On the other hand, Indian (offshore) design and engineering companies offer a wide range of services, with a large number of employees proficient in different automotive areas. This makes them ideally suited for a range of lower-end design jobs.

 Table 1: Average starting salary, India and US.
Occupations  Avg. annual salary, US  Avg. annual salary, India
Bachelors in Engineering (Mechanical)

 $50,236 

 $6,000

Masters in Engineering (Mechanical) 

 $59,880 

 $8,000

PhD in Engineering 

 $68,229 

 $10,000

 Source: National Association of Colleges and Employers in US, ValueNotes Research

Reduced Time-to-Market

By sending work to India, companies can establish a 24/7 engineering schedule. Design is typically a combined effort between the team of the outsourcer and that of the service provider. Due to the time zone differences between India and the US/Europe, work can be done on a continuous basis.

Large Number of English-speaking Engineers

India produced an estimated 215,000 engineering graduates in 2004. This number is rising with the shifting demographics towards younger people and a greater private presence in education. The number of engineering graduates by degree and specialization is given in Table 2.

Table 2: Engineering graduates in India, 2004
Degree Field Graduates
Total Bachelors and Subbaccalaureate Engineering,
Computer Science (CS) and Information Technology (IT) Degrees

 215,000

Bachelors Degrees

 112,000

Engineering (excluding CS and Electrical)

  17,000

CS, Electrical and IT

  95,000

Subbaccalaureate Degrees*

 103,000

Engineering

  57,000

CS and IT

  46,000

*Subbaccalaureate degrees refer to three-year diplomas in India.
Source: National Association of Software and Service Companies, 2005 Strategic Review  

Earlier, many non-IT engineering graduates couldn’t find good opportunities in engineering and ended up working in the IT sector. With engineering and design services gaining momentum, these engineers now have exciting opportunities to work in their areas of specialization. Many engineering colleges have included CAD in their curriculum. There are also a number of design institutes offering industrial and product design courses. The table below lists some of the important design institutes in India.

Table 3. Prominent design institutes in India.
Institute  Location  Courses offered
National Institute of Design (NID)  Ahmedabad  Product design, furniture design
IDC, IIT Bombay Dehli  Industrial design 
DoD, IIT Guwahati  Guwahati, Assam  Product design
IIT Delhi  Delhi  Product design
IIT Kanpur  Kanpur  Product design
CPDM, IISc Bangalore  Product design
Raffles Design International  Mumbai  Product design
DID, SPA  Delhi  Industrial design
M S Ramaih School  Bangalore  Product design
NTTF School of Post Grad. Bangalore  Product design
IILM School of Design  Delhi  Product design
Symbiosis  Pune  Industrial design
Institute of Design   Pune Product design, transportation design
Creative-i College of Arts  Pune  Product design
D J Academy of Design  Coimbatore  Industrial design
College of Architecture  Nasik  Product design
Sristi Bangalore  Industrial design, furniture, interiors

CEDT, IISc 

Bangalore  Instrumentation design
Source: ValueNotes Research

Key Research Findings

  • The automotive design and engineering services outsourcing market is currently estimated to be USD$11 billion.
  • India, China, Russia and Eastern European countries are some of the offshore destinations for design and engineering services. India, with revenues in the range of USD$270 million to $300 million in 2005 is expected to cross USD$1 billion by 2010.
  • The current employee strength of India-based automotive design vendors is approximately 12,000 and is expected to reach 40,000 by 2010.
  • Indian auto part and automobile companies are best positioned to cater to this market, provided they can allay client concerns about intellectual property and can handle non-compete issues. We expect many new entrants from this group, as well as from IT services firms looking to leverage on their software/embedded systems capabilities.
  • Consolidation will intensify and independent engineering and design firms will be attractive acquisition targets.
In June 2006, the National Institute of Design (NID) began a two-and-a-half-year course, “Diploma in Transportation and Automobile design.” NID is also seeking an agreement with Domus Academy, a design school based in Italy. As a part of the Italy tie-up, NID intends to send its students for six months or one year training at Domus. The training program in Italy may also include industry training, wherein students may get an opportunity to understand and gain from the design experience of the top companies there. However, at the time of this writing, talks with Domus haven’t concluded.

In addition to the technical qualifications, English is spoken as a second language by over 200 million Indians, a factor that enables all forms of offshoring.

Presence of Design Software Companies

Design software companies such as Autodesk and PTC have established a significant presence in India. Realizing the need for trained manpower (and its impact on the sale of their software), these companies started partnering with local institutions for imparting CAD training to students. This ensures a readily available resource pool for the industry to source trained manpower.

Domain Expertise

India has demonstrated growing capabilities in auto manufacturing and is well known for its expertise in IT. Despite much skepticism, Indian OEMs Mahindra & Mahindra and TATA Motors have successfully designed and built new vehicles. Maruti Udyog jointly designed its small car Swift with Suzuki’s engineers in Japan. This makes India one of the few countries outside of the US, Europe, Japan and Korea with a proven capability to design and build automobiles.

Government Initiatives for Automobile R&D

The Indian government announced a 150% tax cut in R&D investments by automobile manufacturers in the 2004 budget. This initiative has led to many auto majors setting up research centers or expanding existing ones.

The government, in partnership with the Indian automotive industry has initiated the National Automotive Testing and R&D Infrastructure Project (NATRIP) to create state-of-the-art testing, validation and R&D infrastructure in the country. The project involves an investment of about USD$380 million in setting up the following facilities:

  • Full-fledged testing and homologation centers within the automotive hubs of north and south India at Manesar and Oragadam, respectively.
  • Upgradation of existing testing and homologation facilities in the western hub at the Automotive Research Association of India (ARAI), Pune and at the Vehicle Research and Development Establishment (VRDE), Ahmednagar.
  • A world-class proving ground on 4,098 acres of land in Central India at Pithampur.
  • A center for testing of tractors and off-road vehicles in the Northern region of the country, with a national facility for accident data analysis and specialized driving training at Rae Bareilly.
  • A specialized hill area driving training center and a vehicle management center in the North Eastern region at Silchar.

The launch of NATRIP will provide a major boost to India’s fast growing automotive industry. It will result in better use of India’s strengths in the areas of automotive engineering, information technology and electronics by achieving a high degree of convergence. The infrastructure under NATRIP will offer a wide range of product development and validation services for both domestic and global automotive industry. The objective is to help India become a major force in global product development.

Robust Auto Component Industry

India has a well-established auto component manufacturing industry that supplies to leading global OEMs and ancillaries. OEMs are now involving Indian suppliers more closely in the design process, hoping that their design skills will improve and they’ll eventually evolve into full service suppliers. These are responsible for designing and manufacturing of entire automotive systems. Indian vendors, for their part, are investing in setting up design centers to move up the learning curve. Their strategy involves establishing design subsidiaries for procuring global engineering work.

Further in the area of electronics design, India is better positioned to narrow the gap between manufacturing and engineering and design expertise because of the availability of high quality IT talent.

Useful Links

ValueNotes
http://www.valuenotes.biz/index.asp

For detailed vendor analysis and company profiles, purchase the full report, “Offshoring of Automotive Design & Engineering Services to India”:
http://www.valuenotes.biz/bpo/autodesign.asp