Automotive OEMs Lead in Outsourcing Deals While Suppliers Lead in R&D Centers

Automotive is the biggest tailwind in the engineering services sector and both engineering service providers and R&D centers are growing. Delving into the data from public announcements in 2023, intriguing shifts in the distribution between OEMs and suppliers emerge.

• In Automotive Engineering Outsourcing Deals, OEMs maintain a dominant position over suppliers, securing 72% of the deals compared to suppliers' 28%.
• Conversely, within the realm of Automotive Engineering R&D Centers, suppliers emerge as leaders, accounting for 57% of both new establishments and expansions, whereas OEMs represent 43%.

Empirical Observations:

Anecdotal evidence gathered from discussions with engineering service providers corroborates the aforementioned shift in the outsourcing mix between OEMs and suppliers. Engineering service providers report the following trends:

• Securing a greater number of contracts and projects from OEMs.
• Experiencing higher rates of talent attrition to suppliers.

Why is this change in outsourcing mix of OEMs vs Suppliers?

• Evolving Role of OEMs: Previously, OEMs predominantly relied on suppliers for the majority of systems and subsystems, along with related work. However, there has been a notable shift as OEMs now assume greater control over engineering processes, software stack development, and specifications. Consequently, OEMs require more extensive engineering support, leading to increased collaboration with engineering service providers.
• OEMs Spearheading Large Deals: We covered this in detail in our earlier note.  Why are auto firms outsourcing large engineering services deals? Devil is in the data. Examples of Renault and Honda. (Read here).
• Supplier M&As and Restructuring: Within the automotive industry, there has been a wave of consolidation among tier 1 suppliers. While this consolidation initially stimulated large outsourcing deals, subsequent phases have seen suppliers prioritizing portfolio optimization and organizational restructuring. As a result, opportunities for pursuing extensive outsourcing programs may have diminished. Detailed insights into the impact of supplier consolidation on large outsourcing deals were explored in our previous analysis. (Read here).
• Supplier R&D Maturity. Tier-1 have been engaging in more engineering activities than OEMs in earlier years and have developed more mature R&D centers. So now they are scaling these centers further.

What should engineering service providers and automotive enterprises do?

Engineering service providers should focus on developing both short-term and medium-term strategies to capitalize on market trends and opportunities with OEMs and suppliers.

• In the short term assume that trend remains same. Then engineering service providers should target OEMs more for bigger deals and projects, work packages and collaborating with suppliers more for T&M, GCC work. However if service providers double click, there will find certain kind of new age emerging suppliers who might be more inclined to partnering with engineering service providers
• In the medium term, suppliers may again start to increase outsourcing. Industry reports suggest that suppliers are currently facing more cost pressures than OEMs, which may prompt them to seek assistance from engineering service providers for restructuring and stabilizing operations. Moreover, as suppliers aim to invest in new products and technologies, there will likely be a heightened demand for the expertise of engineering service providers. Engineering service providers should not miss this upside with suppliers whenever it materializes.

Automotive enterprises, including both OEMs and suppliers, stand to gain significant benefits from collaborating with engineering service providers. While cost remains a dominant consideration, the advantages of partnering with engineering service providers extend beyond mere financial savings. They offer substantial benefits in achieving R&D objectives and goals. (Read our earlier note here).

Bottom Line: Stay updated on the evolving mix of automotive engineering and adjust your plans accordingly. Stay informed, remain agile, make better decisions, and pave the way for success.