Mastering Engineering Service Outsourcing in the automotive industry
Mastering Engineering Service Outsourcing in the automotive industry
Mastering Engineering Service Outsourcing in the automotive industry
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<strong>Master<strong>in</strong>g</strong> <strong>Eng<strong>in</strong>eer<strong>in</strong>g</strong> <strong>Service</strong> <strong>Outsourc<strong>in</strong>g</strong> <strong>in</strong> <strong>the</strong> <strong>automotive</strong> <strong>in</strong>dustry<br />
4. OEM/OES approaches to eng<strong>in</strong>eer<strong>in</strong>g outsourc<strong>in</strong>g<br />
and offshor<strong>in</strong>g<br />
A. <strong>Eng<strong>in</strong>eer<strong>in</strong>g</strong> outsourc<strong>in</strong>g is driven by key market trends<br />
The <strong>automotive</strong> <strong>in</strong>dustry has shifted from highly vertically <strong>in</strong>tegrated OEMs<br />
conduct<strong>in</strong>g design, manufactur<strong>in</strong>g and assembly of most vehicle components<br />
<strong>in</strong>house to a buyer-vendor base approach with a multi-tier supplier<br />
structure. As a result, <strong>automotive</strong> suppliers now account for up to 55-60%<br />
of <strong>the</strong> entire vehicle value creation <strong>in</strong> terms of OEM net revenues.<br />
This shift was driven <strong>in</strong> part by <strong>the</strong> fact that only a specific subset of vehicle<br />
components actually provide a dist<strong>in</strong>ct competitive advantage for OEMs.<br />
The rema<strong>in</strong><strong>in</strong>g standard components barely register <strong>in</strong> end-customer perception,<br />
or don't even matter at all. OEMs are thus better off outsourc<strong>in</strong>g <strong>the</strong>se<br />
components or sub-modules to specialized suppliers. Prom<strong>in</strong>ent examples of<br />
this <strong>in</strong>clude <strong>the</strong> heat<strong>in</strong>g, ventilation, and air condition<strong>in</strong>g (HVAC) modules,<br />
vehicle brak<strong>in</strong>g systems and front-end modules. Nowadays, <strong>the</strong>se are<br />
designed and provided entirely by recognized Tier 1 suppliers.<br />
Increas<strong>in</strong>g system complexity and tighter R&D budgets have spurred a<br />
similar shift <strong>in</strong> eng<strong>in</strong>eer<strong>in</strong>g tasks across all doma<strong>in</strong>s where OEMs must<br />
habitually make <strong>the</strong> trade-off decision between <strong>in</strong>ternal development and<br />
external contract<strong>in</strong>g of third parties. The current market downturn only<br />
adds to <strong>the</strong> need for more flexible R&D structures that allow quick reaction<br />
to market developments.<br />
The fur<strong>the</strong>r globalization of vehicle sales and production has also <strong>in</strong>creased<br />
demand for globally delivered R&D, while cont<strong>in</strong>uous cost pressure aga<strong>in</strong><br />
emphasizes <strong>the</strong> role of low-cost eng<strong>in</strong>eer<strong>in</strong>g. The ris<strong>in</strong>g demand of emerg<strong>in</strong>g<br />
markets for <strong>automotive</strong> products (e.g. BRIC) is fur<strong>the</strong>r push<strong>in</strong>g <strong>the</strong> transition<br />
of eng<strong>in</strong>eer<strong>in</strong>g tasks to <strong>the</strong>se emerg<strong>in</strong>g markets. For example, Ch<strong>in</strong>a is<br />
now <strong>the</strong> largest s<strong>in</strong>gle market for <strong>the</strong> Volkswagen Group. New models and<br />
variants are ideally developed and customized locally to meet specific local<br />
requirements and allow companies to capitalize on lower labor costs.<br />
One step fur<strong>the</strong>r down <strong>the</strong> value creation cha<strong>in</strong>, Tier 1 suppliers who are<br />
awarded <strong>the</strong> supply contract for a component or even an entire vehicle<br />
subsystem make similar trade-off decisions when conduct<strong>in</strong>g R&D for<br />
contracted vehicle systems.