Services expertise and industry knowledge are top priorities for Automotive Customers

This report outlines client buying behavior and preferences in the automotive engineering services market projects (see Exhibit 1 and Exhibit 2). We spoke with more than 20 clients to understand their experiences working with service providers to deploy and support automotive engineering projects (see Exhibit 3). Refer to the HfS Blueprint Report: Automotive Engineering Services 2018 for a detailed analysis on the capabilities and vision of the automotive engineering service providers. We outline some of the key trends that emerged from this study and provide recommendations for enterprises embarking on automotive engineering service engagements.

The key findings of this study are:

• Increase in the number of turnkey projects: R&D spending has increased for automotive OEMs and tier-1 suppliers due to more competition and emerging automotive trends. The automotive companies are allocating more dollars to self-driving-, connected car-, and electric vehicle-related technologies. This increased R&D spending will drive outsourcing, particularly for end-to-end vehicle engineering, including design, development, testing, and homologation. We have already observed an increase in turnkey deals and we expect deal flow to increase in the future.
• Consortiums are the new decision makers: The automotive industry is observing the rise of a consortium-led approach in which one or more OEMs, tier-1 suppliers, and technology companies are collaborating. For example, Magna, Intel, Mobileye, and BMW collaborated on a self-driving car project. This is changing the dynamics of the sourcing decision from a top down (OEM-led) to a more collaborative approach. So, the buying decisions are shifting from OEM-only to multiple members of the consortium, increasing the complexity of the outsourcing.
• Digital is the new future: In automotive, the software content is increasing with the application of HMI, IVI, instrument clusters, autonomous driving, etc. Traditionally, the automotive OEMs and tier-1 suppliers have strong expertise in mechanical engineering, so they are outsourcing most of these digital projects. The challenge for engineering service providers is to have expertise around network communications, cloud, cyber security, OTA, and other digital areas, including managing integration complexity.
• Increasing need for testing and validation: In recent times, automotive OEMs have been affected by a huge number of vehicle recalls across geographies, incurring more cost and less trust among customers. For example, GM has recalled hundreds of thousands of Chevy and GMC pickups because of a potential steering issue. Toyota has recalled 600,000+ vehicles in the US to replace Takata air bag inflators. Honda has recalled 20,000+ vehicles in India to rectify faulty airbags. So, there will be an increasing focus on more rigorous testing and validation methodologies and processes.
• More focus on consumer preferences and design: As cars come with more high-tech features, automotive OEMs are also focusing on consumer preferences for vehicle aesthetics. Automotive OEMs are looking for service providers that can provide vehicle concept solutions and design, particularly related to vehicle styling. Service providers need to build expertise in the areas of CAS and UX/UI design to address this challenge.

Exhibit 1: Scope of Automotive Engineering Services Market Across Value Chain

 
Source: HfS Research, 2018

Exhibit 2: Scope of Automotive Engineering Services Market Across Automotive Segments

Source: HfS Research, 2018

Exhibit 3: Study Demographics

Sample set: 20 client interviews | Source: HfS Research, 2018

New product development leads services mix across the automotive engineering value chain

In terms of services, automotive engineering service providers have relied on new product development, product sustenance, manufacturing support, testing and certifications, services, and software implementation services to assist clients in their deployment journeys. These align with the HfS Automotive Engineering services Value Chain of services (see Exhibit 4).

Exhibit 4: What Percentage of Current Automotive Engineering Services Business Is from These Services?

Sample set: 15 Automotive Engineering service providers | Source: HfS Research, 2018

The majority of current automotive engineering service engagements consist of new product development, product sustenance, and testing and certification services, accounting for about 75 percent of the revenue, followed by manufacturing support, services, and software implementation. There is continued opportunity for growth across the HfS Automotive Engineering Services Value Chain, particularly in the areas of services, software implementation, and testing services.

Electronics leads opportunities across the automotive segments

In terms of services, the automotive engineering service providers have provided services to assist clients in their deployment journeys across interior, body, chassis, powertrain, electric and electronic, ADAS, other systems, and additional segments. These align with the HfS Automotive Engineering Services Automotive Segments (see Exhibit 5).

Exhibit 5: What Percentage of Current Automotive Engineering Services Business Is from These Segments?

Sample set: 15 Automotive Engineering service providers | Source: HfS Research, 2018

The majority of current automotive engineering service engagements consist of electric and electronic, body, and ADAS segments, accounting for about 56 percent of the revenue, followed by powertrain and additional segments. There is continued opportunity for growth across the HfS Automotive Engineering services Automotive Segments, particularly in the areas of ADAS, electric and electronic, and additional segments.

Services portfolio and automotive domain expertise are the main reasons for service provider selection

The automotive engineering service provider ecosystem is becoming more complex due to environment regulations, new entrants (Tesla, Google, Uber, etc.), emerging technologies (self-driving, connected car, etc.), and shift in business models (shared mobility). It includes global, regional, and specialist service providers with varying degrees of technical skills and delivery capabilities. Exhibit 6 outlines the main reasons the referenced clients selected their automotive engineering service provider.

Exhibit 6: How Did You Select Your Automotive Engineering Service Provider?

Sample set: 20 client interviews | Source: HfS Research, 2018

Deeper conversations with the referenced clients highlighted that these were the criteria used to identify the service providers to be considered in the RFP phase. The ultimate selection of the service provider was often based on strong service offerings based on specific project requirements. Clients appreciated the automotive domain expertise and resource capability for the engagements. They were also interested in the capability of emerging technologies to improve their existing portfolio and the opportunity of new business models in the future.

Clients rated automotive engineering service providers highest for their quality of account management, delivery capability, and project-specific services portfolio. They rated the service providers lowest for their ability to provide services based on location proximity and emerging technologies adaption (see Exhibit 7).

Exhibit 7: Client Satisfaction with Automotive Engineering Services

Sample set: 20 client interviews | Source: HfS Research, 2018

  Capability and execution are the keys

We also asked the referenced clients to identify the main strengths and challenges of their automotive engineering service providers. Exhibit 8 presents the top 10 strengths and service provider opportunities mentioned by the referenced clients. These are listed in order of client mentions.

Exhibit 8: Automotive Engineering Services Market–Strengths and Development Opportunities

Sample set: 20 client interviews | Source: HfS Research, 2018

The top three strengths noted were services portfolio, delivery capability, and digital engineering expertise. A client who highlighted customer focus as a strength said, “We want service providers that have strong automotive domain knowledge with the capability to take ownership of end-to-end project management,” which demonstrates the service provider’s execution as well as innovation capabilities.

Clients also highlighted that automotive engineering demands core industry knowledge and niche skills. Also, the resources need to have a good idea about the vehicle segment and vehicle types they are working on. Clients have mentioned that in some cases the project execution and innovation are mainly dependent on a few resources. Though service providers are prioritizing resource training, clients expect more focus in resource capability augmentation.

Several clients mentioned that they prefer service delivery at a location very close to them for better execution and shorter time to market. Also, certain European and Japanese customers prefer localized solutions, offering proximity, language compatibility, etc. Service providers need to have a good presence in nearshore countries for better client management.

Several clients mentioned that very few service providers have solid capability in advanced automotive emerging technologies ranging from connected-car and electric vehicle platforms to autonomous driving. One client explained, “The service provider should be matured enough in the emerging technologies to be a part of the advanced engineering project and futuristic vehicle development programs.” Clients observed that service providers need to develop deep expertise in certain areas, including telematics platform, V2X communication, driver assistance systems, battery management system, e-powertrain, and fleet management.

According to clients, pricing flexibility is very important for the engagements. As the vehicle development programs are becoming shorter with a lot of challenges in design, testing and regulations, the team size varies over the period of the project duration. So, clients prefer more nonlinear pricing models, primarily from risk-sharing perspectives. 

In terms of overall satisfaction, it often came down to the specific team on the engagement. In a few cases, referenced clients from the same service provider provided inconsistent feedback in areas such as the level of delivery performance, technical expertise, innovation capability, and flexibility of the service provider team.

Automotive engineering services customers must take these measures to achieve their desired outcomes

• Select service providers based on vehicle development efficiency: Automotive OEMs are facing cost and time pressure for new vehicle launches. The focus for buyers has shifted to modular platform development and testing and validation processes. Buyers should select service providers that can expedite this vehicle launch process without many roadblocks.
• Build a digital transformation agenda: Buyers should partner with service providers to build a digital transformation agenda for in-car digitalization (HMI, connectivity, better customer experience) and other areas (industry 4.0, fleet management, etc.). Also, we have observed the increasing adoption of PLM and its integration with ALM applications in the automotive engineering landscape. Buyers should focus on the capabilities of service providers that can implement PLM with the existing system with minimum disruption.
• Develop few strategic service providers: Traditionally, automotive OEMs and tier-1 suppliers work with several service providers having a large number of contracts. Buyers are interested to outsource more legacy sustenance projects to focus on new technologies. So, we recommend that they rationalize these portfolios to a few strategic service providers so that service providers get the incentive and required scale for more collaboration and innovation.
• Gain competency in emerging areas: Due to the newness of the emerging automotive areas (electric vehicle, connected car applications, autonomous driving, etc.), buyers face challenges to select the right service provider for these areas. They can jointly explore these emerging areas with small projects. There are also frequent requirements changes in emerging areas, so the service provider needs to be flexible enough to incorporate the changes in the SOW without increasing the cost too much.

• Evaluate capabilities in regulation and standardization: Automotive OEMs are launching vehicles into emerging markets more frequently, and in many cases vehicle derivatives are the suitable choice. Buyers need to select the service provider that has an understanding of the local geography and the capability to do value engineering, localization, and certification for the market.
• Leverage industry best practices: The automotive industry is observing new-age technology solutions and services in the areas of fleet management and cloud-based connected car services. Some of these solutions have been implemented in other industries too. Buyers should evaluate service providers with experience of similar solutions in other verticals and can cross-leverage those for the engagements.
• Evolve the engagement model: Buyers are looking for non-linear pricing (royalty-based, outcome- related) models to minimize the effort and risk on their new product development activities. Most of the automotive engineering engagements are run by staff augmentation and fixed-price models. Buyers can link some of the payment terms of the overall pricing based on the business or delivery outcome. This model can be applied for testing and validation projects that are very critical for the buyers from a vehicle safety and regulation point of view.
• Revisit the captives vs. service provider value proposition: Buyers can get better operating leverage, business outcome, and flexibility of ramping up and down based on business requirements by engaging service providers. The technology is changing very fast and service providers are also struggling to stay updated. Regulations and standardizations are shaping up around the applications of these technologies and they will take quite some time to stabilize. Buyers need to think about increasing their capability through captives by taking some of these projects in-house.
   

Bottom line: Service providers need to invest across the engineering value chain and in emerging technologies

New technology areas such as IoT, AI, composites, and 3D printing are influencing different areas of automotive engineering as described in our PoV: Essential Factors For Automotive Engineering Go-To-Market Success. The top-down automotive value chain (OEMs followed by tier-1 and tier-2 suppliers) is disrupted by the emergence of new-age technology companies. Automotive clients are also moving away from small module or system-based projects to end-to-end ownership of projects. Service providers need to equip themselves for capabilities across the value chain starting from vehicle design, value engineering, testing, and manufacturing support to life-cycle management, including expertise in the emerging areas.