Engineering Services Outsourcing (ESO)

Strategic analysis and business opportunities

Vikram Razdan
July 2017

(6 slides)
 1

Engineering Services Outsourcing (ESO)

55% Product development Service support 45%
Captive Outsourcing Non-Captive Outsourcing
Design and Engineering Design, Engineering and Manufacturing (Externalisation)
(Internalisation)
>> offshore/remote >> onshore/onsite
Comparative BPO (65%) BPO (35%)
Offshore: Onshore ratio, 70:30

Design and Manufacturing Design and Manufacturing

Engineering Specifications Engineering Specifications
Studies Scope Studies Scope
Tier-1 Tier-2
OEM Analysis Quality Analysis Quality
supplier supplier
Drawings Cost Drawings Cost
Detailed Design Time Detailed Design Time

Vehicle Sub-system/ Components

Components

Global engineering services market size: USD 750 billion, 20% outsourced (ESO), CAGR 15%. R&D and Innovation outsourcing to
Western countries, CAD/CAE and GD&T to India and China (Duke University; NASSCOM; KPIT)
 3

Automotive industry: convergence of technologies

Toyota Tesla
VW NewCo BYD Qin
Traditional
GM OEM (OEM) Geely
Ford Lucid

Bosch Google
Denso Traditional Apple
NewCo
Supplier
Magna (Supplier) Samsung (Harman)
Continental AT&T

Whats happening? Challenges for Traditional OEMs

Connected vehicles Inadequate technical expertise, interface/integration issues

Electric vehicles
Driverless systems
Remote diagnostics
Develop
Evolving technology, battery life and charging issues
Outsource
New paradigm, regulatory issues Acquire
Inadequate technical expertise, implementation issues
 3

Automotive industry dashboard and technology development

OEM Core competence
OEM System integration

Core OEM/Supplier Engine Transmission Chassis/Body

Supplier Brakes Suspension Steering Fuel system Electrical

Non-core Supplier Electronics Chassis control Safety systems Thermal systems AV systems Mature

Supplier Seating Lighting Glass Tyres Exhaust Design and

Engineering
outsourcing
OEM/Supplier Telematics Anti-collision IoT systems Driverless systems
Turbulent
Developing
OEM/Supplier RCVs Mobile fuelling Future

Opportunities for ESO companies (targets)

Technology Existing New Differentiating factors
Core/Developing OEMs NewCo 1) Analysis and Design capability 2) System Integration knowledge 3) Cost
Non-core Tier-1 suppliers NewCo and Tier-2 suppliers 1) Design capability 2) Cost

Automotive Tier-1 suppliers are likely to present more opportunities for engineering outsourcing, driven by cost considerations, lower
complexity and higher levels of standardisation, while giving the ESOs an opportunity to leverage the experience into other industries
(Common suppliers across automotive, aerospace, rail, marine, construction, mining, agriculture, material handling, machine tools etc.)
 4

OEM new product development and outsourcing

Innovation
Life-cycle Product Process What are the
Research Concept, Layout, MVP QFD drivers?
1990s 2010s
Design CAD, FEA, PLM DFSS, APQP, VA

Development Prototyping, Testing DFM, FMEA, VE

Manufacturing Tooling, Machinery, Equipment DMAIC, QC, Lean, SCM, ERP

Total (50%)
Logistics Packaging WMS

Service - CRM

Outsourcing
OEMs objective for outsourcing: Improve cost of performance i.e. cost of systems + system behaviour
Engineering outsourcing Shorter product development cycles Key drivers
Components Modular design Mass customisation
Focus on
Sub-systems mature Process automation Technology advancements (Industry 4.0, advanced
Electronics technology Standardisation materials, rapid prototyping)
e-Procurement Global production networks
Key issue: System Integration

Automotive industry norm: around 50% of design and engineering work is outsourced. Example of one OEM in Europe achieving 85%, before
scaling back due to knowledge and competency erosion issues. Typically, there are 3,500 technical CAD drawings per car (Zirpoli and Becker, 2011)
 5

Automotive industry ESO opportunity matrix

Industry Technological competency (Scale: 1 to 5)

participant
Core Non-Core Developing
Traditional OEM 5 3 2
Traditional Supplier 3 5 2
NewCo (OEM) 1 1 3
NewCo (Supplier) 1 1 3
Best opportunity

Gap analysis
Gap
Core Moderate to high
4 NewCo (OEM and Supplier) Competitive Low Turbulence
Small market size Non-Core margins
High growth
3 Developing Traditional (OEM and Supplier) Low competition High Turbulence High margins

Moderate to low
Core Traditional OEM Low competition Mature
margins
Large market size 0 Slow growth
Non-Core Traditional Supplier Competitive Mature Low margins
 6

Industry sectors for leveraging automotive ESO experience

(Common supplier focus)

Sectors Equipment Key markets

Aerospace Aeroplanes, Satellites, Drones USA and Europe

Construction Excavators, Concrete mixers, Diggers, Global

Compactors, Access platforms

Agriculture Tractors, Harvesters, Sorting machines, USA, Asia

Loaders

Rail Locos, Bogeys, Mechanical and Electrical USA, Europe, Asia

equipment (modules)

Marine Ships, Boats, ROVs USA (premium), Europe

(premium), Asia

Mining Dumpers, Excavators, Boring machines USA, Europe, Asia

Material Handling Cranes, Forklifts, Conveyor systems Global

Machine tools Lathes, CNC, Grinders, Drilling machines Europe, Asia

Engineering services outsourcing crossed its inflection point in 2011, driven by

successful offshore/onshore working models.
Ensuring quality of work and controlling scope continue to pose challenges.
Effective international project management remains the key to success, including
overcoming cross-cultural barriers while considering factors like motivation, cognition
and behaviour of engineers and staff (Kiznyte, Ciutiene and Dechange, 2015)
End of presentation
Thank You