September 25, 2003

Automakers intend to move engineering, IT functions offshore

Detroit, Michigan - A recent survey of 40 senior executives at automotive manufacturers and suppliers reveals that 9 out of 10 executives say they intend to move certain non-manufacturing business processes to low-cost offshore locations. The survey was conducted by the management consulting firm A.T. Kearney.

Engineering and IT are the predominant functions being sourced to offshore labour pools, said Richard Spitzer, vice president in A.T. Kearney's Global Automotive Practice and co-author of the study. Additionally, certain financial and accounting services and call centre activities also are well-suited for offshoring.

"Done right, offshoring for select engineering, information technology and other support functions to India, for instance, can reduce automakers' and suppliers' costs by nearly 50 percent compared with doing the same functions in the U.S.," said Richard Spitzer, vice president in A.T. Kearney's Global Automotive Practice and co-author of the study.

"In addition, our research indicates quality is as good or better when transitioned to these particular regions," Spitzer added. "These cost-quality dynamic is making offshore initiatives extremely attractive for auto suppliers and manufacturers."

Shifting manufacturing to markets with lower wage and benefits requirements has been fairly widespread in the auto industry for several decades. Moving business processes to offshore locations, however, is a much more recent development across industries. Automotive is not the leader at this point, Spitzer said, but interest is clearly quite high.

Drivers for the growing momentum in this migration of labor include fierce competition in domestic and foreign markets; continuing cost reduction pressures; and an industry-wide strategy calling for local presence by automakers seeking growth in emerging markets, such as Asia and South America, and by suppliers in support of their customers.

A.T. Kearney estimates the North American automotive industry, including manufacturers and suppliers, spends approximately $9 billion annually on business processes with the potential to be offshored, representing an enormous opportunity for cost reduction and profitability improvement.

The most popular destinations for the migration of business processing activities, according to automotive executives responding to the survey, are:

• India (24 percent)
• China (15 percent)
• Mexico (13 percent)
• Brazil (10 percent)
• Czech Republic (8 percent)

"India is clearly the destination of choice for business processing services across all industries," said Nagi Palle, co-author of the research and a principal at A.T. Kearney. "There are tens of thousands of well- educated, English-speaking and highly motivated engineering, IT and accounting professionals in India with the skills and capabilities auto manufacturers and suppliers need for offshore business processing."

While nearly all companies surveyed indicated some level of participation in offshoring, the relative size of offshore operations for automotive manufacturers and suppliers is still small compared to other industries, such as high tech manufacturing and services, Palle added. "We are still early in this process," he said.

A.T. Kearney is one of the world's largest management consulting firms.

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