automotive design engineering a scoping mission to india

7.1 Subsidiaries of the indigenous 18 Indian automotive industryOEMs and Tier 1s 7.1.1 Structure and strategy 187.1.2 Technology level 197.2 IT sector affiliates 207.2.1 Structure and st

Automotive design

engineering – a scoping mission to India

SEPTEMBER 2005

The DTI drives our ambition of

‘prosperity for all’ by working to

create the best environment for

business success in the UK

We help people and companies

become more productive by

promoting enterprise, innovation

and creativity

We champion UK business at home

and abroad We invest heavily in

world-class science and technology

We protect the rights of working

people and consumers And we

stand up for fair and open markets

in the UK, Europe and the world

UK experts to visit leading overseas technologyorganisations to learn vital lessons about innovationand its implementation of benefit to entire industriesand individual organisations

By stimulating debate and informing industrialthinking and action, missions offer uniqueopportunities for fast-tracking technology transfer,sharing deployment know-how, explaining newindustry infrastructures and policies, and developingrelationships and collaborations Around 30 missionstake place annually, with the coordinating

organisation receiving guidance and financial supportfrom the DTI Global Watch Missions team

Disclaimer

This report represents the findings of a missionorganised by the Society of Motor Manufacturers andTraders (SMMT) with the support of DTI Views

expressed reflect a consensus reached by themembers of the mission team and do not necessarilyreflect those of the organisations to which the

mission members belong, SMMT or DTI

Although every effort has been made to ensure theaccuracy and objective viewpoint of this report, andinformation is provided in good faith, no liability can

be accepted for its accuracy or for any use to which itmight be put Comments attributed to organisationsvisited during this mission were those expressed bypersonnel interviewed and should not be taken asthose of the organisation as a whole

Whilst every effort has been made to ensure that theinformation provided in this report is accurate and up

to date, DTI accepts no responsibility whatsoever inrelation to this information DTI shall not be liable forany loss of profits or contracts or any direct, indirect,special or consequential loss or damages whether incontract, tort or otherwise, arising out of or in

Automotive design

engineering

– a scoping mission to India

REPORT OF A DTI GLOBAL WATCH MISSION

SEPTEMBER 2005

1.2 Why India and why now? 5

2 THE PERSPECTIVE OF THE 8

INDIGENOUS INDIAN

AUTOMOTIVE INDUSTRY

3 THE POLICY CONTEXT OF 10

FOREIGN DIRECT INVESTMENT

4 SUPPLY SIDE HUMAN 11

RESOURCE ISSUES

4.1 The good news – costs are 11

currently extremely competitive

4.2 But the problem of staff ‘attrition’ 11

at lower levels is endemic

4.3 And figures for graduate supply 12

can be deceptive

4.4 So how long will the situation of 12

‘labour rate arbitrage’ endure?

7.1 Subsidiaries of the indigenous 18

Indian automotive industry(OEMs and Tier 1s)

7.1.1 Structure and strategy 187.1.2 Technology level 197.2 IT sector affiliates 207.2.1 Structure and strategy 207.2.2 Technology level 207.3 Independent engineering 20

service providers7.3.1 Structure and strategy 207.3.2 Technology level 22

8.1 Templates for possible 23

collaboration8.2 Possible offshore outsourcing 23

business models8.2.1 Project-based consulting model 238.2.2 Dedicated resource provision 248.2.3 Provision of managed facilities 248.2.4 Establish, operate and transfer 24

facilities8.2.5 In-house offshore facilities 25

A Mission delegate details 27

B Host company visit reports 31

C Best practice guidelines 49

D List of exhibits 52

EXECUTIVE SUMMARY

What and why

This report describes a DTI Global Watch

Scoping Mission to India under the auspices

of the Society of Motor Manufacturers and

Traders (SMMT) The aim of the mission was

to characterise and assess the potential of

the developing automotive research and

development (R&D) capability and technology

base of India Specifically, the mission aimed

to characterise and assess both the current

and likely future capability and technology

level of this sector of the Indian automotive

economy With this information it was

intended to establish a range of potential

models of collaboration, cooperation and

competition between UK and Indian

engineering service providers

Where and when

Fifteen visits were made to host companies

actively engaged in the automotive

engineering services market, in five Indian

cities (Delhi, Pune, Hyderabad, Chennai and

Bangalore), in five days (5-9 September

2005) In order to provide a complementary

focus on issues relating to foreign direct

investment (FDI) and the indigenous Indian

automotive industry, additional visits were

made while in New Delhi to the Government

of India Ministry of Commerce and Industry

(MCI) Department of Industrial Policy and

Promotion (DIPP) and to the head office of

the Society of Indian Automobile

Manufacturers (SIAM)

How reported

Four distinct market segments are identifiedbased on the host company visits, and ananalysis provided of the observations of themission on the typical structure, strategy andtechnology level representative of serviceproviders within each segment A series oftemplates for possible collaboration ofWestern customers in this sector is thendescribed Finally, a number of best practiceguidelines are set out both for potentialservice users and for service providers

Who for

The information contained in this report islikely to be of most direct relevance to UKcompanies engaged in independentautomotive R&D It will be of particularinterest to those considering engaging withthe Indian offshoring sector, whether throughthe use of local engineering service providers

or through the establishment of an in-houseoffshore engineering facility However, many

of the observations presented are also likely

to be of interest to those from other –non-automotive – industrial sectors who arenonetheless interested in the opportunitiesand threats posed by the offshoring of work

of a technical nature

Some caveats

Notwithstanding the above comments, it isimportant that readers of this report fullyappreciate that the information andobservations contained are of a generalnature The mission was necessarily focused

on a small sample of host companies which

The report should therefore be considered

neither a detailed directory of the market nor

a detailed statement of capabilities, strengths

and weaknesses of any of the individual host

companies visited Similarly, the best practice

guidelines set out in this report are intended

as additional, non-obvious considerations forthose engaged in the market for offshoreengineering services; they should in no way

be viewed as a substitute for the commercialand engineering best practices which shouldform part of any outsourcing process

Exhibit S.1 ProSIM R&D centre, Bangalore

1.1 Introduction

1.1 Introduction

The UK automotive design engineering

sector provides high added-value

consultancy and engineering services to the

world’s leading automakers and Tier 1

suppliers This is a truly global industry in

which the UK has enjoyed a substantial

market share The automotive industry

continues to evolve globally, and changes

potentially affecting the UK’s strong position

in design engineering are appearing

Emerging economies present opportunities

for new business and collaboration as well

as potential competitive threats from new

market entrants

This DTI Global Watch Scoping Mission was

carried out under the auspices of the Design

Engineering Group (DEG), an industrial

committee of the Society of Motor

Manufacturers and Traders (SMMT) which

addresses the precompetitive needs and

interests of the independent automotive

research and development (R&D) sector

within the UK The aim of the mission was

to characterise and assess the potential of

the developing automotive R&D capability

and technology base of India, with a view to

establishing potential models of

collaboration, cooperation and competition

between UK and Indian engineering service

providers Hence from the outset the

mission was viewed as providing potentially

beneficial results for both UK industry and

1.2 Why India and why now?

The increasing outsourcing of businessprocesses to low-cost economies has been awell-documented trend in recent years With the focus upon labour-intensive

‘back-office’ operations, many types ofservice-based business activity from callcentres to information technology (IT) supporthave been successfully outsourced

While many countries offer the potential forlow-cost outsourcing, few come close tothe attractive mix represented by India,which offers the advantage of a largetechnically educated and English-speakingworkforce Despite the fact that India fallswell behind China in terms of the volume

of foreign direct investment (FDI)($4.3 billion versus $53.5 billion), the Indianeconomy is viewed by international

investors as being particularly attractive foroutsourcing IT, business processes andR&D1 In contrast, when asked what kinds

of activity will be offshored to China,investors indicated a preference formanufacturing and assembly A particularsuccess for India has been the outsourced

IT and software industries where clusterssuch as that in the region of Bangaloreplace the country in a highly competitiveinternational position

In addition to its successful recent trackrecord in business process outsourcing, India also has a significantly sized domesticautomotive industry The country producesannually in excess of six and a half million

and 0.3 million commercial vehicles

(Exhibit 1.1) As such it ranks second in the

world in production of two wheelers2, fifth in

commercial vehicles and thirteenth in

passenger cars

Traditionally the Indian automotive industry

has been a customer for the UK design

engineering sector and this relationship

continues However, the Indian government is

actively encouraging the development of the

indigenous automotive R&D base, including

for example provisions for the weighted

deduction of 150% of R&D expenses3

Signs of emergent low-cost competition from

India in automotive design engineering have

been evident for some time now, primarily

restricted to lower added-value

computer-based functions such as the legacy

conversion of computer-aided design (CAD)

data and the creation of meshes for finite

element analysis (FEA) In many cases these

niche competitors have grown from existing

outsourcing providers in the IT sector rather

than from the domestic automotive industry

Increasingly, however, the stated strategic

aspiration of both of these service

organisations as well as the indigenousautomakers is to compete on an internationalscale for design engineering business4 While the current technology base within theIndian automotive and IT industries may notenable such new entrants to competeinternationally for highest added-value R&D,

it is clearly an open question as to the possiblerate and extent of technological developmentwhich may allow this in the future

The situation described represents both anopportunity as well as a challenge for UKindustry Clearly there is the potential for UKengineering organisations to achieve

advantage over international competitorsthrough cooperation and collaboration withlow-cost partners in an English-speakingenvironment, or through the establishment oftheir own low-cost operations in-territory.Conversely it also presents a potentialcompetitive challenge for the future as newservice providers emerge and competedirectly for business Whether or notindividual Western R&D organisations wish toengage in India therefore, knowledge of thisrapidly developing part of the Indian economy

is an essential input to future strategy

Exhibit 1.3

Despite the introduction of new passenger car models, two and three wheelers continue to dominate with India ranking second globally in this market sector

The Society of Indian Automobile

Manufacturers (SIAM) is the national

representative body of the automotive

manufacturing industry in India SIAM

represents the indigenous original equipment

manufacturer (OEM) base as well as joint

ventures (JVs) and wholly owned subsidiaries

of international automakers The task of

representing the supply chain – in particular

the larger Tier 1 component manufacturers –

falls to a separate body known as the

Automotive Component Manufacturers

Association of India (ACMA) The mission

visited the offices of SIAM in New Delhi and

the meeting was hosted by a team led by

the organisation’s Director General, Dilip

Chenoy and Assistant Director, Pamela Tikku

SIAM set out its view of the current state

of the Indian automotive industry, including

a range of general statistics which werepublished recently in the organisation’s2004/05 annual report5 It views

automotive R&D as a rapidly developingarea in which Indian companies arebeginning to strengthen their skills basethrough both organic growth and

acquisition Particular areas cited asrequiring further technology and skillsdevelopment were concept design,prototype validation and specialistpowertrain technology, the latter an area inwhich many Indian OEMs have

considerable well-established experience

of using European specialists

SIAM identified regulated emissions, air

quality and fuel consumption as amongst

the primary technology drivers for the Indian

OEM sector There have been a number of

extremely high profile government initiatives

such as the mandatory conversion to

compressed natural gas (CNG) of the entire

public transport road vehicle fleet in the

New Delhi area SIAM expects that similar

local initiatives will follow throughout India

The country is essentially adopting European

legislation and is currently working toward

harmonisation; currently Euro III emission

levels apply in 11 major cities There is also

considerable interest in the development of

biofuels and – in the longer term – hydrogen

fuelled vehicles (principally internal

combustion based as opposed to fuel cell

powered) In terms of current market

drivers, fuel efficiency remains a key

marketing point for Indian products, much

more so than luxury options

SIAM considers that there is huge potentialfor European automotive design engineeringcompanies to work with Indian OEMs andfeels that this is an important means throughwhich its members’ R&D skills can be

augmented through technology transfer Inaddition to promoting direct commercialrelationships, SIAM also encourages andsupports the involvement of Indian companiesand academia in precompetitive Europeanresearch frameworks

While ACMA was not visited by the mission,the delegates noted from independentobservations that there is a recent apparenttrend on the part of indigenous OEMs totransfer component and system-level designresponsibility onto the supply chain This wasconsidered a further area in which servicesmay be required, both on the part of theindependent automotive R&D sector withinthe UK and its developing counterpart in India.Exhibit 2.2 India – land of automotive contrasts

In order to evaluate the legal obstacles and

incentives to the direct involvement of

UK-based companies in the Indian market,

either through JVs or the establishment of

wholly-owned subsidiaries, views on this

subject were sought from an appropriate

representative of the Government of India

The mission was granted a meeting with

Mr Umesh Kumar, Joint Secretary to the

Government of India Ministry of Commerce

and Industry (MCI) Department of Industrial

Policy and Promotion (DIPP) The following

paragraphs summarise the notes of the

delegation regarding the views expressed by

Mr Kumar

At the outset, Mr Kumar wished to reassure

the delegation that the Indian economy is

very much a market economy and that the

Government of India encourages this

Foreign companies wishing to set up in India

enjoy equal footing with indigenous Indian

companies, and there are many local

incentives which may be available from state

or city governments to support new

investment The extent of foreign ownership

is free from government control; both JVs

and wholly owned subsidiaries have each

proved successful and the balance of equity

is entirely at the discretion of the

partnership Companies can usually be

incorporated in around 7-10 days, with more

complex cases taking no more than four

weeks There are numerous consultancies

which specialise in supporting overseas

companies setting up in India

has recently been strengthened and ongoingprocess improvements are aimed at

reducing application backlogs The legalprocess in terms of disputes procedures isalso well established A law is expected to

be passed in the coming year, the existingrecommendations of which will streamlinethe whole life cycle of a company includingthe process of closing a business Taxationrules are clear and the rates applicable for anew business can be agreed in the form of

an advance ruling that must be granted bythe tax authority within 90 days

The labour market is tilted more in favour ofthe employee than the employer in

comparison with the situation prevailingwithin the UK This has implications in terms

of rules relating to the termination ofemployment and closure of businesses

Overall the delegation was impressed at theopenness of the government in encouragingFDI and in highlighting the strengths andweaknesses of India as a location for newbusiness During the course of subsequentmeetings with design engineering

companies the delegation became aware ofthe nature of some of the mechanisms thatmay be used to maximise advantage whileestablishing a new company The clearrecommendation has to be for thosewishing to establish their own facility toseek informed and expert advice beforeproceeding with the formation of a newcompany and recruitment of employees

4 SUPPLY SIDE HUMAN RESOURCE ISSUES

extremely competitive

at lower levels is endemic

be deceptive

‘labour rate arbitrage’ endure?

4.1 The good news – costs are

currently extremely competitive

Without exception the cost base

demonstrated by the host companies visited

was extremely competitive compared to that

typical of similar industrial activity in the UK

and other Western nations With labour the

dominant cost in most engineering design

activities, this clearly translates to a

competitive advantage for offshored activity

even when overheads of remote working

(ignoring set-up costs and learning curve

effects) are taken into account

Despite the fact that they were all

significantly lower than Western labour

rates, the figures provided by host

companies indicated that prevailing rates

vary considerably between what might be

termed the offshoring hot spots such as

Bangalore, and less favoured locations

Together with availability of key staff, this

may be a key consideration for those

companies considering establishing their

own Indian subsidiaries

Most of the host companies visited operate

highly flexible shift working patterns in order

infrastructure) All of this translates intocurrent fee structures that are highlycompetitive on an engineer-hours basis, with the host companies typically claiming adirect charge-out rate advantage of 30-40%compared with similar activity carried out inWestern Europe or North America

4.2 But the problem of staff ‘attrition’

at lower levels is endemic

The delegation was surprised by thechallenge posed to local providers ofengineering services by the high turnover ofyoung engineers in the early years of theircareers While figures vary according to thehuman resource management practices ofeach company and are clearly anecdotalgiven the small sample size, typical staffturnover or ‘attrition’ rates for junior gradeengineers were found to be in the region of15-25%

This problem is compounded by the steepsalary progression expectations of youngengineers Whereas in Europe the salarydifferential between an experiencedengineer of around 30 years old and a rawengineering graduate recruit might be in theorder of 60%, the equivalent differentialfound with the host companies was closer

to 400% The delegation was told that ayoung engineer transferring betweenemployers might expect to receive a typicalincrease in pay of 30-35% The motivatingforce behind the problem of attrition is thuseasily understood

From a customer perspective, widespread

attrition is clearly a concern in respect of the

initial learning-curve overhead of establishing

a business relationship It is also potentially

a concern with regard to confidentiality and

the dilution of know-how

Many host companies visited demonstrated

some highly innovative approaches in

meeting this challenge Some for example

use fiscal incentives such as employee

share ownership schemes while others

focus upon intrinsic career development

rewards such as the opportunity for

international travel In some cases suppliers

will use previous employee loyalty as a

significant filter in the recruitment process

One executive explained: ‘I deliberately look

for prior loyalty and give this similar weight

to technical skills – candidates with a

previous track record of ‘job-hopping’ are

usually screened out’ Comments by service

users too indicate some of the methods by

which the effects of attrition can be

mitigated, such as the contractual

requirement that named individuals will be

engaged on follow-on projects

These together with other guidelines are a

crucial element of the best practice

guidelines presented later in this report

(Appendix C)

4.3 And figures for graduate supply

can be deceptive

While the available pool of young university

graduates in India has been estimated at

14 million, the proportion of such

engineering graduates considered suitable

for employment by a multinational company

is as low as 25%.6 This finding was broadly

those providing more advanced, technologyfocused services Questioned on this aspect

of human resource management, one seniorexecutive said: ‘I do not think that there aremany good engineers available – there arejust a few who are capable of being trainedfor the type of work that we do.’

With the growth in offshore engineeringactivity which is clearly apparent in the rapiddevelopment of many of the host

companies, a gradual tightening of themarket for graduate recruits must beexpected As with the problem of attrition,the most innovative host companies haddeveloped training and recruitment policiesaimed at ensuring a ready supply of talentwithin their organisations These too informthe best practice guidelines (Appendix C)

4.4 So how long will the situation of

‘labour rate arbitrage’ endure?

While the cost advantage of engineeringactivity in India is considerable at present,observations of the host companies visitedindicated that general wage inflation in thissector is in the region of 20% Given thatcomparable wage inflation in the UK iscurrently closer to 2-3% it is clear that whilethe cost advantage of carrying out

engineering activity in India is currentlysignificant, this advantage is being erodedover time

This raises the obvious question of just howlong the cost advantage of carrying outengineering activity in India will endure

A number of the host companies visitedstated that the twin effects of inflation andthe looming shortage of graduate supply willerode the cost advantage within the next

7

stabilise closer to 30%, the differential

currently prevailing between the wages of

young professionals in Mexico and the USA

While a 30% long-term staff cost advantage

might seem at first sight extremely

attractive, it is important to recognise that

the current differential is potentially

significantly greater than this Based on

salary expectations provided by the host

companies, the delegation estimate that raw

wage costs for offshore engineering work

are up to 70% less than those of a typical

UK company, based on an engineering team

of mixed age and experience With current

fee rates for Indian suppliers typically only

30-40% lower than those in the West, it

would appear that overheads and retained

profits are proportionally significantly higher

To remain competitive therefore, Indian

suppliers will need to markedly improve their

efficiency or reduce retained profits

compared with prevailing levels For those

able to do this and at the same time provide

internationally competitive technology and

service, the residual cost advantage of

offshoring engineering work to India is likely

to remain significant, even if perhaps slightly

less so than today

As the phenomenal success of the

outsourced business process and customer

relationship management (CRM) sectors in

India have amply demonstrated, the country

is well equipped to provide a base for

remote business activities utilising IT and

telecom links However, for those seeking to

establish their own subsidiary offshore

operations, geographical influences upon

aspects such as staff cost and availability

and the general quality of infrastructure

should be critical considerations

There is evidence that some inward

investors have been drawn to the major

offshoring clusters without due

consideration for alternative geographical

centres which may offer a more attractive

cost base It was suggested to the

delegation for example that salary

expectations in Bangalore are typically

around 25% higher on a like-for-like basis

compared with less favoured offshoring

locations such as Pune

Equally however it was clearly apparent to

the delegation that the quality of

infrastructure – from the reliability of power

supplies and availability of backup generators

to the standard of the local road network –

can vary widely both within and between

regions and cities

For potential inward investors there can be

no substitute for direct, thorough and

informed research into prospective locations

In advance of the scoping mission, the

delegation identified a clear, four-way

segmentation of the independent

automotive engineering services sector in

India based on the host companies to be

visited The primary segments were

This framework avoids consideration of a

further rapidly developing segment of

activity: the in-house operations of overseas

OEMs and Tier 1s The rationale for this is

that these organisations within India appear

to be solely focused upon the fulfilment of

in-house needs and are not active in the

independent engineering services sector

Exhibit 6.1 overleaf shows the

segmentation of each of the host

companies visited by the delegation

In assessing the characteristics and

technology level of the independent

automotive engineering service sector

within India, the delegation has been careful

to analyse the observations made at an

industry segment level rather than an

individual company level There are two

reasons for this:

1 The selection of the host companies wasintended to provide a representativesample of this sector of the Indianautomotive economy based on a smallnumber of companies drawn from eachindustry segment There are numerousadditional organisations of all sizes whichwould have been appropriate for inclusion

in the study but which were omitted fromthe list of prospective host companies inorder to create a manageable sample sizefor the scoping mission It would beinappropriate and also unfair to thoseorganisations not visited to imply through

a company-by-company presentation thatthis sample is in any respect exhaustive

2 Given the degree of openness andcooperation with the mission exhibitedwithout exception by the individual hostcompanies, the delegation feels that acompany-level presentation of resultswould be unfair in the portrayal ofchallenges that are faced by industry

at large

Notwithstanding the above comments, visitreports containing more general observationsfor each of the companies visited are

contained in Appendix B to this report

Direct subsidiaries of indigenous Subsidiary name Parent organisation Indian automotive OEMs Ashley Design & Engineering Services Div Ashok Leyland

Remote Services Division Hindustan Motors Tata AutoComp* Tata Motors Tata Technologies Tata Motors Subsidiaries and affiliates Subsidiary name Parent organisation

of automotive Tier 1s Harita Infoserve TVS Group

MIND** Motherson/Sumitomo JV Tata AutoComp* Tata Motors

Subsidiaries and affiliates Subsidiary name Parent organisation

of IT service organisations Infotech Enterprises Operates as part of parent

Satyam-Venture Satyam Computer Services/

Venture Global (USA) Wipro Operates as part of parent Independent automotive engineering Caepro

service providers MIND**

(Most of these companies operate Neilsoft

in multiple industries and Onward Technologies

application domains) ProSIM

Quantech Global Services QuEST

Certain organisations cross the boundaries of the segmentation identified by the mission:

* Tata AutoComp, while under the ultimate ownership of Tata Motors, operates predominantly within the Tier 1 sector

** MIND is a JV with Tier 1 ownership but appears to operate with a high degree of autonomy similar to that of the independent segment

Exhibit 6.1 Segmentation of independent automotive engineering service providers

Caepro Onward Technologies Tata AutoComp

Tata Technologies Neilsoft

Infotech Enterprises Quantech Global Satyam-Venture

ProSIM Harita Infoserve Wipro

QuEST

ProSIM Harita Infoserve Wipro

QuEST

Remote Services Ashley Design

7.1 Subsidiaries of the indigenous

Indian automotive industry

(OEMs and Tier 1s)

7.1 Subsidiaries of the indigenous

Indian automotive industry

(OEMs and Tier 1s)

These two segments share many common

characteristics, not least due to their very

similar industrial background and business

culture For this reason the delegation chose to

analyse them together while highlighting those

areas in which differentiation is apparent

7.1.1 Structure and strategy

The OEM and Tier 1 sector organisations

appear to be closely integrated with their

parent organisations at an operational level

and view this as a significant competitive

advantage in terms of the automotive

domain experience that it brings It was also

cited on many occasions as offering the

ability to add and remove resource from the

external engineering service business

depending on the immediate demands of

The OEM and Tier 1 service providersshowed a clear distinction from the ITaffiliates and independent engineeringcompanies in their strategic direction

They exhibit a clear and self-confident sense

of a long-term mission that appears to beshared throughout the management team

A willingness to grow through strategicinternational acquisitions and JVs in support

of strategic goals was often stated and isalso borne out by examination of the recenthistory of many of the organisations visited.Some were also extremely frank about their marketing strategy, seeing the large,global automakers and multinational Tier 1s

as their primary future customer base rather than the small to medium sizedenterprises (SMEs) further down theautomotive value chain

While some of the operational advantages

of industrial ownership will currently favourthe OEM more than the Tier 1 subsidiaries,

Exhibit 7.1 The recently opened technical centre of

Tata Technologies, Pune (courtesy Tata)

given to high-level collaborations with

global automakers8

7.1.2 Technology level

The OEM and Tier 1 segments were typified

by companies with a very strong automotive

focus and culture They demonstrated a deep

level of production engineering and

manufacturing process knowledge drawn

from their parent organisations and they

presented themselves as extremely well

managed and process-oriented organisations

A considerable exposure to large-scale

programmes was demonstrated, although

overall skill levels in powertrain engineering

CAD skills in the OEM and Tier 1 segmentswere generally the best seen during themission, demonstrating in many cases athorough appreciation of the requirements

of collaborative working using the latestCAD systems on large-scale programmes.Testing and validation skills varied widelybetween individual organisations

Computer-aided engineering (CAE) skillsappeared to be generally more process thanexpertise oriented, with excellent skillsexhibited for general work but more limitedexamples of more advanced applications andthe use of true optimisation based methods Exhibit 7.2 CAD skills being demonstrated to Mike Reeve during the visit to Hindustan Motors Remote

Services Division, Chennai

knowledge-based engineering (KBE)

applications in which certain of the OEM

sector appeared to have invested

significantly This was in keeping with the

apparent focus on the acquisition and

retention of process knowledge as the

primary driver for future development of

skills and service competence (engagement

in advanced R&D appeared limited by

international comparison) The use of KBE

systems might also be seen as a highly

innovative means of limiting the negative

impacts of staff attrition

7.2 IT sector affiliates

7.2.1 Structure and strategy

The IT services sector has been a major

success story for India in recent years and

boasts the rapid development of a number of

large and internationally leading organisations

These are some of India’s most respected

business brands and are amongst the most

sought after for prospective new employees

While some are extremely large, they tend to

be highly decentralised, innovative and

flexible in their approach to the development

of new business streams and the acquisition

of new skills

Drawing on experience of growth in the IT

services sector, these engineering service

providers have a business model which

relies on a close knowledge of the individual

parts divisions and departments of their

customers This model lends itself to the

provision of services to larger customers

such as the leading automakers and Tier 1

organisations rather than to SMEs

While acquisitions are far from unknown

7.2.2 Technology level

The technology capability of this sectorappears in general to be based on theclustered development of similarcompetencies across a range of industries,rather than focusing strictly at a domainlevel Skills were thus fragmented andclustered on selected application areas, andthe segment as a whole appeared to havethe lowest level of overall automotive focus

of those investigated

The development of each new area ofcompetence appeared both highlyopportunistic and efficient, with an activewillingness to invest in learning theircustomers’ product development processes.CAD and CAE skills were consistent with thisapproach, with highly specific and discreteareas of application expertise Once activewithin an application area, a path of verticaldevelopment appeared common; for example,starting with CAD legacy conversion workbefore moving into added-value engineering ofsimilar components and systems

7.3 Independent engineering service

providers

7.3.1 Structure and strategy

This segment is comprised of a large number

of predominantly smaller and highlyentrepreneurial companies Most have beenformed in recent years or have developedfrom related sectors such as engineeringsoftware development and distribution Overallthey exhibit an extremely high level of domainand technical focus on the targeted industriesand subsectors that they serve They aremostly privately owned and independent of

facilities for individual customers Some

highly innovative approaches were found In

one case the supplier’s business model is

based upon the provision of local on-site

support by a liaison engineer of the same

nationality as the customer, in order to

provide a truly local interface to the offshore

service In another case a supplier has

developed a hybrid business model as an

option for clients wishing to graduate to their

own in-house facility, whereby the supplier

establishes the new facility as a service and

transfers ownership after a fixed period and

subject to agreed performance criteria

While some large customers are served, this

segment had a clear focus on providing

services to medium sized companies

Operating at a highly focused and technical

level, human resource strategies are extremely

important A number of innovative approaches

were demonstrated aimed at limiting and

mitigating the negative impacts of attrition,

ranging from the identification of core staff

Despite the fact that it includes some of themost innovative and entrepreneurial of thecompanies visited, this segment is likely to

be at greater exposure to fluctuating marketdemands Threats in particular to lower-endwork are likely to arise from improvements

in mesh generation software which reducethe labour content and hence the

attractiveness of outsourcing (this view wasprovided by a long-standing Western

customer of this sector) Similarly for largercustomers there is a tendency to graduatefrom the use of an outsourcing model to thedevelopment of local in-house facilities

However, the highly entrepreneurial nature

of the companies in this segment mayenable them to respond to such marketchanges Some in particular are extremelyclear in their intention to move towardshigher added-value analysis and designservices which are globally competitive ontechnology as well as price This wasreflected in a few examples of methods-Exhibit 7.3 Part of the technical centre of Onward Technologies, Pune

7.3.2 Technology level

The companies visited in this segmentexhibited a high degree of domain

knowledge and concentrated upon providing

a selected range of services and

technologies While showing similarities inbusiness culture and technical strategy, notwo organisations exhibited an identicalprofile of competences and service Theyappeared to focus on recruiting and retainingstaff with specific skills as a means of

developing and maintaining competence ineach application domain

In general terms the focus of companieswithin this segment was more upon CAEapplications than on CAD and product design.This is in part reflected by a lesser exposure

to programme-level activity than that typicallyfound in the OEM and Tier 1 segments

While most organisations were fairly broadbased in the analysis applications coveredand the industry sectors served, a smallnumber were extremely focused, providing anarrow range of specialist analytical

applications that could be considered

globally competitive

8.1 Templates for possible collaboration

business models

The automotive design engineering services

sector in India is characterised by a number

of extremely well-run companies, most if not

all of which have well-defined processes

accredited to international standards Within

the four industry subsegments identified

there is a wide range of providers offering

many competing as well as complementary

mixes of services, as well as business

models through which they are delivered

From the outset of this research the

delegation was firmly of the opinion that

there could be no ‘one size fits all’ solution for

all customers and for all project types; this

view has been confirmed by the mission

In order to approach the process of

offshoring an element of design engineering

activity however, it is appropriate that

customers equip themselves with

knowledge of the full range of potential

business models that are available to them

The following sections therefore describe

the models identified during the scoping

and for brevity the more obvious criteriasuch as quality thresholds and technicalcompetency for the work at hand have beendeliberately omitted, as these are

appropriate to any outsourcing activityregardless of its location

In the list of engagement models presentedthere were clear anecdotal indications thatthere is a tendency for those offshoringengineering work to progress from some ofthe more transactional models to higher levels

of engagement up to and including their owntechnical centres, once sufficient marketexperience and confidence has been gained ateach level There are however strengths andweaknesses of each model for each

customer, and there are many for examplewho may conclude that project-basedconsulting support is the best long-termsolution to their particular business needs

8.2 Possible offshore outsourcing

business models

8.2.1 Project-based consulting model

The conventional project-based consultingmodel is possibly the most common form ofinitial engagement for customers of offshoreengineering services However, this model isclearly best suited to discrete one-off

assignments and it is important to note thatthere is always a learning-curve overhead toany work with a new service provider

wherever it is located Such learning-curveeffects are clearly likely to be proportionatelygreater for a provider from a different

is that the cost and time savings actually

achieved did not match expectations

Certain service providers actively manage

customer expectations in this regard and

others have advanced liaison approaches

including the use of staff on-site at the

customer’s premises in order to improve

communication of customer requirements

and processes

For maximum effectiveness this model

should be used only where the requirement

is either a one-off task or specialist exercise

that is inappropriate to a longer-term

engagement model

8.2.2 Dedicated resource provision

Where a customer has an ongoing need for

resource of a particular type (eg CAD, FEA,

CFD, etc), many service providers offer a

model whereby a guaranteed level of

resource is ring-fenced exclusively for use by

this customer There are many variations of

this basic model, for example including

pre-agreed levels of flexibility on either side,

or notice periods for termination

Despite the best efforts of service

providers to record and document

customer processes, it is clearly an

advantage for customers engaging in this

business model to negotiate guarantees

regarding the continuity of key named

individuals to ensure that the learning-curve

overheads of the ‘project’-based model do

not recur

Managed effectively, however, this model

can be particularly advantageous for those

wishing to offshore a controlled proportion

of activity but lacking the critical mass to

dedicated facility and team workingexclusively on a single customer’s projects

In this model, while management andadministration remain the responsibility ofthe service provider, the facility effectivelybecomes an operational part of the

customer’s business for the duration of theengagement In many instances this may

be a physically separate building with itsown secure access-control procedures

In more advanced cases the facility mayalso be open to the customer’s ownemployees who co-work projects with theservice provider

This model appears to be usedsuccessfully by a number of medium tolarge sized engineering companies Inmany cases a highly effective partnershipbetween customer and service providerappears to operate in which risk andreward are shared as the extent ofoffshore activity is increased

8.2.4 Establish, operate and transfer

facilities

This is a hybrid model that wasdemonstrated to the delegation by one ofthe host companies A managed facility isinitially established by the service providersubject to the specification of the customer.The service provider is responsible for initialrecruitment of staff and operation of thefacility for a pre-agreed period Once thisperiod is completed the customer has theoption to assume full ownership of thefacility and associated management control,subject to the achievement of strict

performance criteria agreed at the outset ofthe engagement

8.2.5 In-house offshore facilities

Direct investment in in-house offshore

facilities offers the advantage of complete

managerial control and clearly the highest

level of intellectual property right (IPR)

protection This model has been favoured by

the very largest international OEMs and Tier 1

organisations but there are also numerous

examples of the successful operation of

in-house facilities by much smaller companies

Clearly this is not a short-term option and

should only be considered by those whose

strategy is such as to guarantee the

requirement for offshore resource for a

considerable period It should also be

For those establishing their own in-houseoperations from scratch, as well as

customers of the hybrid model described inSection 8.2.4, it will also be important toensure that the administrative framework ofthe new facility meets with their long-termneeds and objectives, for example in theappropriate establishment of terms andconditions of employment and thenegotiation of taxation arrangements

8.3 Summing up

The results of this study have served todemonstrate the vibrant nature of theemerging automotive engineering servicessector in India The segment-by-segment

Exhibit 8.1 The QuEST technical centre in Bangalore like many in the independent engineering services

segment is divided into a number of access-controlled offices dedicated to individual customers,

as well as more general in-house work areas

many of the challenges facing serviceproviders both now and in the years ahead.While these challenges may well lead tosome degree of shake-out, the uniqueenvironment of India offers the potential for the most innovative and

technologically advanced service providers

to survive and prosper in an internationallycompetitive environment

At the outset of this study the mission hadidentified that it was unlikely that therewould be a ‘one size fits all’ solution to theoutsourcing of engineering activity to India,and that a range of models would be

appropriate for different customers rangingfrom the use of project-based consultancyservices to the establishment of in-houseoffshore engineering facilities For thisreason a range of possible engagementmodels have been described for possibleconsideration by those wishing to enter theoffshore market

Finally, the mission has attempted to

establish a range of best practice guidelinesfor both service users and providers

(Appendix C) While these should in no way

be considered a substitute for the rigorousprocesses of supplier qualification andselection, and project specification andmonitoring, which should be the subject ofany engineering services outsourcing

decision, it is hoped that they may enablefuture service users and providers to gainmaximum advantage from engagement inthis sector of the Indian economy

Appendix A

MISSION DELEGATE DETAILS

Exhibit A.1 The delegation during a brief sightseeing break in New Delhi; L to R: Anthony Baxendale, Mike Reeve,

Tony Braddon, V R K Eshwaran (Senior Trade Advisor, British High Commission), Anthony Smith

Anthony Smith is the proprietor of

MediaTechnical Ltd A mechanical engineer by

initial training he is a Chartered Engineer and

member of both the Institution of Mechanical

Engineers and the Chartered Institute of

Marketing He has spent most of his career

to date in the automotive design engineering

consulting sector and founded technology

marketing and media relations consultancy

T +44 (0)1908 513 049

tbraddon@prodrive.com www.prodrive.com

Tony Braddon is General Manager of ProdriveTest Technology (Europe) Ltd He is a member

of the Institution of Incorporated Engineerswith over 20 years’ experience in theAutomotive Engineering Consultancy sectorand has specific powertrain knowledge

He has spent the last 10 years in a businessdevelopment role, focusing his activities onvehicle manufacturers and Tier 1 automotivesuppliers worldwide