GLOBAL WATCH MISSION REPORT 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. Global Watch Missions DTI Global Watch Missions enable small groups of UK experts to visit leading overseas technology organisations to learn vital lessons about innovation and its implementation of benefit to entire industries and individual organisations. By stimulating debate and informing industrial thinking and action, missions offer unique opportunities for fast-tracking technology transfer, sharing deployment know-how, explaining new industry infrastructures and policies, and developing relationships and collaborations. Around 30 missions take place annually, with the coordinating organisation receiving guidance and financial support from the DTI Global Watch Missions team. Disclaimer This report represents the findings of a mission organised by the Society of Motor Manufacturers and Traders (SMMT) with the support of DTI. Views expressed reflect a consensus reached by the members of the mission team and do not necessarily reflect those of the organisations to which the mission members belong, SMMT or DTI. Although every effort has been made to ensure the accuracy and objective viewpoint of this report, and information is provided in good faith, no liability can be accepted for its accuracy or for any use to which it might be put. Comments attributed to organisations visited during this mission were those expressed by personnel interviewed and should not be taken as those of the organisation as a whole. Whilst every effort has been made to ensure that the information provided in this report is accurate and up to date, DTI accepts no responsibility whatsoever in relation to this information. DTI shall not be liable for any loss of profits or contracts or any direct, indirect, special or consequential loss or damages whether in contract, tort or otherwise, arising out of or in connection with your use of this information. This disclaimer shall apply to the maximum extent permissible by law. Cover picture: robotic welding at a car factory © Getty Images 1 Automotive design engineering – a scoping mission to India REPORT OF A DTI GLOBAL WATCH MISSION SEPTEMBER 2005 CONTENTS EXECUTIVE SUMMARY 3 1 BACKGROUND AND 5 OBJECTIVES OF THE MISSION 1.1 Introduction 5 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? 5 GEOGRAPHICAL AND 14 INFRASTRUCTURAL CONSIDERATIONS 6 ENGINEERING SERVICES IN 15 INDIA – STRUCTURE AND SEGMENTATION 7 OBSERVATIONS BY 18 INDUSTRY SEGMENT 7.1 Subsidiaries of the indigenous 18 Indian automotive industry (OEMs and Tier 1s) 7.1.1 Structure and strategy 18 7.1.2 Technology level 19 7.2 IT sector affiliates 20 7.2.1 Structure and strategy 20 7.2.2 Technology level 20 7.3 Independent engineering 20 service providers 7.3.1 Structure and strategy 20 7.3.2 Technology level 22 8 CONCLUSIONS 23 8.1 Templates for possible 23 collaboration 8.2 Possible offshore outsourcing 23 business models 8.2.1 Project-based consulting model 23 8.2.2 Dedicated resource provision 24 8.2.3 Provision of managed facilities 24 8.2.4 Establish, operate and transfer 24 facilities 8.2.5 In-house offshore facilities 25 8.3 Summing up 25 APPENDICES 27 A Mission delegate details 27 B Host company visit reports 31 C Best practice guidelines 49 D List of exhibits 52 E Glossary 53 F Acknowledgments 55 2 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA 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 The report sets out some of the key issues which influence all parts of the market for offshore automotive engineering services. Four distinct market segments are identified based on the host company visits, and an analysis provided of the observations of the mission on the typical structure, strategy and technology level representative of service providers within each segment. A series of templates for possible collaboration of Western customers in this sector is then described. Finally, a number of best practice guidelines are set out both for potential service users and for service providers. Who for The information contained in this report is likely to be of most direct relevance to UK companies engaged in independent automotive R&D. It will be of particular interest to those considering engaging with the Indian offshoring sector, whether through the use of local engineering service providers or through the establishment of an in-house offshore engineering facility. However, many of the observations presented are also likely to be of interest to those from other – non-automotive – industrial sectors who are nonetheless interested in the opportunities and threats posed by the offshoring of work of a technical nature. Some caveats Notwithstanding the above comments, it is important that readers of this report fully appreciate that the information and observations contained are of a general nature. The mission was necessarily focused on a small sample of host companies which were representative of each market segment; while the team considers that these give a reasonable characterisation of the market, they are far from representing its totality. 3 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA 4 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA 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 for those engaged in the market for offshore engineering services; they should in no way be viewed as a substitute for the commercial and engineering best practices which should form part of any outsourcing process. Exhibit S.1 ProSIM R&D centre, Bangalore 5 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA 1.1 Introduction 1.2 Why India and why now? 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 potential partners in India. 1.2 Why India and why now? The increasing outsourcing of business processes to low-cost economies has been a well-documented trend in recent years. With the focus upon labour-intensive ‘back-office’ operations, many types of service-based business activity from call centres to information technology (IT) support have been successfully outsourced. While many countries offer the potential for low-cost outsourcing, few come close to the attractive mix represented by India, which offers the advantage of a large technically educated and English-speaking workforce. Despite the fact that India falls well behind China in terms of the volume of foreign direct investment (FDI) ($4.3 billion versus $53.5 billion), the Indian economy is viewed by international investors as being particularly attractive for outsourcing IT, business processes and R&D 1 . In contrast, when asked what kinds of activity will be offshored to China, investors indicated a preference for manufacturing and assembly. A particular success for India has been the outsourced IT and software industries where clusters such as that in the region of Bangalore place the country in a highly competitive international position. In addition to its successful recent track record in business process outsourcing, India also has a significantly sized domestic automotive industry. The country produces annually in excess of six and a half million two and three wheelers, one million passenger cars and multipurpose vehicles, 1 BACKGROUND AND OBJECTIVES OF THE MISSION 1 FDI Confidence Index , Global Business Policy Council, A T Kearney, Volume 7, October 2004: www.atkearney.com/shared_res/pdf/FDICIOct_2004_S.pdf 6 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA 0 1000 2000 3000 4000 5000 6000 7000 -20 -10 0 10 20 30 40 Exhibit 1.1 Vehicle production in India, 1999/2000 to 2004/2005 (source: SIAM) Exhibit 1.2 Vehicle production in India: percentage year-on-year growth (source: SIAM) 7 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA and 0.3 million commercial vehicles (Exhibit 1.1). As such it ranks second in the world in production of two wheelers 2 , 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 expenses 3 . 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 indigenous automakers is to compete on an international scale for design engineering business 4 . While the current technology base within the Indian automotive and IT industries may not enable such new entrants to compete internationally for highest added-value R&D, it is clearly an open question as to the possible rate and extent of technological development which may allow this in the future. The situation described represents both an opportunity as well as a challenge for UK industry. Clearly there is the potential for UK engineering organisations to achieve advantage over international competitors through cooperation and collaboration with low-cost partners in an English-speaking environment, or through the establishment of their own low-cost operations in-territory. Conversely it also presents a potential competitive challenge for the future as new service providers emerge and compete directly for business. Whether or not individual Western R&D organisations wish to engage in India therefore, knowledge of this rapidly 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 2 Society of Indian Automobile Manufacturers (SIAM) annual convention, September 2004 3 Government of India, Budget 2004-05 4 Design engineering, IT’s the next big thing, Times News Network, May 2004 Exhibit 2.1 Automotive clusters in India (courtesy ACMA) 5 Annual Report 2004-2005 , Society of Indian Automobile Manufacturers (SIAM) 8 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA 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 were published recently in the organisation’s 2004/05 annual report 5 . It views automotive R&D as a rapidly developing area in which Indian companies are beginning to strengthen their skills base through both organic growth and acquisition. Particular areas cited as requiring further technology and skills development were concept design, prototype validation and specialist powertrain technology, the latter an area in which many Indian OEMs have considerable well-established experience of using European specialists. 2 THE PERSPECTIVE OF THE INDIGENOUS INDIAN AUTOMOTIVE INDUSTRY [...]... installation Anthony Baxendale is Head of Advanced Engineering and Innovation at MIRA Ltd, a leading UK automotive design engineering consultancy He is a chartered engineer with a background in aeronautical, offshore and automotive engineering He has a particular interest in the strategic development of technology-based companies 29 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA In addition... each of the companies visited are contained in Appendix B to this report 15 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA 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... Its CAD capability appeared to cover all of the major software platforms, with the jig and fixture design 33 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA carried out in CATIA V4 and V5, and with component design being mainly executed in Unigraphics CAD data management is reliant on loading data into the client PDM system Good linkages were apparent between the CAD and CAE groups, and manufacturing... 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 Independent automotive engineering Caepro... hoped that they may enable future service users and providers to gain maximum advantage from engagement in this sector of the Indian economy 26 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA 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,... FEA and CFD as a means of design validation Standards appeared to be customer driven in terms of mesh quality and boundary conditions Reflecting the focus on body and trim components, the company appears to have well-developed skills in plastic mould tool design and associated CAE systems such as Moldflow 31 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA Aspirations From the delegation’s discussion... Commission), Anthony Smith 27 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA Anthony Smith Mission leader and coordinator Consultant to SMMT MediaTechnical Ltd 4 Hampden Road Brighton East Sussex BN2 9TN UK T +44 (0)1273 382 710 avsmith@mediatechnical.com www.mediatechnical.com Anthony Smith is the proprietor of MediaTechnical Ltd A mechanical engineer by initial training he is a Chartered... significant exception to this observation however was in the deployment of For example: Fiat, Tata to join forces in India, Automotive News Europe, 3 October 2005: http://europe.autonews.com/toc.cms?date=2005-10-03 19 AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA knowledge-based engineering (KBE) applications in which certain of the OEM sector appeared to have invested significantly This was... 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. . .AUTOMOTIVE DESIGN ENGINEERING – A SCOPING MISSION TO INDIA Exhibit 2.2 India – land of automotive contrasts 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