Volkswagen-Rivian, Volkswagen-Xpeng, Honda-Nissan and Volvo AB-Daimler Truck are among the deals signed in 2024 to jointly develop software and vehicle architecture. These alliances are likely to pull down the total tech spending, possibly causing a business loss to Indian IT firms, particularly in the ER&D area, when they are already facing muted demand for outsourced services.
Advanced driver assistance systems (ADAS), electric vehicles and software defined vehicles are the main drivers of tech spend for automakers globally, experts told ET. An increase in the focus on high-end infotainment inside vehicles has also been adding to demand for software.
As per analysts at Kotak Institutional Equities, Volkswagen and Xpeng will be jointly developing zonal E/E (electrical/electronic) architecture to turn pure electric models of Volkswagen brands into software-defined vehicles in China from 2026. While Honda and Nissan will jointly develop software, Volvo AB and Daimler Truck announced in May an agreement to develop a common vehicle platform and dedicated truck operating system, providing the basis for future software-defined commercial vehicles.
In their August 14 note, the Kotak Institutional Equities analysts said: “We believe there would be some opportunity from software integration, testing and validation activities from joint software development but this is likely to be lower than in a scenario of independent and parallel development programmes by OEMs (original equipment makers).”
According to outsourcing expert Pareekh Jain, auto companies and tier-1 component makers give about $4 billion of business to both pure play ER&D firms and IT services’ ER&D divisions. Jain, who is also the chief executive of EIIRTrend engineering insight platform, said: “Indian automotive engineering service providers are starting to face client-specific issues, creating short-term challenges. The first issue is the shift in new product development priorities of automotive OEMs in the current macro environment. Some earlier EV programmes have ended, leading to a strategy shift due to limited success in EVs and growing industry interest in hybrids, energy-efficient ICEs, and more.”
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Jain added: “The second issue is the increasing partnerships between auto companies, such as Volkswagen and Rivian, which will lead to joint or shared R&D. This shift is impacting their R&D strategies and, consequently, their engineering engagements with Indian service providers.”He also cautioned that many Indian engineering service providers have made acquisitions in automotive engineering in Germany. “They need to be vigilant about changing industry dynamics, client-specific issues, and the impact on engineering outsourcing.”
“Globally, the auto industry is seeing two distinct trends playing out,” said Gaurav Vasu, founder of tech market intelligence firm UnearthInsight. Companies making affordable vehicles are under pressure to improve revenue growth and cut down tech spending for profitability, while makers of luxury vehicles are seeing better growth and profitability, allowing them to experiment with new technologies.
Services providers will have to build differentiated offerings for affordable and luxury auto clients, Vasu said. “They’ll have to shift firms from the traditional ‘outsourcing mindset’ to a ‘strategic value creator mindset’ by focusing on IoT, AI and analytics with specialised skills.”
According to Jain, while these alliances might create a short-term impact, in the long term there is a strong business case for moving more engineering and R&D work to India due to cost and talent advantages for the global capability centres of MNCs and engineering service providers.
According to UnearthInsight data, India houses more than 70 auto and auto component GCCs employing 180,000-200,000 engineering, tech, operations, AI & analytics talent.
