I’m sorry, but I really don’t want the new design of my Texas-sized pickup truck being offshored to India.

“Rather than piecemeal sub-contracting of design, engineering and manufacturing jobs, auto companies prefer vendors offering end-to-end services or complete solutions, from design to manufacture of components,” says Arun Jethmalani, CEO of ValueNotes.

A recently released report by ValueNotes titled “Offshoring of Automotive Design and Engineering Services to India” puts the revenue from offshored automotive design and engineering services in India at around $270 - $300 million, with the potential of reaching $1 billion by 2010. Currently employing 12,000 people, the industry is expected to grow at more than 30 percent per annum for the next five years.

Unlike other segments such as financial, healthcare and legal services, where cost advantage is the primary driver for offshoring, in auto design, outsourcing is driven not just by cost but intense competitive forces that demand an ever-increasing supply of new designs.

Auto companies in the US and Europe have recently started offshoring higher value services such as analysis and testing of individual components as well as entire systems to India. Though labor arbitrage benefits might reduce in future, India’s ability to move up the value chain will help the country remain the most favored offshoring destination. Though the volumes will be driven by low-end work such as data services, Indian vendors will definitely see end-to-end outsourcing of entire systems or products in the next three years.

The Indian vendor landscape consists of captives (e.g. GM, Delphi, Ford), subsidiaries of Indian auto OEMs (e.g. Mahindra, Hero, Eicher), independent engineering design firms (e.g. Plexion, DC Design, Neilsoft) and Indian IT services firms (e.g. TCS, Wipro, Infosys). Apart from the captive units of international auto companies (many of which already offer high end services), the research suggests that the subsidiaries of Indian auto companies/ancillaries are best positioned to offer end-to-end design and engineering services, encompassing a comprehensive range of tasks. This is a result of their strong domain knowledge as well as financial clout that enables them to acquire new capabilities.

An increasing number of Indian auto ancillaries have recognized the opportunity, and the need to quickly ramp up their design capabilities. In line with this trend, analyst and co-author Niranjan Natu expects “more Indian auto-part makers to look for joint ventures or acquisition opportunities with independent engineering and design firms to acquire capabilities and expertise.”

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