Automotive Continues Offshore Investment

This is not good news for American communities with major automotive operations now, or those with their heart set on luring the next big auto plant to town.

According to A.T. Kearney Management Consulting, nine out of 10 executives surveyed at North American automotive manufacturers and suppliers say they intend to move certain non-manufacturing business processes to low-cost offshore locations.

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.

“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.”

Engineering and IT are the predominant functions being sourced to offshore labor pools, Spitzer said. Additionally, certain financial and accounting services and call center activities also are well-suited for offshoring.

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.

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.”

There are three primary business models for firms conducting business offshore, according to A.T. Kearney. They are:

- Completely outsourced business processing, through local or U.S. based third party providers

-Captive divisions or subsidiaries operating offshore, but fully owned by North American auto or supplier companies

- Hybrid approaches that combine elements of the outsourced and captive models.

For now, there is no single predominant model for transferring business services to offshore environments, Palle said. “We find successful examples of all models and there is no ‘right’ model yet. In fact, the flexibility available to companies looking to move services offshore keeps the situation competitive and creative, which are desirable characteristics for executive decision-makers.”

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.

Source: A.T. Kearney Automotive Group