Global Outsourcing On Rise

TRAVERSE CITY, MI – Outsourcing product development is nothing new, with companies such as Ricardo plc ready to celebrate a century of life in 2008, but it is about to become a standard business practice, according to speakers at today’s Global Product Development and R&D session at the Management Briefing Seminars here.

The emergence of the Chinese auto industry has meant big business for Western engineering companies such as Ricardo and Italian design houses such as Bertone SpA and Pininfarina SpA. Global suppliers such as Johnson Controls Inc., Visteon Corp. and Delphi Corp. are turning to engineering companies in India to cut their costs, as well.

Outsourcing to offshore suppliers “is inevitable. It has to happen,” says Hema Rao, of Harita TVS Technologies in Bangalore, India. “It is just beginning right now,” she says, but it will spread just as lean manufacturing did.

The Chinese companies turn to Western firms to get up-to-date technology. “They are eager to learn,” says Stan Clemens, vice president-China for software provider Powerway Inc. and a former General Motors Corp. manager.

In addition, he says, “they don’t know what they don’t know,” so they are willing to accept outside help, where the big Western auto companies tend to rely on themselves more.

Meanwhile, Western companies such as JCI, Delphi, Visteon and Robert Bosch GmbH look to Harita TVS Technologies to cut their costs. Harita does basic mechanical and electrical engineering, prototyping and tooling and is nowhere close to being able to develop a new product or platform, says Rao.

However, the products engineered by Harita cut costs 35% or more compared with in-house services.

Some 220,000 engineers graduate each year in India, says Rao. Tata Group, India’s leading industrial company, is “very close” to becoming a true global player by introducing its vehicle brand in Europe.

Hema Rao, of Harita TVS Technologies in Bangalore, India.

Although Rao’s parent company has sales of $2.6 billion annually, her division of 370 engineers generated only $15 million. However, the total overseas engineering services market is currently $2 billion a year and is growing by 40% to 50% per year.

“Labor rates in India are growing quickly, but the gap (with North America and Europe) remains very high,” Rao says. “By 2020, they may catch up.”

Chinese auto makers believe on average they will reach globally competitive levels in 10 to 15 years, says Bruce Belzowski, assistant research scientist with the University of Michigan Transportation Research Institute, with the most optimistic planning to reach that level in 10 years.

Chinese auto makers will be forced to export cars because they have too much capacity for the local market, but they will find it difficult to develop cars quickly due to their inexperience.

Fewer than 1% of Chinese households have a car, “and the workers making the cars don’t know what it means to be a customer,” Clemens says.

Ricardo’s group marketing officer, John Van Alstyne, says North American auto makers have tended to treat his company like contract labor, but the trend is toward more strategic relationships to take advantage of the company’s expertise in engine development.