Automotive ESO Market Size, Share & Trends Analysis Report By Applications (Autonomous Driving/ADAS, Body and Chassis, Powertrain and After-treatment, Infotainment and Connectivity, Others), By Service (Designing, Prototyping, System Integration, Testing, Others), By Location (On-shore, Off-shore) and By Region(North America, Europe, APAC, Middle East and Africa, LATAM) Forecasts, 2024-2032

Automotive ESO Market Size

The global automotive ESO market size was valued at USD 84.87 billion in 2023 and is projected to reach a value from USD 85.5 billion in 2024 to USD 272.84 billion by 2032, registering a CAGR of 13.85% during the forecast period (2024-2032).

Automotive engineering services outsourcing (ESO) refers to contracting out non-physical engineering tasks, such as design, prototyping, system integration, and testing, to a third party. They support a variety of capabilities, including production, the design of vehicle components, and safety testing. The automotive engineering services outsourcing (ESO) market focuses on outsourcing specialized engineering services in the automotive sector. These services include product design, development, testing, and implementation of advanced automotive technologies. Outsourcing allows OEMs (Original Equipment Manufacturers) and Tier 1 suppliers to manage the increasing complexity of modern vehicles, particularly with the rise of electric vehicles (EVs), autonomous driving, and connected car technologies.

The market has been expanding rapidly due to the increased demand for technological innovations and the rising complexity of automotive components. OEMs seek ESO providers to reduce costs, accelerate product development, improve vehicle performance, and comply with global environmental standards. Primary services outsourced include simulation, prototyping, CAD modeling, and testing services. Furthermore, the growing adoption of Artificial Intelligence (AI), machine learning, and data analytics drives demand for sophisticated engineering solutions. 

Top 3 key highlights

• Powertrain and after-treatment dominate the market by Application.
• The prototyping segment owns the highest market share by service.
• The on-shore segment dominates the global market by location.

Automotive ESO Market Growth Factors

Increased tie-ups between automotive oems and eso providers

Automotive innovation has historically been concentrated around the R&D centers of prominent automakers and tier-one suppliers, with the largest OEMs investing the most in R&D. The current paradigm has witnessed an automotive evolution in which OEMs lack the necessary skill set, and it has not been cost-effective for OEMs to invest in technologies in which they are deficient. Major ESO providers who invest in emerging technologies are filling this void considerably.

OEMs are anticipated to have less control over R&D, which will expand their technology relationships with suppliers and automotive ESO providers. Due to their expertise and competitive cost advantage, OEMs are expected to outsource product development processes to vendors.

• For instance, in January 2014, prominent automotive companies Audi, General Motors, Honda, and Hyundai allied with Google and chipmaker NVIDIA, called the Open Automotive Alliance (OAA), to bring the Android platform to cars and develop connected vehicles in the future. Therefore, the surging tie-ups between OEMs and ESO providers are estimated to fuel the market growth over the forecast period.

Cost effective labor at off-shore locations

Automotive companies outsource their engineering services to emerging economies with less stringent labor laws, resulting in cost-effective labor. Developing nations like India, China, and the Philippines have profitable labor. The major automotive companies outsource their labor-intensive manufacturing to ESO vendors in cost-effective countries. The labor-intensive work requiring skilled and unskilled workers is outsourced to their off-shore ESO vendors or captive manufacturing centers.

• For instance, the base hourly wage in offshore countries is typically between USD 2 and USD 4 per hour, while in near-shore countries, it is approximately USD 4 to USD 6 per hour.

Various local ESO vendors are associated with automotive companies that manufacture parts and components. These vendors offer lower-cost engineering services to attract automotive companies, benefiting from cost-effective labor.

• For instance, Automotive Engineering Services Co. Ltd. (AES), a Japanese ESO vendor, collaborated with Samvardhana Motherson Group and formed a joint venture named AES (India) Engineering Ltd. to benefit from the cost-effective labor in India. Such factors drive market growth.

Market Restraint

Building r&d competence

Automotive companies such as Daimler AG, Audi AG, Toyota Motor Corporation, BMW AG, Volkswagen AG, and Ford Motor Corporation focus on in-house research and development (R&D) activities instead of outsourcing these services to ESO vendors. These companies prefer to conduct in-house R&D activities with a specialized team of researchers to gain the first-mover advantage in the case of innovative technology development due to the unavailability of skilled R&D teams in ESO companies.

• For instance, Volkswagen AG has an in-house research team for its R&D activities; its research headquarters are located in Wolfsburg, Germany, for carrying out R&D activities for all Group brands. Moreover, the company filed around 6,465 patent applications worldwide for its employee inventions. This is anticipated as a significant challenge to the ESO vendors, restricting market growth.

Market Opportunity

Technological breakthroughs in the automotive industry

The intervention of technological advancements in automobiles' conventional ecosystem is expected to gain tremendous opportunities for the ESPS in the long run. This can be subjected to the increasing deployment of embedded software and upgrades in automobiles' electronic architectures. In addition, incorporating embedded technologies has transformed vehicles from simple means of transportation to advanced platforms offering entertainment and connectivity functionalities. The technological breakthroughs in the industry with the incorporation of smart technology to provide a safe, simplified, and controlled driving experience are expected to significantly contribute to the automotive ESO growth over the forecast period.

Furthermore, integrating embedded software and advanced electronics architecture offers opportunities for pure-play ESPs. The enormous advancements in solutions and electronic architecture have led to the prevalence of the ACES framework within the automotive industry. This framework is expected to bring about a tectonic shift in the mobility industry. The modern innovations in the automobile industry, such as connectivity and autonomous driving, will likely transform the mechanical-focused automotive sector, thereby gauging the ESO market.

Regional Insights

Asia-pacific: dominant region

Asia-Pacific is the most significant global automotive ESO market shareholder and is estimated to exhibit a CAGR of 14.3% during the forecast period. The integration of embedded software into the existing models and continuous requirements of technological innovations in the automotive models has contributed to the growth of the ESO market in the Asia Pacific region. Furthermore, the area is the central hub for software outsourcing service providers, with the critical participants based in India, Vietnam, the Philippines, Thailand, and China. One of the significant developments in the automotive industry is the deployment of electric vehicles to reduce fuel emissions and cause less environmental damage, which is also expected to offer enormous opportunities to the ESPs in this region.

Additionally, the region is poised to witness robust market growth attributed to the reduced availability of skilled labor. The effective transition of procurement patterns from core mechanical services to the procurement of technologically advanced solutions will likely offer enormous opportunities to the automotive ESO market over the next seven years. In addition, the industry is expected to gain massive prominence in Japan as key automotive manufacturers have a significant presence. The Japanese automakers initially emphasized producing their models in-house and are now collaborating with the ESPs to discover features and mechanisms that are not their core competencies.

North america: growing region

In North America, automotive engineering services have evolved significantly owing to the rapid alignment of the OEMs with global megatrends, including the increased emphasis on superior performance, safety, fuel efficiency, and self-driving. Increased need for innovation, adherence to high environmental sustainability and safety standards, and designing automobiles catering to diverse market segments with shorter time-to-market have gained prominence.

The South American automotive ESO market is forecasted to grow enormously over the next few years. The region has emerged as the most preferred off-shore location by U.S. automotive manufacturers and suppliers. As a result, various key participants are trying to expand their geographical footprints. Another critical factor leading to the growth of automotive ESO in this region is the stable wage inflation compared to other off-shore locations. Global companies also attain numerous opportunities due to the moderately performing domestic automotive market, especially in Argentina and Brazil.

Segmentation Analysis

By application

The market is further segmented by applications into autonomous driving/ADAS, body and chassis, powertrain and after-treatment, infotainment and connectivity, and others. The powertrain and after-treatment segment is the most significant revenue contributor to the market and is predicted to exhibit a CAGR of 13.31% over the forecast period. This segment considers engineering services outsourced for hybrid and electric drive systems or further development of the existing engine system. It considers services outsourced for exhaust treatment, engine calibration, downsizing, electrification of the powertrain, and emission reductions. Module development, engine integration, and powertrain simulation constitute services offered under the powertrain and after-treatment application segment.

Furthermore, the industry is witnessing a soaring demand to downsize the engines, resulting in lesser fuel consumption. Owing to these attributes, the powertrain and after-treatment segment is expected to retain its dominance over the next seven years. The stricter regulations governments impose worldwide for reduced CO2 emissions have led to the popularity of powertrain electrification.

Infotainment and connectivity include the automobile engineering services outsourced for creating various solutions related to infotainment, connectivity, and electrical and electronic systems in vehicles, including Wi-Fi and Bluetooth connectivity of the car, radio, telephony, navigation, and multimedia systems for ensuring smooth connection along with expedient usage of mobile devices. This segment is expected to grow with the highest CAGR over the forecast period. In addition, the prevalence of Vehicle-To-Everything (V2X) technology that connects vehicles with smart traffic signals and Vehicle-to-Vehicle (V2V) technology that would help drivers communicate to simplify congestion and reduce unforeseen risks is expected to drive the growth of this segment.

By service

The market is further segmented by service into designing, prototyping, system integration, testing, and others. The prototyping segment owns the highest market share and is estimated to exhibit a CAGR of 13.5% during the forecast period. Prototyping includes system engineering services, hardware product engineering, mechanical and electronic prototyping for light vehicles, driver development and diagnostics, Application Specific Integrated Circuit (ASIC), and virtual prototyping. The prototyping segment is anticipated to maintain its dominance over the forecast period due to the automotive industry's increased utilization of 3D printing technology to design a prototype of an assembly, specific parts, or a model of an entire vehicle. With 3D printing technology, manufacturers can rapidly identify flaws in a prototype and cost-effectively make the necessary corrections. Companies are progressively deploying 3D CAD software to improve communications through documentation, increase design productivity, create a manufacturing database, and enhance design quality.

Designing includes automobile engineering services, such as conceptual designing, designing engines and vehicle parts, modeling, process validation, lightweight material designing, design adjustments, algorithm development, and system engineering. The design segment is expected to witness the fastest growth. This may be attributed to the increased engineering complexities in designing vehicles, especially incorporating embedded software systems. Outsourcing testing of auto parts is also anticipated to grow over the forecast period. As the prototyping and manufacturing of parts and accessories are widely outsourced, their testing is also outsourced to vendors. The OEMs usually test the vehicle after assembly.

By location

The market is further segmented by location into on-shore and off-shore. The on-shore segment dominates the global market and is estimated to exhibit a CAGR of 16.21% over the forecast period. On-shore market estimates refer to the revenue generated within a country when a home company outsources its engineering services to another domestic company within the national territory. For instance, a U.S. company outsourcing its engineering services to another company in the U.S. will generate on-shore ESO revenue for the U.S. Various attributes, such as language barriers, trade restrictions, stringer regulations, and similar time zones, favor the on-shoring engineering services in the automotive sector, thereby highly contributing to its market growth over the forecast period.

The revenue produced inside a nation from sources that are not domestic but foreign is called off-shore market estimates. The revenue made in the country where an engineering service provider is based is a component of the off-shore ESO market when an organization of foreign origin outsources its engineering services there. For instance, a Japanese company outsourcing its engineering services to a company in India is considered to generate off-shore ESO revenue for India.

Recent Developments

• June 2024- AKKA Technologies, now part of Modis, announced a new collaboration with BMW to develop next-gen connected car solutions, including V2X communication (vehicle-to-everything) technologies. This partnership aims to improve real-time data exchange between vehicles and surrounding infrastructure to enhance safety and efficiency in urban mobility systems.
• April 2024- Tata Technologies launched an autonomous driving development platform, leveraging AI and machine learning to support OEMs in developing advanced driver-assistance systems (ADAS). This initiative aligns with the global shift towards autonomous and connected vehicles.