The global automotive ESO market size was valued at USD 79.91 billion in 2022. It is estimated to reach USD 272.43 billion by 2031, growing at a CAGR of 14.6% during the forecast period (2023–2031). Technological breakthroughs in the automotive industry are a great opportunity in the global market.
Automotive engineering, naval architecture, and aerospace engineering are sub-fields of vehicle engineering. Automotive engineering studies designing, developing, producing, and evaluating automobiles or vehicle components from concept to production. 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.
These services, which include various technology tools and mathematical models, are typically required at the beginning of the product design and development processes. Automotive engineering services outsourcing lowers overall labor costs, improves efficiency and flexibility, and saves time. Therefore, these services are utilized extensively in commercial, passenger, electric, and hybrid vehicles (EVs/HVs).
|Market Size||USD 272.43 billion by 2031|
|Fastest Growing Market||North America|
|Report Coverage||Revenue Forecast, Competitive Landscape, Growth Factors, Environment & Regulatory Landscape and Trends|
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 cars in the future. Therefore, the surging tie-ups between OEMs and ESO providers are estimated to fuel the market growth over the forecast period.
Automotive companies are outsourcing 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.
Various local ESO vendors are associated with automotive companies manufacturing parts and components. In order to attract automotive companies, these vendors offer lower-cost engineering services, 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.
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 case of the innovative technology developed and due to the unavailability of the skilled R&D team in the 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.
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 offer 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 industry, thereby gauging the ESO market.
Asia-Pacific Dominates the Global Market
Based on region, the global automotive ESO market is bifurcated into North America, Europe, Asia-Pacific, Latin America, and the Middle East and Africa.
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 region is the major hub for software outsourcing service providers, with the key 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 enormous 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.
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 fairly performing domestic automotive market, especially in Argentina and Brazil.
The global automotive ESO market is segmented by application, service, and location.
Based on application, the global automotive ESO market is divided into autonomous driving/ADAS, body and chassis, powertrain and after-treatment, infotainment and connectivity, and others.
The powertrain and after-treatment segment is the largest revenue contributor to the market and is predicted to exhibit a CAGR of 13.31% over the forecast period. The powertrain and after-treatment 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 vehicle, radio, telephony, navigation, and multimedia systems for ensuring smooth connection along with expedient usage of mobile devices. The infotainment and connectivity 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.
Based on service, the global automotive ESO market is segmented 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) prototyping, 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 increase 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.
Based on location, the global automotive ESO market is bifurcated 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 nation 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.