Automotive Insights from Clearwater International Engineering Services Clearthought Engineering Services Increasing e-mobility, connectivity and autonomous driving are demanding new relationships between OEMs and engineering service providers. Inside: • Industry summary • Leading players • M&A activity • Ricardo Automotive interview clearwaterinternational.com 2 Market overview Specialised Engineering Service Services The overall benefits for Providers (ESPs) have always Engineering services across the automotive individual ESPs depends on the played a role in the automotive sector break down into five core areas2: degree of specialisation that they industry however, as a recent report notes1, in the past they were • Design services - design and surfacing, can offer to OEMs and the types mainly used for specific tasks such virtual reality, design modelling of services that they provide. as creating drawings, designing • Simulation -crashworthiness, occupant components and modules, safety, structural add-on parts, stiffness/ Market growth vibration, fluid dynamics calculating specifics, and for Although demand for engineering conducting testing procedures. • Modelling/Rapid tech - CAD/CAM, services will continue to rise triggered Today the picture is very different milling technology, gauge building, by an increasing number of models and as OEMs outsource a huge range of toolmaking, measuring technology variants, especially in areas such as engineering activities to ESPs, including the electric vehicles, the actual number of • Testing - interior/exterior testing, engine development of systems and derivatives, vehicle platforms is decreasing as OEMs chassis and tank system, vehicle safety, and even complete vehicles. They have seek to make efficiencies. acoustics, electric mobility, vehicle also sought ESP support for services construction For instance, Volkswagen’s MQB platform such as quality assurance, supplier and is used across a whole range of vehicles • Engineering services - project project management, and for training including the VW Golf and Polo, Audi A1 management, quality management, programmes. and A3, and the Skoda Octavia. This trend process validation, logistics towards sharing platforms was also the OEMs outsource a huge driver for the recent announcement by range of engineering Daimler and BMW that they would pool activities to ESPs, including their mobility services in a move which brings together 14 different brands. the development of systems and derivatives, and even Global Market for ESP complete vehicles. in Software and p.a. 4.0 +14.0% In turn, ESPs now need the capability to Electronics work on completely new development 3.5 projects which demand expertise in all 3.1 aspects of product development. As 2.7 the report concludes, the ESP will “make a. 2.4 or break” the success of an outsourced +14.8% p. 2.1 product development project which 1.8 makes it imperative for the OEM to 1.5 carefully assess the competencies of an 1.3 ESP partner. 1.2 1.0 ) (€bn 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: McKinsey Center for Future Mobility in: ATZ Special Issue May 2018 (Automotive Engineering Partners) Automotive Insights 3 The overall benefits for individual ESPs depends on the degree of specialisation that they can offer to OEMs and the types €7.2bnyears of services that they provide. For instance, Increase of engineering whether they focus on interior/exterior engineering as opposed to powertrain services market by 2023 engineering. That said, the need for R&D efficiency supply agreements with a number among OEMs will require them to of Korean and Chinese battery outsource all non-core competence tasks manufacturers to fulfil its ambitions. and lead to the outsourcing of ever larger work packages. One forecast3 predicts ZF Friedrichshafen, the German vehicle that the engineering services market will technology provider, is another good increase from €11.1bn in 2017 to €18.3bn example of the investment taking place by 2023 at a CAGR of 8.7%, while another4 across the industry. In recent years it has predicts that the global automotive ESP significantly expanded its development market will see a CAGR of 6.3% between capabilities in autonomous driving and 2018-2022. plans to invest €12bn in electromobility and autonomous driving over the next Research and development five years. In early 2019 it opened a new test centre for driveline technologies, R&D spending in the automotive industry creating additional testing capacities for will continue to rise as OEMs need to electric, hybrid, and internal combustion invest in new technologies. engine drives. Much of this spending is in Europe where in 2016/17, 24% of all R&D spend5 went on the automotive sector, while in Asia the automotive sector accounted for 19% of R&D spend. VW is by far the largest R&D spend in the R&D investor in the sector. In late 2018 it announced6 that, in order to accelerate automotive industry its pace of innovation, it would increase Company R&D spend 2017/2018 (€bn) its investment in R&D in the areas of digitisation, autonomous driving and Volkswagen 13.14 electric mobility to €44bn over the next Daimler 8.66 five years, up from an initial estimate Toyota Motor 7.86 of €34bn. Ford Motor 6.67 BMW 6.11 At present, VW the company has six General Motors 6.09 battery-powered models in its product Honda Motor 5.40 range, but by 2025 it has plans for Fiat Chrysler 4.28 more than 50 models and to produce Nissan Motor 3.66 approximately a million electric cars Denso 3.30 annually. VW has reached strategic Source: 2018 EU Industrial R&D Investment scoreboard Clearthought 4 Industry challenges • Product Data Management - Product actionable data. Such data will provide Data Management (PDM) tools should valuable information to engineers on how A recent report7 cited a number of key promote company wide data sharing their products are used in real life and the challenges facing the engineering sector: and can drastically accelerate new constraints they experience • Polarisation of engineering skills - On product development. But a gap exists • the one hand, the increasing technical between functionalities offered by IT Customer-centric product design - B2B suppliers are increasingly focusing complexity of products requires more engineering tools and the low adoption their innovation efforts on the needs of highly skilled systems engineers and rate by engineers who are often reluctant the final customer and are acquiring architects. On the other, the increasing to adopt new tools technical sophistication of products more and more user experience • Fully agile and digital development will require more scientific specialists. capabilities. New engineered products process - As the graph on page 2 shows, Between the two the more simple must not only match technical and the global market for ESP in software and detailed design tasks are likely to functional specifications but also provide and electronics is forecast to grow from be supported by IT tools and Artificial a unique ‘emotional’ experience €2.7bn in 2017 to €4bn in 2020 at a Intelligence (AI) systems 1: McKinsey & Co: Development Excellence - CAGR of 14%. The growing importance of ‘Capturing the full value of collaboration with • Work in open ecosystems - A growing software for engineering new products engineering service providers’ and open ‘ecosystem’ brings has promoted agility in old fashioned 2: Bertrand/Clearwater International 3: Berylls Strategy Advisers, ESP market update 2018 several challenges. For example, car engineering organisations. The next 4: ResearchAndMarkets.com: Global Automotive manufacturers must maintain control challenge is to convert hardware ESP Market 2018-2022 of all developments done by external engineers to become more accustomed 5: Oliver Wyman analysis: EU Industrial R&D Investment Scorecard suppliers and must be able to prove to digital development, and synchronise 6: eeNews: November 2018 the robustness of their design in case hardware and software development 7: Oliver Wyman Engineering 2030 of prosecution. Working efficiently with • Use of product data to optimise design external players requires a common - With the cost of sensors and data language and standard IT tools processing rapidly decreasing, almost any object will be able to produce Leading players Worldwide 15 top-selling ESP companies Ranking Company Automotive sales 2017 (€m) Total sales 2017 (€m) Employees Engineering focus 1 AVL List 1,550 1,550 9,500 Drive systems, testing technology, simulation 2 Bertrandt 894 993 11,800 Total vehicle, environmentally friendly mobility, autonomous driving 3 IAV 798 798 7,000 Powertrain, electronics and vehicle development 4 Edag Engineering 717 717 8,404 Total vehicle, production equipment, lightweight construction, e-mobility/car IT 5 Akka Group 559 1,334 4,734 Total vehicle, digitisation, autonomous driving, e-mobility 6 Horiba Automotive 543 1,448 3,002 Test systems, emissions measurement, vehicle tests, cyber security 7 FEV 529 529 4,743 Engines, alternative drives, E/E measuring and testing technology 8 Bosch Engineering 520 570 2,100 Software and function development, networking, E/E systems, IoT 9 Altran 500 2,282 7,800 Total vehicle, driver assistance, connected car, powertrain 10 Alten Group 491 1,975 6,000 E/E systems, car2X, interior, drive, validation 11 Magna Steyr Engineering 380 380 2,100 Total vehicle, engineering services, E/E, alternative drivetrain 12 Assystem Group 274 700 4,200 E-mobility, connectivity, driver assistance,