Automakers to move offshore

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.

This is according to a recent survey of 40 senior automotive executives conducted by the Global Automotive Practice of management consulting firm A.T. Kearney.

The reason for the migration? 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.

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% compared with doing the same functions in the US,’ said Richard Spitzer, vice president in A.T. Kearney’s Global Automotive Practice and co-author of the study.

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

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. Automotive is not the leader at this point, Spitzer said, but interest is high.

The most popular destinations for the migration of business activities, according to automotive executives responding to the survey, are India (24%), China (15%), Mexico (13%), Brazil (10%) and the Czech Republic (8%).

‘India is clearly the destination of choice for business 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.’

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 concluded.

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