Will Automotive Disrupt the Current Momentum in ER&D Services?
About one year, I wrote a blog signaling that the automotive market had reached the peak of its cycle and that, sooner than later, automotive OEMs would reduce their R&D and ER&D spending. I also said that, because Europe’s largest R&D buyers are automotive OEMs, the continent would be more impacted than the US (which has the FANGs as the largest R&D spenders globally).
So far, by September 2018, the automotive ER&D sector has eroded but not gotten into a sharp decline. Market conditions in automotive are eroding in the US and China, as a result of high sales, of the Trump administration’s taxes on Chinese imports, and potentially on German cars too. Elsewhere, market conditions remain favorable, but the cycle is reaching its inflection point.
On the ER&D service side, the market continues to perform well overall. Germany is accelerating, thanks notably to automotive suppliers. Spending with OEMs is stable to slightly declining. France is still growing in volume, but prices are impacted by nearshoring. Sweden is up thanks to both trucks and car OEMs. UK automotive spending, as reported by Ricardo, is delayed by Brexit considerations.
More and more, the state of the market depends on each client. For instance, Ford ER&D spending was down in H1 2018, with the end of its Mondeo work, while PSA will be increasing its spent, notably by 2,000 Opel jobs to Segula.
So, is there a massive slowdown in automotive ER&D spending coming or not? I will argue that we are seeing the early signs of a market reaching its inflection point from a buoyant market, to a mixed market. It does not matter that OEMs and suppliers have a high appetite for anything digital, clean, and autonomous. What matters is their profitability level : if their margins are under pressure, they will cut expenses in all areas, including in ER&D. The scenaro I am envisioning is offshoring or nearshoring of non-critical ER&D activities, while keeping embedded systems, and clean energy activities onsite or onshore. What is clear that the automotive industry cannot keep on increasing its ER&D spending by 10-15% each year, now that it has reached the peak of its cycle.