Study (before corona) predicted annual growth of 3 percent in engineering services, and a market volume of 29 billion euros in 2030. New conditions must be taken into account to benefit from more whole-vehicle development projects and new technologies. Providers of engineering services can use several standard strategies to secure their competitiveness as important value-creation partners: R&D incentives and targeted retraining and staff development.
Engineering service providers constitute a major part of the automotive value chain. Before the coronavirus pandemic began, they could expect a healthy level of orders from traditional auto makers and suppliers in the period up to 2030 – despite the transformation of the whole sector. The study reported that in 2030 the total order volume for the developers of vehicles and vehicle technologies would, in all probability, come to 29 billion euros – far higher than in 2019 (20.5 billion euros). This is one of the results of a comprehensive analysis of the engineering services sector commissioned by the German Association of the Automotive Industry (VDA) (which brings the automotive industry together and represents the interests of the OEMs, suppliers and the generally mid-sized engineering providers) – from the firm Stahl Automotive Consulting in the first quarter of 2020. Depending on how long the crisis lasts, these prospects will be less rosy at least in the short and medium term, as right now many businesses are trimming back their R&D budgets.
There is a long-term trend, however: the engineering providers will add to their skills and develop new cooperation arrangements in order to satisfy the increasing wishes and demands from the OEMs and mobility service providers. In particular, the expected rise in order volumes relating to the series maturity of vehicles and the development of new technologies (such as self-driving cars and additional requirements for on-board software) will generate further business potential, leading to a 40 percent increase in the overall market by 2030 as compared with the pre-crisis level in 2019.
Dr. Martin Koers, Managing Director of the VDA, stressed: “One important competitive advantage for Germany as an automotive location and the transformation of the industry is the intensive dovetailing of the auto makers, suppliers and engineering providers. The detailed division of labor among these three groups has resulted in a very innovative and efficient value chain structure, which has been generating major achievements in vehicle development for many years. The engineering firms in Germany form a very diverse group in a highly competitive field. After the corona crisis, above-average growth rates may certainly be expected in engineering services.”
Pressure on development service providers demands rapid adaptation
“The study shows that the market for development engineering will grow all over the world – but much faster in other countries than in Germany, which will seriously jeopardize existing jobs in engineering. Yet as German service providers we can benefit from growth if we succeed in adapting our services to the global market – to established and new customer groups and also regarding service content, which we will have to concentrate on. So under the bottom line, the automotive transformation will harbor many opportunities but also huge risks for the sector in Germany. It will take place relatively quickly, and not everyone will be able to keep up if the policy conditions do not change,” says Udo Jankowski, who is on the Management Board of the Tecosim Group and chairs the Development Service Providers’ Working Group in the VDA. Improving the conditions will include expanding the charging infrastructure to provide full coverage, plus expansion of the network, in order to meet the challenges of digitization. Another key aspect at present is to guarantee liquidity, especially at mid-sized companies.
Three standard strategies identified
The study, entitled “Automotive Engineering Services 4.0 – Der künftige Wertschöpfungsbeitrag der EDL-Branche in der global transformierten Automobilindustrie” (“Automotive Engineering Services 4.0 – The future contribution of development services to value creation in the globally transformed automotive industry”), identified three standard strategies. Prof. Nina Leffers, the Partner at Stahl Automotive Consulting who headed up the study, said, “We identified three strategies for engineering service providers to safeguard their competitiveness as important value-creation partners. The ‘commodity’ strategy demands a high level of cost-efficiency, coupled with economies of scale and location optimization. The ‘new tech’ strategy aims for technological leadership in innovative areas, while the ‘whole vehicle’ strategy deals with the very broad service portfolio and global presence.”
The study’s overall result is that the following are urgently needed to strengthen engineering service providers in Germany: targeted R&D promotion (sufficient to be internationally competitive, and technology-neutral), more extensive tax incentives for R&D, and securing competitiveness through targeted retraining and staff development measures.
The doubling of the assessment base for the research allowance from 2 to 4 million euros per recipient per year, which was passed as part of the economic stimulus package and will end in mid-2026, is definitely a step in the right direction. If the allowance is provided at a rate of 25 percent, the maximum additional tax relief on research spending will be 1 million euros per year per recipient.
German Association of the Automotive Industry (VDA)
Eckehart Rotter, Head of Press Department
Tel.: +49 179 4712154
Stahl Automotive Consulting GmbH & Co. KG
Prof. Nina Leffers, Partner
Tel.: +49 172 6978018