Despite auto industry slowdown, our deal pipeline remains strong over last two quarters: KPIT President

A little bit is an understatement. This year will be the defining year for the automotive industry. The overall automotive market saw 90 million vehicles last year, which has changed only a bit. Over the last decade, it grew by 2-3%, went down a little, and may grow at 2-3% at best during good years. That has been the trend. 

Traditionally, 10 years ago, 20 automakers got most of the 90 million — General Motors, Ford, BMW, Volkswagen, Land Rover, Hyundai, Toyota, and Honda. Today, China has the largest market, with 24 million cars a year. India does 4 million or more, so China is 6X of us. Earlier, China had a 30-40 per cent market share globally, with the global having 60. Today, it’s reversed. 

Every month, global OEMs are losing market share to the Chinese. The second change is that the US is the second biggest market, with 16-17 million cars, followed by Europe, with around 14-15 million cars. Then, it’s India, Japan, and others.

To protect their industry, the European Union has put a 30-50% duty on Chinese vehicles, depending on compliance, transparency, and funding from the government, among others. This means restricted access in Europe. Americans have banned software and you can’t sell Chinese cars in the US. Japan and South Korea also prefer their vehicles.

The open markets are the Middle East, Southeast Asia, parts of Latin America, and Africa, where everybody can compete. China has an advantage because its  vehicles have better features, and the perceived value is 30-50 per cent less in cost. 

95 per cent of our business comes from non-Chinese OEMs. On average, these players may take a 25 per cent haircut. While in India, the Tatas and Mahindras are competitive, once the full force of the Chinese players comes in, this might change. India is playing it smart by not allowing Chinese companies without special permission. If it’s not made in India, the duties can be as high as 110%. We are still protected.

Our focus for the last two and a half years has been working with our clients to reduce their costs and the time to market. For a traditional Japanese or European car, the concept to production is a 4-5 year cycle, while China has done it in two years and wants to reduce it to 18 months; the other one is releasing the features important to the consumers. The Chinese have over-the-air updates. While global companies like Tesla do this once a month, in China, they do it on a daily to weekly basis.

We are trying to help our global OEM with three things — nimbleness, cost optimisation, and software features. For cars, as the software component grows  and becomes complex, bugs and issues may arise. It is about recognising the issues ahead of time to reduce the software to SOP time. You make incremental investments but not capital investments in software. 

Currently, the cost of the software is still 5-8 per cent of the vehicle. We have started looking at other areas to reduce the vehicle cost. For example, we benchmark and compare the client’s vehicle to a Tesla or a competing Chinese company, comparing the design, the number of parts, and how they can be sourced differently.

We have had a presence in China since 2008 and have done  business there since many of our global clients are  there. But before COVID, we also worked with some upcoming Chinese companies on their programs and so, have kept good track. We have a team of 50 people who continuously look at the ecosystem.

We are reasonably confident, given our conversations with all our OEMs. While growth in the last two quarters has been far better than the industry, it has come down a bit because OEMs realise how crucial the situation is. While 2023 was one of the best years for most OEMs, in 2024, sales started going down, with their bottom line getting deep. These players will have to revisit their cost structure and find their feet in the changing world. They were going through that over the last two or three quarters and will continue over the next one or two quarters before they hit the bottom and realise this is the new normal. 

Companies selling 5 million vehicles are now selling 3.8 million vehicles. How do you make money selling 3.8 million vehicles are the decisions being made. That’s why some of our larger engagements are taking longer to close. Our pipeline has never been better. In the last two quarters, the pipeline has been great. We remain bullish and sceptical  about the next few quarters.

Globally, we have around 13,000 people and 600-700 in America. In Europe, we have 1,200 and 400 in Tunisia since it’s close to Europe. We also acquired a German company that we bought. In Brazil, we have close to 100 to support many US programs.

Like in India, in the US, we have started university programs where we hire some interns after their graduation. This is our third year of that model being implemented. Because we work with better-known companies in Michigan, our ability to hire and retain talent is high. Our attrition in the US is probably 6% or 5%, which is low. We are not concerned about the administration making any changes.

One area where we see growth potential is in the cost reduction part of the vehicle. We have some capabilities, but we can strengthen them and create greater  value for our clients through  partnerships, joint ventures, and potential acquisitions. While we continue to build these capabilities ourselves, we are open to other possibilities. 

Cybersecurity is becoming critical. We have built some things on our own, but some security elements are specific to locals, and some countries are better. Some companies in Israel are doing a good job, and we can learn and benefit from them. The third investment area is AI, which has impacted the IT business a bit. 

While IT companies are growing at 3-4%, headcount is reducing. In the automotive industry, with embedded software, there is less scope for AI, meaning we have a slightly longer runway than others. AI has many benefits and can help our clients substantially  reduce their costs and time to market substantially. 

We have been playing around with it for the last few years and have piloted it in some of our internal programs to see the benefits. In the next financial year, we will pilot it out to some of our clients limitedly.