A downturn in the automotive sector and broader economic challenges slowed down the growth pace of engineering, research, and development (ER&D) companies in the quarter ended June, following several quarters of outperformance compared to traditional IT services companies.
“The investment outlook for OEMs’ (original equipment manufactures) was higher for 2024, but the results clearly show that the demand for automotives are slowing down mainly due to high prices and macroeconomic issues,” an analyst from a domestic broking firm said. This is evident as the ER&D companies are also not able to revive their long-term projects, he added.
Several companies have reported a sharp decline in demand, particularly in Europe, due to slower-than-expected adoption of electric vehicles (EVs) and increasing cost pressures.
As a result, major top ER&D services companies, including- L&T Technology Services and Tata Technologies – who cater largely to automobile companies reported a sequential decline in revenues for the first quarter.
L&T Technology Services saw a 3.3% quarter-on-quarter decline in its topline, Tata Technologies reported a 2.9% decrease, CyientDET saw a 5.4% plunge, and among the major players, HCLTech ERS experienced a 3.7% drop in dollar revenue.
“There are headwinds for the mobility which I’m sure you are seeing in the news, but it is different headwinds for different people,” said Kishor Patil, co-founder, chief executive officer, and managing director of KPIT, during a discussion with analysts following the Q1 results. “For overall automotive, especially passenger cars, the overall sales of vehicles are going to be flattish or go down a bit,” he added.
Inflation continues to pose a challenge to the automotive industry, driving up the costs of materials and vehicle prices while consumers face high-interest rates. Further, demand for EVs in Europe is also struggling, with Germany in recession and other major countries grappling with slow economic growth. Recent US economic data has also sparked renewed recession fears.
“The Germany’s auto sector is facing challenges due to the government’s removal of EV subsidies and auto companies have cut fown their R&D expences because of this,” the analyst said.
Patil said that the market has reached a saturation point for Chinese original equipment manufacturers, while European markets face the dual challenge of competing with Chinese companies both in China and within their own territories.
Additionally, the rise of global capability centres (GCCs) has altered the dynamics in the ER&D sector as OEMs focus on cost optimisation, they are increasingly shifting work to their in-house GCCs rather than outsourcing to traditional ER&D service providers.
However, looking ahead, analysts expect a recovery in the sector in the next year, on the hope of interest rate cuts by the US Federal Reserve and by the European central banks.
