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Why outsourcing non-core functions makes sense for automobile OEMs

Across industries, there are benefits at large of outsourcing non-core functions. This ranges from easing HR challenges to solving for lack of specialist knowhow. Sometimes it might be needed because expertise is needed only for a short period of time, and other times to avoid underutilisation of both machinery and personnel. But more than anything else, it allows the organization to focus its resources and mindspace to its core competence. 

The auto industry is not new to outsourcing. In fact, OEMs are among the biggest clients for global IT / ITeS giants. Apart from technology, companies have often outsourced aspects of production and manufacturing, even in India.

“Managers have to constantly ensure the company’s survival in the market. This perspective emphasises the need for managers to consider outsourcing in order to sustain a company’s competitive advantage. The use of external assembly service providers in the automotive industry is widespread and is embraced in the build-to-order concept.” – Jens K. Roehrich, Outsourcing: Management and Practice Within the Automotive Industry

However, recent changes and trends have the potential to change things even further. 

As the industry changes, so will outsourcing requirements

Over the last few years, the auto industry has been significantly intertwined with shifts in regulation, technology and consumer behaviour – and that is not to speak of the wide-ranging changes brought about by the global pandemic. 

From standardization because of norms, to new business models (such as subscriptions), the ever-prevalent role of automation and AI, new demographics and markets and the increasing preference for electric vehicles, it’s fair to say the last few years has heralded more change (or discussion points!) than the preceding few decades. What’s more, unpredictable short/medium-term trends such as the ones brought about by Covid-19 (increased hygiene, preference for personal transport bucking the ride-sharing trend, etc) just goes to underline the old cliche that the only constant is change.

In fact, a Deloitte report says that an OEM in 2025 will look substantially different from that at the time of writing (2017). The consultancy projects that “a typical OEM will retain the core business of car production but other business models might account for upto 40% of total revenues.” Depending on the scenario, workforce numbers for an OEM might drop by up to 50%”. Consider this report was written before Covid-19, it’s not unthinkable that some of the projections might come even sooner!

All this makes life tough for management in OEMs because they may not know what next year might bring, because of myriad factors. While R&D, marketing, design & other core functions will become more entrenched to differentiate and come out with new products, flexibility for support or non-core functions becomes increasingly important to keep in line with changing strategy. The lack of flexibility can even lead to inertia for innovation, as we’ve seen with legacy companies during the digitisation brought about by the pandemic.

How a company like 21 North can help 

Luckily, one company’s non-core function is another company’s core function! Here at 21 North, we help out OEMs (and other players in the automotive ecosystem) with flexibility for a variety of services. 

This includes internal movement between stockyard, warehouse and showroom, for example: home test ride and delivery services, after-sales logistics (pick-up and drop to/from customer’s home and service centre) and more. Each of these services can be scaled up or down depending on your requirement and changing business realities, so you incur cost for services only when you need them, and are not left with unproductive overheads.

The other advantage is that since these functions are our core, we have invested in great technology developed and maintained by us, security features such as cloud calling, vehicle tracking, etc. and personnel (our select team of Ambassadors are trained and equipped to handle even customer-facing tasks). This allows both us and OEMs to work mutually, each building up their own expertise. For example, 21 North takes the responsibility of recruiting and managing drivers off your plate. What does all this mean for an OEM? The freedom to focus on core activities and gaining increased EBIDTA.

It’s an interesting period for the automobile industry – some makers are bringing back some functions that could be considered core (Tesla is in-sourcing batteries into its Gigafactories, for instance). This strengthens our belief that support functions or non-core activities will continue to be outsourced and OEMs will seek reliable partners who focus on them.

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