R&D localisation in emerging markets

Roland Berger consultants discuss the success factors for captive engineering centres in the automotive industry

The need for western manufacturers to localise their R&D activities in emerging markets is ever increasing. Primarily due to a shift in production and sales volumes, it has been intensified by the necessity to address local market requirements. Roland Berger’s Dr Wolfgang Bernhart, Dr Wilfried Aulbur, Ludwig Fazel and Junyi Zhang discuss the success factors for captive engineering centres

In the future, the majority of the increase in global passenger car sales will take place in emerging markets. This will have a significant effect on the expected sales distribution of western OEMs: both European and US manufacturers will see their share of sales generated in the BRIC countries shift from the current 21-28% to 27-41%.

In addition, the importance of western markets as production hubs will decline steadily: the volume of passenger cars produced in Europe as a share of global production has already decreased continuously from 22% in 2009 to an estimated 16% in 2013, and will reach around 15% in 2019. A similar picture can be observed for production volumes in the US, which will drop from an estimated 13% in 2013 to 11% in 2019. At the same time, the production share of the BRIC countries will increase from 22% in 2009 to an estimated 40% in 2019.

To participate in this development, and the resulting sales growth shift towards emerging markets, OEMs must adapt products and engineering processes to local requirements.

This process of localisation and customisation of products to emerging market needs can be implemented in 4 steps. The first comprises the de-contenting of global products, combined with low-cost production and purchasing.

Step two requires a global platform with local components, offering the possibility to realise further cost-saving potential. The next stage combines designated concepts for low cost markets with the integration of local suppliers. Very often, partnerships and/or joint ventures with local companies pave the way for a fast and effective realisation of such a low-cost product.

Finally, the fourth step requires the establishment of a product creation process, specifically tailored to the requirements, needs and capabilities of emerging markets. This low cost development process must be backed by additional low cost processes within the organisation, for example adjusted testing and validation. This can help cut product costs by 20-30%.


The reasons for OEMs to increase their presence are manifold. On one hand, emerging markets have become major global automotive powerhouses and are increasingly gaining importance as hubs for innovation. On the other hand, emerging markets strongly differ from established western markets and are characterised by specific requirements, resulting in the need for local adaptation and customisation. At the same time, western OEMs are facing increasing cost pressure in emerging markets due to the rapidly improving ability of emerging market players to compete for customers. Furthermore, greater complexity and increasingly shorter product lifecycles make it necessary to adjust products to specific customer needs in emerging markets over a short period of time. Local regulations also demand market-specific product offerings, and have significant impact on the required flexibility of the global R&D organisation.

All of these factors are pushing western OEMs to establish local R&D activities in emerging markets. Generally, this can be done in two ways: through collaboration with engineering service providers or via the set-up of a captive engineering centre. At least at first, collaborating with an engineering service provider might be a fast and cost-effective way to cover local market needs. However, some severe risks arise in the mid- and long-term. The security of critical know-how cannot be guaranteed when partnering with a local engineering service provider. Knowledge, especially in R&D, will become ever more important as a competitive factor for differentiation, and so this lack of security poses a significant risk for OEMs. Moreover, working with an engineering service provider does not offer the same opportunities that a local R&D organisation can with regards to building up and sharing knowledge with the global company. Only a wholly-owned local R&D organisation will pave the way for global knowledge sharing with emerging markets and provide an adequate link to global structures. For these reasons, establishing a captive engineering centre is clearly the better way for western OEMs to localise R&D activities and build up know-how in emerging markets.


The business scope of the local R&D activities must be clearly defined and aligned with central R&D, as well as other global R&D departments. This makes it possible to clearly allocate responsibilities and avoid duplicate work. After defining the business scope for local R&D activities, a specific R&D centre setup should be fleshed out. The steps required to establish a local R&D centre must be identified and a concept for the overall organisational structure must be developed, which also includes the specific functions to be covered by the local engineering centre.

Furthermore, the position and role of the R&D centre must be clearly defined. This includes its positioning in the OEM’s global network as well as its integration into the global R&D organisation. Dedicated functions should be installed to support this integration of local R&D, for example, assignment of expatriates and roadmaps for knowledge transfer. Finally, a detailed roadmap for the implementation of the local R&D centre must be developed.

Companies setting up local R&D organisations have to face some serious challenges. However, these can be countered by bearing in mind several success factors.

One major challenge is the historically grown R&D footprint of western OEMs with a clear focus on headquarters. This leads to a lack of focused capacity and competence built up in low-cost countries. OEMs therefore need to transfer respective research capacities to emerging markets in order to effectively utilise low-cost engineering locations and thereby balance their R&D capacity on a global level.

Moreover, an insufficient differentiation between core and non-core competencies can often be observed. By analysing and adjusting core competencies to optimise development depth, cost advantages can be achieved and capacity can be made more flexible.

Additionally, a homogenous setup of OEMs’ global engineering units with similar functions means that efficiency levers cannot fully be exploited and work may be duplicated. This can be overcome by creating global competence centres with clearly assigned responsibilities and leads for specific development fields.

OEMs establishing local R&D capacity also have to contend with a lack of clear structures and processes for transferring global R&D know-how to the local organisation and vice versa. Implementing the right set of processes enables the rapid and effective set up of local R&D activities, as well as leveraging both regional and global know-how.

Dr. Wolfgang Bernhart is Senior Partner of the Automotive Competence Center; Dr. Wilfried Aulbur is Managing Partner – India; Ludwig Fazel is Senior Consultant at the Automotive Competence Center; and Junyi Zhang is the Principal of the Automotive Competence Center at Roland Berger Strategy Consultants.