The downturn in the European automotive sector has cast a shadow over the auto engineering business for leading Indian software service providers and engineering, research and development (ER&D) firms in the first half of FY25.
Key IT services players like Tata Consultancy Services (TCS), Infosys and HCLTech posted weaker demand from their automotive clients, driven largely by the European market’s challenges with supply chains, shifts in regulatory needs, poor macroeconomic conditions and rising cost pressures weighing heavily on the sector.
The revenue growth of ER&D-focused firms, who previously outperformed traditional IT services companies, has also been hit with many companies reporting a negative sequential growth in the June quarter after nearly two years.
Prominent ER&D services companies focused on automotive clients such as L&T Technology Services, Tata Technologies and CyientDET also reported revenue declines in the first quarter of FY25. LTTS saw a 3.3% q-o-q decline in its topline, while Tata Tech posted a 2.9% fall and CyientDET logged a 5.4% plunge. HCLTech’s ER&D segment also saw a 3.7% drop in its dollar revenue. However, in the September quarter, most of them reported a sequential growth.
Meanwhile, the mid-sized, automotive-focused engineering firms like KPIT Technologies have seen an even sharper impact as the company derives over 40% of its revenues from Europe. “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, CEO and MD of KPIT, during an analyst call after 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.
During the September quarter earnings, Infosys CEO Salil Parekh, too, said, “We have seen slowdown in the automotive sector in Europe.” Even HCLTech CEO C Vijayakumar said, “There is pressure in automotive, especially in Europe, reflected in our numbers this quarter and likely in the next as well.” He added that some major clients in Europe have implemented cost-cutting measures, leading to project cancellations.
The EU’s regulatory push toward EVs has led automakers to contend with slim margins in EV production, as well as intense price competition from Chinese manufacturers. As a result, new car demand has slowed. Large European automakers such as Volkswagen, Stellantis, Mercedes-Benz and Porsche reported lower-than-expected profits due to these pressures, reflecting the widespread impact on the sector.
Pareekh Jain, CEO, EIIR Trend, said, “Even though the automotive market was not doing that good in the last couple of years, the R&D market was not that impacted. However, now they are losing shares to Chinese EVs and Teslas of the world. Additionally, whatever products they launched earlier were not that successful. So, they are revisiting their strategy, and that is impacting the work here.”
Further, the structural changes are also notable. The increased adoption of global capability centres (GCCs) by major automakers has shifted work in-house for many original equipment manufacturers (OEMs). This shift is part of a larger trend toward cost optimisation, with OEMs preferring to leverage GCCs over traditional service providers.
Nonetheless, some industry leaders maintain an optimistic outlook on manufacturing prospects outside the automotive sector. Wipro CEO and MD Srinivas Pallia highlighted the opportunities for growth in software-defined vehicles and cloud-based automotive solutions, altough these emerging areas are unlikely to compensate for the overall decline in demand from traditional automotive clients in the near term.
Analysts expect that the sector may see some recovery by next year, supported by continued interest rate cuts by central banks in the US and Europe. “Some companies are now shifting from EV to hybrid. Once these strategies are decided, then strong demand will come up for ER&D,” Jain said.
From: financialexpress
Financial News
