BOSTON – February 6, 2025 – Established global automakers are facing rising competition from insurgent OEMs as the latter are generating more volume and profit yet spending significantly less in R&D per model they develop. Bain & Company’s new report recommends traditional OEMs to review their product portfolios and rethink their R&D strategies to stay competitive.

Insurgent Chinese OEMs, for example, had an average cost per full vehicle equivalent (FVE) development that was 27% of the average FVE for the top five German OEMs from 2020 to 2024, according to Bain’s research. In addition, European OEMs have continued to launch numerous models, more so than their Asian counterparts, over the past two decades. The model portfolio size for two European OEMs, for example, has increased by approximately 250% since 2000.

“Innovation in R&D determines how competitive future products will be and constitutes a major investment, so improving the efficiency of R&D spending will be key,” said Eric Zayer, head of Bain & Company’s EMEA Automotive & Mobility practice.

“Traditional automakers that pull ahead of competitors will need to focus on a few key critical mandates. For example, they will reduce the number of models and derivatives in their product portfolio. They will also raise R&D efficiency to the next level by accelerating development times, often using AI-powered automation tools, focusing on key future core competencies, and reviewing their R&D footprint.”

Currently, traditional auto OEMs still work with development times of 48 to 54 months, while insurgent OEMs do so in 24 months to 30 months. To decrease the gap in development time, leading OEMs need to shorten product development timelines by running key processes in parallel and using agile techniques. AI-powered tools create vast new opportunities to reduce the development time. AI can help by automating single steps such as generating product documentation of software code or drawings; completing automated quality checks of drawings; or speeding up the value engineering process by analyzing construction drawings and suggesting more common, cost-efficient parts to use instead. In some areas, AI can replace entire tasks, such as building physical prototypes by using digital twins and simulating a larger variety of test cases, thereby significantly reducing the need for physical testing.

Shorter product development cycles not only help increase R&D efficiency but also allow OEMs to bring up-to-date models with in-demand features to market faster and at a lower internal cost.

Traditional OEMs should also consider investing in new capabilities that they lack internally. Key future core competencies will include batteries, energy management systems, software-driven functions like advanced driver assistance systems (ADAS), data management, and infotainment, among other features. OEMs must redefine their core competencies and focus their engineering resources on the critical future areas that will differentiate them from competitors.

While many European automakers primarily operate their R&D departments in European high-cost countries, manufacturers outside of Europe, particularly in China, have a higher share of R&D resources in mid- and low-cost countries, making them more flexible and better at managing costs than competitors.

There are two main reasons to offshore. First, it may make sense to develop in key markets for these markets.  For example, engineers in China are more likely to understand Chinese customers’ needs and preferences when designing interiors and user interfaces. Second, a company headquartered in a more expensive country can benefit from offshoring more of their R&D operations to lower-cost regions, as they can reduce expenses while maintaining efficiency in product development.

Building up capabilities in offshore locations usually requires time and a staged process, starting with the less complex capabilities and topics. However, given the massive pressure to act, OEMs may need to offshore certain functional areas now to build the skills their current workforce lack.

Finally, establishing local Centers of Excellence, such as in India, can also help OEMs to centralize R&D efforts, optimize resource utilization, and enhance collaboration while boosting local technical expertise and capacity to innovate.

“Insurgents are building more for less. Traditional OEMs must adapt or fall behind. To stay competitive, traditional OEMs must cut complexity, boost R&D efficiency, and embrace AI-powered innovation," said Daniel Suter, a partner from Bain & Company’s Advanced Manufacturing & Services practice.

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Editor's Note: For more information or interview requests please contact:

Gary Duncan (London) — Email: gary.duncan@bain.com

Katie Ware (New York) — Email: katie.ware@bain.com

Ann Lee (Singapore) — Email: ann.lee@bain.com

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