We are at a make-or-break moment for established global automakers. New OEMs are entering the market, generating more volume and profit yet spending significantly less in R&D per model they develop. Bain research shows some 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 (see Figure 1).

Now is the time for traditional OEMs to review their product portfolios and focus on their R&D departments. 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.

Traditional automakers that pull ahead of competitors will 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. They can do so by accelerating development times, often using artificial intelligence (AI)-powered automation tools, focusing on key future core competencies, and reviewing their R&D footprint.

Reducing R&D intensity with a more focused portfolio

Most CEOs and their leadership teams know they need to decrease their R&D intensity, or the percentage of R&D as a percentage of revenues. Recent Bain research shows that German OEMs, for example, are planning to reduce R&D intensity by an average of 35% between now and 2027, with some targeting a reduction of more than 50%.

Many of the OEMs that plan to achieve this reduction are banking on two assumptions. First, as the industry shifts toward battery electric vehicles (BEVs), traditional OEMs believe they can focus on building BEVs and significantly reduce the development of plug-in hybrid electric vehicles (PHEVs), and internal combustion engine (ICE) models. However, given decreasing government incentives, tepid consumer interest in BEVs in some countries, and potential changes in government policies toward BEVs, OEMs may have to continue developing both PHEVs and BEVs in parallel for longer than the OEMs initially anticipated.

Second, traditional OEMs plan to increase the price and volume of cars sold, thus boosting their revenues, which would in turn reduce the amount of R&D spending as a percentage of revenue. However, these goals will be very hard to meet in the near future, given economic headwinds, stagnating core markets, intensified customs policies, and new OEMs (mainly from China but also the US) entering the market.

Winning OEMs are approaching the challenge of reducing R&D intensity entirely differently. They are rigorously examining their product portfolios to see how to serve the same number of customers with fewer models and body shapes and how to reduce the complexity in the cars they develop by providing fewer options. 

Recent Bain research shows the number of models European OEMs launched has ballooned over the past two decades. The model portfolio size for two European OEMs, for example, has increased by approximately 250% since 2000 while a major Asian OEM offers nearly the same number of models today as it did in 2000 (not accounting for region-specific units).

Boosting R&D efficiency by reducing product development time

Product development time and cost have a strong correlation. OEMs that develop cars in a shorter amount of time typically also have significantly lower development costs.

The length of time that leading OEMs take to develop a new car has shrunk dramatically in recent years. Although some traditional auto OEMs still work with development times of 48 to 54 months, insurgent OEMs are reducing those time frames by nearly two years, setting development targets of 24 months to 30 months. Furthermore, the best insurgent OEMs manage to stick to the shortened time frames, whereas many traditional OEMs frequently overrun their longer target development times by a significant amount.

Insurgent OEMs get an additional edge by constantly launching improvements during a model series and thus keeping their cars up-to-date for much longer. They are doing so through continuous over-the-air software updates as well as continuously improving hardware during the model run. Meanwhile, traditional OEMs try to combine all updates in new models or “facelift models” that they launch only every few years.

To decrease the gap in development time, leading OEMs need to use different tactics. For example, they need to shorten product development timelines by running key processes in parallel and using Agile techniques. They need to involve key suppliers earlier and streamline the transition from development to manufacturing by integrating the teams much earlier. They also need to reduce cost overruns by maintaining stricter control of key processes, enforcing design freezes, avoiding unnecessary late changes, and managing predictable issues (e.g., software) more efficiently. 

AI-powered tools also create vast new opportunities to reduce the development time. Product life-cycle management systems and automation have already helped to boost efficiency in the last several years, but AI can raise efficiency to a whole new level. 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, however, 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. While we are currently seeing only the tip of the iceberg in terms of AI, leading OEMs work in parallel to fix basic development practices while also leveraging new AI tools.

Ultimately, OEMs that manage to shorten development times will be more successful. 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.

Leading OEMs realign their in-house R&D efforts on critical emerging competencies

Many traditional OEMs have expertise in classical areas of car development such as combustion engines and outsource a higher share of the work 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 (see Figure 2). OEMs must redefine their core competencies and focus their engineering resources on the critical future areas that will differentiate them from competitors.

The current engineering workforce will also need to undergo a transformation. Bain research indicates that between 30% to 50% of traditional OEMs’ total R&D workforce have tenures of more than 20 years, compared to 10% to 25% for insurgent OEMs’ R&D workforce. The vast experience of a senior workforce is a great asset but also poses a challenge as it is both harder to retrain high-tenure engineers on new areas of expertise and more expensive to lay them off. Much of the senior talent will need to be retrained and upskilled to align with the shift toward BEVs and software-defined vehicles.

OEMs also need to find the right balance between outsourcing R&D activities and in-house development. Outsourcing gives OEMs the opportunity to tap into lower-cost engineering resources, to react more flexibly to market needs, and to cover peak loads more efficiently. At the same time, OEMs must ensure they have the right talent to develop successful, differentiating cars.

Finally, the engineering workforce of established traditional automakers often relies too heavily on employing “thinkers” and “watchers” and outsourcing the “doers.” The R&D workforce of the future needs to be able to execute critical core capabilities in-house and outsource more non-critical and contextual activities.

Restructuring the R&D footprint 

While many European automakers (both premium and mass market) primarily operate their R&D departments in European high-cost countries, manufacturers outside of Europe 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. Within Europe, some auto OEMs use offshore resources more than others (see Figure 3).

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.

From India to North Africa to Southeast Asia, countries offer a different mix of skills that make them attractive locations for offshoring R&D activities. India, for example, has a large talent pool of high-quality, lower-cost automotive engineers, particularly in product and process testing, as well as digital and software development and mechanical engineering.

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 workforces 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.

Measures such as streamlining the portfolio mix, reducing the product development time, using the power of new AI-enabled tools, and remapping the R&D footprint are critical. Yet these are only a few key focus areas among a larger set of measures that automotive OEMs will need to implement to keep pace with competitors as the industry continues to transform rapidly.

While each OEM will ultimately need to select the R&D optimization strategies that work best for them, the common denominator for all OEMs is starting now and taking bold, decisive, and strategically thoughtful steps to remain competitive in the future.