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IT, ER&D Firms Affected by European Auto Downturn

Automobile

Infosys & Automotive Sector: Revenue Amid Macroeconomics

Business Honor
05 November, 2024

European automotive sector slowdown hits IT and ER&D firms; recovery seen in hybrids, software

The downturn in the European automotive sector has impacted Indian software service providers and ER&D companies sharply during the first half of FY25, with weaker demand reported. Among some of the key IT players impacted by these challenges are Tata Consultancy Services, Infosys, and HCLTech, driven by supply chain disruptions, regulatory shifts, poor macroeconomic conditions, and cost pressures. This has led to weaker performance in the automotive sector for these companies.

Not even ER&D firms, which have outperformed the traditional IT services companies over the past few years, were spared. L&T Technology Services (LTTS), Tata Technologies, and CyientDET all reported sequential declines in revenue in Q1 FY25, with LTTS at 3.3%, Tata Tech at 2.9%, and CyientDET at 5.4%. The ER&D segment of HCLTech was also down 3.7% in dollar terms. Most such companies, however, reported sequential growth in the September quarter.

KPIT Technologies is one of the mid-sized firms focused on engineering in the auto space, where revenues exceed 40% from Europe. Kishor Patil, the CEO, says he's aware of headwinds in the European automotive market, especially in passenger cars that will be flat or decline.

As the EU continues to intensify its effort towards electric vehicles, the European automobile industry currently faces strong competition, especially at the hands of Chinese manufacturers. The consequence has been extremely thin margins for the remaining Europeans. Reluctance in the demand of new cars on top of that has further added to the deterioration of the conditions. Both Volkswagen and Stellantis are earning lower profits than expected.

The good news is that despite these challenges, bright spots have emerged in areas such as software-defined vehicles and cloud-based automotive solutions. Analysts forecast some recovery by next year, driven by interest rate cuts and shifts towards hybrid vehicles that may boost demand for ER&D services.