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All "auto update" button does with a design is replace all components with the same number of a newer component if it thinks it is better, like seeker missles -> concussion missles, etc. It won't add or remove things. There are a few things it doesn't do well - it will revert racials back to mainline if mainline is further researched, even if stats are still not as good, and it will force all your reactors onto one design if you wanted all military on hydrogen, all civ on casion. It's easy to revert though, so go ahead and try it out if you know you have some components to update, just check the results carefully and if it made more of a mess than you want to fix, you can always delete the design and go manually update from the previous design.
BTW, even on full manual, the AI still handles private ship retrofits no matter what.