They might also do this through joint ventures that do captive work.

Among the global players, Kvaerner PowerGas in India provides design-engineering services to Aker Kvaerner offices in the UK, the US, and the Netherlands for projects in those countries, apart from the work it does for Indian companies. It employs around 1,000 people.

Captive vs third-party outfits

Logically, the next question is: Will captive units play a bigger role in this activity as against third-party outfits?

Lance Travis, speaking at Nasscom 2005, was of the opinion that in the beginning, global players would use third-party vendors to test the waters before setting up their own captive units. Others were of the opinion that third-party units, with their risks more spread out among customers, would be more viable.

It is much the same argument that one heard about captive and third-party BPOs about a year ago. Obviously, over the next two to three years, the engineering services market may also see similar attrition.

For the present, however, both the models will subsist. Take for instance, ABB. Last October, it announced that it was establishing a dedicated engineering and operations centre in Bangalore, one that would be `a vital resource base for ABB units across the world.'

The Centre's main scope of operations will include the development and execution of system and engineering solutions to support automation activities across the ABB group. The initial target is to build up to around 500 man-years of support to other ABB operations over the next few years.

Speaking at Nasscom 2005, A.K. Jain, Venture Director, Westbridge Capital Partners, a private equity outfit, said that a lot of engineering design is done in-house and not outsourced, accounting for the high number of captive centres in the country.

The other thing that could impact the cost-advantage for third-party companies is that the tool cost in engineering design could be very high and this could impact the India advantage.

Finally, a large onshore presence is required, though there are early signs of offshoring, he said.

Existing players such as L&T enjoy an advantage as they have been in the product engineering space for over three years now. Although business is only around $50 million (mostly overseas work), it is of strategic importance to the company, says the Chief Financial Officer of L&T, Y.M. Deosthalee. This business has the potential to mitigate the income risks from project execution that forms the bulk of L&T's business today, he says. Spelling out the advantages for L&T vis-à-vis Indian software houses, he says, "Software coding ability can be developed easily, but domain expertise is scarce and that is what we have."

"Again it is a completely international business, like software. We have a number of good customers. It is in growth mode. But it is still at a nascent stage. But we do believe that in the next two to three years it will take off significantly. L&T would be looking at the higher end of the engineering services spectrum — design of aircraft parts, automobile parts, construction equipment, and the like."

At the same time, software outfits entering engineering services feel their advantage lies in being able to provide end-to-end services, including any software-tweaking requirements, and that this would be to their advantage against the pure engineering companies. "Domain knowledge can always be hired," says an executive from TCS.

Tata Consultancy Services, which won a deal from Scuderia Ferrari for providing IT and engineering services for the development of Ferrari's Formula 1 racing car, also has the concept of Global Engineering Design Centres (GEDC). These centres are a "seamless extension" of the customer's own engineering arm in India.

The Product Engineering practice of TCS has set up Global Engineering Design Centres for many major international companies. Engineering costs and product cycle time could be reduced by around 30 per cent, says a senior TCS executive.

TCS has such centres for General Electric, Ingersoll-Rand, and General Motors, connected by exclusive communication links to the customer companies.

Engineering technology is the next big activity for TCS, said Ravi Gopinath, vice-president, at TCS, who heads this practice, at the engineering services session of Nasscom 2005.

Gopinath felt that since no one kind of company has the complete range of offerings as well as domain expertise, there would be several cross-functional partnerships happening too.

According to him, TCS revenues from engineering services still make a single digit contribution to revenues in percentage terms.

Picture by K.K. Mustafah

kripram@thehindu.co.in

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