The Hindu Business Line : The eye of opportunity

You have heard this a dozen times: The engineering services market is a huge, untapped opportunity. But, more questions beg our attention: What kind of work gets done here under this umbrella? Who is making the best of the opportunity now? And, why India?

WHEN Tata Consultancy Services (TCS) announced a mega-deal with Scuderia Ferrari to provide IT and engineering services last year, the Indian IT fraternity had two reasons to celebrate. While TCS earned the distinction of becoming the first Indian company to enter the Formula 1 stadium, the deal sent a clear signal that the Indian IT industry was evolving — from a low-cost, back-office, destination into a preferred supplier of high-end engineering services. And firing the imagination of the Indian IT industry is the huge market opportunity that makes a compelling business case for companies to seriously evaluate the engineering services domain. With the market potential for outsourced engineering services estimated at between $7 and 12 billion, Indian vendors have barely scratched the surface. The value of work currently undertaken by these players is estimated to be a mere $400-500 million, according to Nasscom.

"Engineering services is amongst the most promising segments in IT services, along with infrastructure management, in the next 3-5 years. The engineering services space is interesting for India not so much for our low-cost model but because of the existing world-class manufacturing prowess of Indian companies in segments such as automotive," says Sunil Mehta, Vice-President, Nasscom.

Moreover, Indian companies have successfully leveraged the skill sets, tools and experience from outsourcing IT software and services to gain a strong foothold in outsourced product design and engineering, says Dr Ravi Gopinath, Vice-President and Head, Engineering and Industrial Services Business Unit of TCS.

Demystifying engineering services

In simple terms, engineering services augment or manage processes associated with the creation of a product or service, as well as those associated with maximising the life span and optimising the yield associated with a product or asset.

This not only includes design elements of the product or service itself, but also infrastructure, equipment and processes engaged in manufacturing or delivering them. Engineering services outsourcing is the practice of sourcing some or all of a company's design and engineering requirements from external service providers.

"The $400-500 million market that Indian vendors have cornered primarily represents outsourced product design and engineering, which is one part of the engineering services market. There are opportunities waiting to be tapped. Today, the scope of outsourced engineering services has expanded beyond product design/engineering to include industrial services such as process engineering, plant automation and Enterprise Asset Management (EAM)," says Mehta of Nasscom. All these services classified within engineering services find applications in verticals such as automotive, aerospace, minerals and metals, F&B, plastics and paper. "Newer verticals are likely to emerge strongly in near future. These include utilities, chemicals, pharmaceuticals and medical equipment," says Dr Gopinath.

Showing the way

Four categories of stakeholders are seeking to exploit the opportunities thrown up by the engineering services market (see box).

Engineering services is not just design. Examples of processes that are easily outsourced and which see value addition from an offshore vendor include, among others, validation, simulation, pre-production work and product life-cycle management.

(Validation involves ensuring that once a product is designed and tested, it should perform the required functions by producing instructions. For instance, if it is a chip on a mobile phone, every time you miss a call, does a message flash on the screen? Simulation involves testing a chip over and over to see if it is doing the required function under all kinds of scenario. In pre-production work, those working on the process design it, put it on silicon and see if it performs, before it is sent into full production. PLM refers to the entire product life cycle management after production to see if there are bugs or errors. The errors are then removed.)

Amongst the categories of stakeholders we have referred to, HCL Technologies offers end-to-end services, including conversion, drafting, modelling for product definition, modelling for analysis, product design, analysis, prototyping, testing and validation, tooling and even limited manufacturing of prototypes. It has close to 20-25 active clients in the engineering services space in verticals such as aerospace, medical electronics, Electronics Manufacturing Services and Heavy Engineering.

The company has a high focus on the aerospace vertical, and clocked $5 million from engineering services in the current fiscal ended June 2005. Its focus on the engineering services space is evident from the fact that it is targeting over 150 per cent growth rate for the next financial year.

"We are in the process of setting up a design centre for an aerospace Tier-1company, which will have in excess of 100-150 engineers. The facility in Bangalore is expected to be inaugurated by August this year. It will entail an investment of at least Rs 10-12 crore. We are also setting up a large design centre for a US-based air-conditioner company," says Bijoy George, GM-Strategic Initiative, HCL Technologies.

TCS has over 200 customers in the engineering services space. Considered a veteran player in this market, TCS' clientele includes global giants such as General Electric, Boeing, Ferrari and United Utilities. TCS' Global Engineering Centres are present across the world to serve its customers across Australia, Brazil, Canada, China, Hungary, Japan, the UK, Uruguay and the US, besides India. "Our revenues from the engineering services practice in financial year 2004-05 stood at $123 million. This represented six per cent of TCS' revenues," Dr Gopinath says. Amongst various verticals, Heavy Engineering accounts for 22 per cent of its engineering services revenues, Hi-tech and Precision 21 per cent, Automotive 14 per cent, Aerospace 12 per cent, Utilities 9 per cent, and Chemicals and Pharmaceuticals 2 per cent.

The US-based QuEST, which employs over 700 engineers in Bangalore and supports a host of Fortune 500 clients with high-end solutions for improved product development, clocked revenues of $20 million in 2004-05. "We are projecting revenues of $27 million for 2005-06," Raman Subramanian, Vice-President (Automotive and Industrial Products), says.

Sizing up the market

A Nasscom research report recently quoted IDC estimates that the worldwide market for outsourced engineering was worth $69.8 billion in 2001, with a forecast to grow at a five-year compounded annual growth rate (CAGR) of 12.2 per cent, to $123.9 billion in 2006.

Areport by Avendus — focused largely on the engineering design space — released in 2003 had valued the worldwide opportunity in engineering services at $7 billion. The study further noted that there was a growing interest in offshoring these services and estimated that 20 per cent of the value was being outsourced to third-party vendors in countries such as India, Taiwan and China.

However, since these estimates were primarily focused on design engineering, they addressed only a part of the market potential for engineering services.

Industry estimates peg the market potential for process engineering, asset management and industrial embedded systems at over $5 billion, taking the total outsourced/offshore market potential to a whopping $12 billion. Automotive design accounts for a bulk 65-70 per cent of the market, followed by aerospace at 15-16 per cent, and electric/electronic machinery design at 10-12 per cent. Other key vertical segments considered good targets for outsourced engineering services include utilities and pharmaceutical companies.

"We estimate that the biggest revenue opportunity within engineering services is the automotive segment where the potential offshore outsource-able component is close to $4.8 billion. This is followed by the aerospace segment with a market potential of $1billion, and construction and heavy machinery space where the potential stands at $800 million. The opportunity in the medical devices segment is about $300 million," says Nasscom's Mehta.

Interestingly, according to an online survey of American automotive executives conducted by AT Kearney, India leads the outsourcing market when it comes to auto-outsourcing with 24 per cent of auto manufacturers giving it the thumbs-up for outsourcing. Bigger automotive markets such as China and Mexico lag behind at 15 per cent and 13 per cent, respectively, while other locations such as Brazil, Thailand and the Philippines corner less than10 per cent of the actual outsourcing markets.

Opportunities and challenges

Nasscom believes that while India is a significant player in the overall offshorable outsourcing market for engineering services in the Asia-Pacific region today, China and Taiwan could emerge as formidable rivals in coming years.

"China is likely to emerge as a strong competitor for India. China has demonstrated its capabilities as an offshore destination for manufacturing of automotives, cellular phones and consumer durables. As the country develops its expertise in manufacturing, it will also look at enhancing capabilities to deliver services around engineering, for its customers," Mehta opines.

However, India's edge in this market will be its ability to combine skills with cost. "We have a long history in automobiles, and aerospace. These are the sectors where India has demonstrated its manufacturing capabilities. In addition, we have a whole talent pool in the manufacturing sector. We will see a situation where cross-functional teams — IT engineers understanding design capabilities, and plant and process engineers trained in IT — will operate in this segment," says Mehta. According to him, while the IT companies currently have a base of 8,000-10,000 professionals with strong engineering services capabilities, there are about a million professionals in the engineering talent pool who are acquiring IT skills. "This talent pool will grow at 35 per cent per annum in line with the industry growth rate for offshore engineering services," he says.

Agrees Dr Gopinath of TCS. "India's advantage lies in its reputation and ability to deliver technology services to global customers at great value and high speed. India also has a tremendous pool of engineering and scientific talent, which can be tapped for the sector. Access to cutting-edge technology through global alliances with product companies, availability of prototyping and testing facilities, and sourcing domain skills through collaboration with the domestic industry, are some of the advantages Indian vendors will have," he says.

George of HCL feels India will have an edge in high-value, low-volume, work, even as China makes its presence felt in low-value, high-volume, activities.

However, to become a major hub for engineering and design services outsourcing, India will need to tackle various issues.

"Much of the design activities are still done in-house, and therefore persuading automotive and aerospace companies to move more work to offshore locations still remains an issue," Mehta points out.

In addition, engineering services involves significant investments in software and design tools, making it more investment-intensive than vanilla IT service offerings. Moreover, given the fact that the engineering services market is in fairly early stages of offshoring, it requires a significant onsite presence, thus lowering the margins for vendors, he says.Other challenges include a high degree of core knowledge transfer involved in engineering services contracts, and the high cost of exit due to up-front investments for clients, says Mehta. Subramanian of QuEST adds another perspective. "The challenge faced by Indian companies operating in the engineering services markets is trained talent in the sector. Since our sector requires some tool knowledge which is normally not imparted by colleges, it is up to the various companies to train these individuals who are already well-versed in domain knowledge," he says.

The stakeholders

Engineering services in India comprise four categories of players. They are:

Captive Units comprising the units of international engineering, automotive, aerospace, ICT and other industrial majors such as Bechtel, Flour Daniel, Kvaerner, Ford, Daimler Chrysler, General Motors, Caterpillar, Texas Instruments, Motorola, Cadence, etc. who undertake work for their own (parent) consumption globally.

Next come IT Vendors with an Engineering Services practice. They comprise large IT players such as HCL Technologies, Satyam, TCS and Wipro. They have leveraged their skills in the engineering domain, coupled with project management and global service delivery, to become important players in this space.

The third categorisation is of OEM (original equipment manufacturer) players with sizeable design departments that offer these services on an outsourced basis. These include players such as L&T, Thermax, Mahindra and Hero Global Design.

The final category is that of vendors of Specialist Engineering Services. They comprise a relatively newer set of firms such as Nielsoft, Sierra Atlantic and Infotech Enterprises that focus on engineering outsourcing.

moumita@thehindu.co.in

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