The Hindu Business Line : An eye on the action

Hey, did you see the new car model released by ..XYZ company,” I asked a friend. ‘Yeah’, he replied, before adding wistfully, “Wonder how long it will take others to come out with new updates that quickly!”

Whoa, hold on right there, you don’t have to wait. Haven’t you heard of engineering services outsourcing (ESO) and where India is headed along that route?

Here’s taking off on a racy, technology-automobiles ride, with insight from the industry experts.

Japan, China and India are expected to be the major consumers of third-party, automotive-related engineering work from Indian vendors, believes T.S.K. Murthy, head of Satyam Engineering Services, the automotive division of Satyam Computer Services.

And by 2009, the Asia-Pacific region is expected to net 23 million sales of automobiles, compared to the 22.7 million sales expected in Europe.

“The Asia-Pacific region is already home to the world’s second- and third- largest light-vehicle markets — China and Japan — and future sales will be bolstered by continued growth in China, plus expected expansion in India, South-East Asia and Korea,” says a JD Power and Associates report.

Raja Ramana Macha, Chief Operating Officer of Geometric Ltd, a Mumbai-based provider of engineering solutions, says the increase in the number of models has boosted the demand and requirement of engineering services outsourcing.

The primary factor that drives the outsourcing of automotive design and engineering services is the intense competition faced by original equipment manufacturers (OEMs) and ancillaries, believes Arun Jethmalani, CEO, ValueNotes Research.

This, in turn, creates additional drivers related to pressure on cost reduction, shorter product cycles, etc, he says.

The action’s in the lab

Generally, Indian vendors enable computerised design and virtual testing of various components of the automobile by using advanced engineering techniques such as computer aided design (CAD), computer aided manufacturing (CAM) and various other computer aided technologies, explains Regu Ayyaswamy, Vice-President and head of engineering & industrial services at the country’s largest software exporter, Tata Consultancy Services (TCS).

The vendor tests designs in a simulated environment and depending on the findings, he suggests modifications to the actual design of the various parts of the car, such as chassis, engine, brakes, etc.

This enables the client company to detect anomalies in the design even before the actual prototype (a functional but experimental version of the automobile) goes through a physical or on-road testing.

For instance, the proposed design of a car chassis will be subjected to virtual crash analysis (hitting both stationary and mobile objects) at different speeds; depending on what the findings are, the vendor will suggest the thickness of the car chassis.

Since the design has already passed the virtual test, there is an up to 95 per cent chance of the prototype producing the desired results during the physical testing stage, says Ayyaswamy. All this will not only reduce the time to develop a vehicle but also reduce cost substantially. Result: More features at affordable prices.

Second wave of outsourcing

Auto engineering requires high-end engineering skills. Though Japanese engineers are known for their technology acumen, the demand simply outmatches the supply.

“There will be a dearth of about 70,000-90,000 embedded software engineers in Japan in the next few years, which is a major trigger for Japanese firms to outsource to India,” says Ayyaswamy of TCS.

Japan is a prolific spender on IT; in spite of this it continues to be largely untapped by Indian vendors.

The quality consciousness of Japanese companies has resulted in their being averse to the idea of outsourcing their core engineering work as compared to companies in the US or Europe, says Ajay Chamania, Senior Vice-President and Head, Embedded Technology Solutions, at Patni.

Owing to cultural and linguistic proximity, Japanese companies have traditionally preferred Chinese firms for the little outsourcing work they have engaged in.

This explains why very few Indian vendors have been able to reach the desired levels of scale or profits from their Japanese operations.

However, the good news is that Japanese companies are now in the second wave of outsourcing where they are extending their contracts with Indian companies for engineering outsourcing projects, says Chamania.

Concurs Murthy of Satyam: “The quality of outsourcing work from Japanese firms will not be too high to start off with; once Indian companies establish their credibility in that market, it is going to be a lot easier.”

Breaking cultural barriers

So how do Indian vendors work around the language barrier and cultural issues for engaging with Japanese customers?

Firms such as Patni do not employ local talent in Japan, but they invest significantly in training employees in India on Japanese culture, says Chamania.

Patni has two global development centres that cater exclusively to Japanese clients.

Some companies, such as Satyam and TCS, utilise their existing base in China, which was initially set up for pure-play IT operations, for serving Japanese clients. They use China for servicing clients in geographies such as the UK and the US as well.

“This is because US and European organisations are seeking to set up design centres of their own in China and India and will outsource a lot of work from these centres too,” points out Macha of Geometric.

Ayyaswamy of TCS believes that Indian vendors have a significant edge over their Chinese counterparts due to English speaking capabilities and the service mindset that they have.

Moreover, having worked with these clients in other geographies, Indian firms are familiar with their systems and processes.

Hiring local Chinese talent enables Indian companies handling engineering services outsourcing to work around the language and cultural hurdle that has been a stumbling block for doing business in China.

TCS has about 800 engineers in China and about 90 per cent of them are local Chinese nationals, says Ayyaswamy.

Customisation factor

Indian vendors help their clients to achieve localisation and indigenisation in their automobiles, which may not be as important in the European/US market, but are key drivers in the Asia-Pacific region, stresses Macha of Geometric.

Another major factor helping Indian vendors is that global automobile majors are looking at countries such as India and China from a dual perspective. They not only want to leverage the cost structure for getting engineering services at a much lower cost but are also keen to source auto components for their global businesses from these regions.

Nasscom findings on auto components

A recent Nasscom study of about 158 automobile firms in the country has found IT adoption among automobile component manufacturing units to be low.

However, suggests Nasscom, IT has the potential to act as a force multiplier for the Indian auto component industry and enable the sector to achieve its target of becoming a $40-billion industry by 2015.

Indian vendors have already sighted the opportunity and are working towards helping component manufacturers in improving quality and reducing the time to market, of components.

A similar opportunity exists in China, which is forecast to become the world’s second-largest market in terms of production by 2013, when it is expected to build more cars than Japan.

Moreover, the Chinese government has mandated that products manufactured and sold in China have to be designed in China as well, according to a report by Ernst & Young.

This throws open a huge domestic market in China, which spells opportunity for Indian companies.

However, only if they manage to tap into the manufacturing hub of the world will the Indian industry manage to have a leadership position in the automotive engineering space, stress analysts.

Slowdown or no slowdown…

Chamania of Patni feels it is difficult to quantify the market for engineering services outsourcing in Asia-Pacific.

He also stresses that the move to give special impetus to the Asia-Pacific region is not due to the impending recession in the US.

Patni does not see slowdown in demand from the US.

“Engineering services outsourcing or ESO is like investing in the heart of the R&D cycle for any client company.

Slowdown or no slowdown, companies who want to stay ahead of the competition will continue to invest in ESO,” says Chamania.

adith@thehindu.co.in

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