Engg services
outsourcing:
The
$40-billion
opportunity
By
Dev Varam
Over
a period of
time, India
has developed
world-class
manufacturing
ability and
today, the country
produces a variety
of hi-tech products
from jet aircraft
to semiconductors.
India's evolution
as a giant in
the manufacturing
sector has coincided
with the country's
prowess in Information
Technology and
IT-enabled services
such as business
process outsourcing
(BPO). The result
is an immense
opportunity
for engineering
services outsourcing.
A recent study,
conducted jointly
by NASSCOM (National
Association
of Software
Companies) and
Booz Allen Hamilton,
a management
consulting firm,
has estimated
the offshoring
business in
engineering
services that
could come India's
way at $40 billion
by the year
2020. In 2005,
engineering
services outsourced
to India fetched
about $2.2 billion.
Clearly engineering
services outsourcing
is emerging
as the next
big opportunity
for India.
The
study, “Globalization
of Engineering
Services. The
Next Frontier
for India”,
takes a comprehensive
view of the
emerging markets
in engineering
services between
2005 and 2020.
The findings
of the study
estimate an
additional $
40 billion opportunity
for the Indian
IT industry
by 2020 from
offshoring of
engineering
services alone.
The study outlines
the existing
and potential
opportunities
along the five
verticals and
four service
lines.
“The domain
knowledge developed
over the last
100 years by
the manufacturing
industry, along
with the outsourcing
process knowledge
of the IT and
business process
outsourcing
industries,
has enabled
Indian companies
to make significant
inroads into
engineering
services,”
says B.V.R.
Mohan Reddy,
Chairman &
Managing Director
of InfoTech
Enterprises
Ltd., who is
also Chairman
of the NASSCOM
Engineering
Services Forum.
Engineering
services outsourcing
involves the
design of products
and processes
using the principles
of engineering
design such
as mechanical,
electrical,
electronic,
and civil engineering.
According to
Reddy, the emphasis
on self-reliance
and the associated
government policies
after Independence
in many ways
has provided
the impetus
to many companies
to design and
produce indigenously.
“Over
the last three
decades much
of this design
methodology
has become electronic.
Further, the
Internet and
Product Lifecycle
Management (PLM)
software have
enabled engineers
in diverse locations
to cooperate
on engineering
design projects.
The maturity
of engineering
design outsourcing
and India's
intrinsic strengths,
such as domain
knowledge, availability
of skilled engineers
and outsourcing
process capability,
make the country
a preferred
destination
for engineering
services outsourcing.”
There are certain
key advantages
India has in
this field.
The first is
domain expertise.
Public sector
companies, defence
research establishments,
and private
organisations
continue to
be in the forefront
of engineering
design and innovation.
This is enabling
Indian industry
to develop a
significant
amount of the
domain knowledge
being used to
service global
clients.
The second is
the availability
of engineering
talent. Engineering
design tends
to be extremely
collaborative
and communicative
due to the complexity
and interdependencies
within a project
and constant
changes in specifications.
Hence the communications
skills of engineers,
beginning with
English language,
become very
important. The
Nasscom-Booz
Allen study
reports that
qualified Indian
engineers represent
28 per cent
of the global
engineering
talent. This
is greater than
the next two
countries Russia
(11 per cent)
and China (10
per cent) combined.
The third advantage
is the existing
process capability,
infrastructure,
and customer
relationships
developed over
the last 20
years of IT
services and
business process
outsourcing
(BPO). Today,
a significant
majority of
the world's
largest corporations
outsource their
IT work to India.
Indian companies
not only hold
a cost advantage,
but are also
considered technically
strong. Many
of these customers
are manufacturing
companies which
after the success
of IT and BPO
are looking
to outsource
engineering
services.
One of the major
constraints
coming in the
way of India
achieving its
full potential
in engineering
services outsourcing
is the inadequate
numbers of engineers
available to
meet the requirements.
To achieve the
target revenue
of $40 billion
by 2020, India
would require
an estimated
number of 250,000
qualified engineers.
This is a big
task for the
1,400-odd engineering
institutions
to cope with
in the next
15 years. Emphasis
must also be
laid on developing
both technical
as well as communicative
skills that
the industry
requires to
service global
clients.
The second challenge
is the physical
infrastructure.
The Government
needs to continue
to focus on
building roads,
ports, and airports.
According to
Reddy, engineering
designs will
also require
the import and
export of physical
parts, components
and machinery
and hence, the
government needs
to define a
robust process
in which there
is a seamless
transfer of
goods that are
required to
deliver world
class engineering
services from
India.
Reddy says that
since a large
amount of domain
knowledge that
exists in India
today is with
public sector
undertakings,
it is imperative
that these firms
collaborate
and cooperate
with educational
institutions
and engineering
services firms
to ensure that
this knowledge
is passed on
to the next
generation of
engineers within
the country.
A concerted
effort is also
required by
industry organisations
such as NASSCOM,
the State and
Central Governments,
and private
companies to
address these
challenges and
be in a strong
position to
realise engineering
outsourcing
potential.
NASSCOM has
formed the engineering
services forum,
comprising a
wide cross-section
of engineering
services companies
in India. The
objective of
the engineering
services forum
is to help build
a significant
brand for India
in engineering
services outsourcing.
Initiatives
which would
ensure that
India can deliver
world class
services in
large volume
include increasing
domain expertise
in India, continuing
the creation
of world class
infrastructure,
improving the
quality and
quantity of
engineers in
India, and leveraging
the local demand
for engineered
goods and services.
“The country's
long-term objective
should be to
ensure that
the "engineered
in India"
brand carries
pride, credibility,
and demand in
the global market
space,”
says Reddy.
“Spending
on engineering
services was
US$750 billion
in 2004 and
is projected
to increase
to US$1.1 trillion
by 2020. The
report also
indicates that
the market is
highly fragmented
by industry
with Automotive
at 19 percent,
Aerospace at
8.0 perfect
and Utilities
at 3.0 percent
in 2004. High-Tech/
Telecom is the
dominant and
fastest growing
sector, with
30 percent of
the market,
and the traditional
engineering
powerhouses
– USA,
Germany and
Japan have a
lead in engineering
spend,”
Reddy says.
Discussing the
report, Kiran
Karnik, President
NASSCOM said,
“The Indian
IT and software
industry is
continuously
renewing itself
and seeking
to grow by addressing
newer service
lines; the latest
one being engineering
services. Companies
in India have
developed capabilities
and skill sets,
and invested
in technology
platforms to
leverage this
opportunity.
The growth in
engineering
services signifies
the need for
global corporations
to expand their
R&D pool
beyond their
home countries”.
“The total
offshore engineering
spend is expected
to grow to US$150
– US$225
billion by the
year 2020, and
India with its
talent pool#
and existing
experience in
engineering
services, is
well suited
to realize 25%
of this opportunity.
However, we
must ensure
that required
steps are taken
by stakeholders
to address possible
roadblocks -
especially those
concerning workforce”,
he added.
“The demand
for engineering
talent is growing,
and emerging
market countries
such as India
will play a
vital role in
expanding capacity,”
said Kevin Dehoff,
Vice President
at Booz Allen.
“Companies
will increasingly
create competitive
advantage by
accessing and
building core
innovation capabilities
in a world-class
global network.”
Vikas Sehgal,
Executive Director,
Booz Allen Hamilton
said “For
India, Engineering
Services Offshoring
presents a tremendous
opportunity
– it is
not only a significant
revenue generator,
but will also
place India
on the global
innovation map.
Attaining, training
and retaining
talent will
be a critical
next step for
India to maintain
its current
advantage.”
As per the report,
India enjoys
a relatively
strong position
in the automotive
and high-tech/
telecom engineering
services market
with a US$25
billion opportunity
by 2020. Aerospace
offers the greatest
potential for
expansion –
though it is
also one of
the toughest
opportunities
to tap because
of its close
association
with the defense
sector. The
report calls
for greater
support from
the government
to realize this
opportunity.
If addressed
appropriately,
engineering
services offshoring
(ESO) can help
the Indian offshore
services industry
further consolidate
its leadership
position and
build a significant
skill-value
advantage over
the competition.
B Ramalinga
Raju, Founder
and Chairman
of Satyam Computer
Services &
Chairman NASSCOM
said, “Today,
globalisation
of innovation
is being spearheaded
by the largest
spenders on
innovation,
in terms of
both regions
and sectors.
Engineering
Services offshoring
is being used
to expand global
innovation capacity.
To target the
maximum potential
revenue of $40
billion by 2020
– all
important stakeholders
including the
government of
India, academic
institutions,
service providers
and trade bodies
such as NASSCOM
will need to
undertake a
series of important
measures. A
carefully thought
out strategy
that combines
strong marketing
efforts –
such as the
development
of an ‘Engineered
in India”
brand, with
investments
in infrastructure,
workforce and
expertise and
the very least
is required.
In addition,
it’s important
for all stakeholders
us to get together
and think about
how India’s
domestic growth
can become a
strategic advantage
in the long
term.”
Key
Findings of
the Study
Engineering
services is
a growth market:
Current spending
on engineering
services ($750
billion in 2004)
is projected
to increase
to $1.1 trillion
by 2020. The
market is highly
fragmented by
industry, with
Automotive at
19%, Aerospace
at 8% and Utilities
at 3% in 2004.
High-Tech/ Telecom
is the dominant
and fastest
growing sector,
with 30% of
the market
CEOs are increasingly
viewing offshoring
as a way to
counter market
forces that
are exerting
pressure on
engineering
services: While
cost control
remains a concern,
companies are
also seeking
access to a
high quality
talent pool
that can grow
engineering
capacity and
increase productivity.
Locating engineering
services in
emerging markets
also provides
access to a
growing market
of customers,
and can decrease
time to market.
While in FY05,
only $10-15
billion of engineering
services was
offshored, the
market is expected
to grow to $150
-225 billion
by 2020.
India’s
current share
of the offshored
engineering
services market
is about 12%
– relatively
small as compared
to its information
technology and
business process
outsourcing
sectors: The
study also found
that India is
well-positioned
to increase
its market share
of engineering
offshoring from
12% to 30% by
2020. The potential
engineering
market in India
could exceed
$40 billion
by 2020.
India offers
a unique set
of attributes
that will translate
into a sustainable
position as
an offs-shoring
destination.
