Engineering services until recently were aggregated either under information technology services (as R&D services) or under information technology engineering services—business process outsourcing (as engineering BPO). However, the evolution of market demand and increasing maturity of the vendor landscape for engineering services has highlighted the need for examining it as a separate segment. Indian companies have successfully leveraged their skill sets, tools and experience from outsourced IT software and services to gain a strong foothold in product design and engineering. However, significant potential still lies relatively untapped.Today, the scope of outsourced engineering services has expanded beyond product design and R&D services to include industrial services like process engineering plant automation and enterprise asset management.



Engineering services
Today, product engineering, embedded systems design and product lifecycle management (PLM) services are included under the ambit of engineering services.

Product design and engineering services
Product design and engineering services include concept generation, feasibility study, concept selection, assembly layout, detail design and prototype building and testing. It also includes simulation analysis using tools such as finite element analysis (FEA), computational fluid dynamics (CFD), system dynamics and virtual prototyping.

Embedded system design services
An embedded system is a special purpose system in which the computer is completely encapsulated by the device that it controls. Unlike a general purpose computer, such as a personal computer, an embedded system performs one or a few predefined tasks, usually with very specific requirements. Since the system is dedicated to specific tasks, design engineers can optimise it, reducing the size and cost of the product. Embedded systems are often mass produced, benefiting from economies of scale.

Multimedia browsers/players and communication components for car entertainment, car navigation and remote diagnostics are examples of embedded applications.

Product lifecycle management
The PLM market comprises six distinct subsectors. They are portfolio management, programme management, collaborative design, product data management, manufacturing process management and service and support management. Combined, these solutions enable a company
to manage their products over the entire lifecycle.

Within each application sector, there are unique market drivers. For portfolio management, tier I companies are looking to better allocate resources to their most promising development prospects. Within collaborative design, the strongest growth area is product simulation tools to minimise physical prototyping. For manufacturing process management, companies are looking towards true digital manufacturing, including matching new product concepts to available manufacturing assets to accelerate time to market at the lowest possible manufacturing cost. Such disparate needs will create unique market opportunities for a wide range of suppliers of enabling solutions.



Program management
Product development initiatives are born within programmes. A new product initiative starts as a programme, with a programme manager defining a roadmap, detailing timelines, intermediate deliverables and high-level requirements. The selected project team then executes the programme, crossing departmental boundaries and collaborating with suppliers, contractors,partners and customers to achieve its objective within the time and cost parameters of the programme.

The organisation creates working methodologies and business processes to develop and deliver the product. While the uniqueness of these processes is key to distinctive products, collaboration and information sharing are universal enablers in product development. Better tools for collaboration and information sharing lead not only to better products but also make the product development process more efficient.

Collaborative design
Collaboration in the product development context is all about integrating seamlessly with various participating agencies in a closed loop fashion. The participating agencies belong to internal as well as external organisations.

Indian engineering services market
India has become a global hub for IT and business process offshoring. For the most part, offshoring to India had been associated with outsourcing to Indian services companies purely based on cost arbitrage. However, captive offshoring, primarily for control over assets, intellectual property and core business activities is also picking up.

Work comes to Indian IT vendors in two forms: dedicated offshore development centres and in large enterprise-wide IT projects. Offshore development centres (ODCs) are for the companies who outsourced the entire business division to the service vendor. The ODCs are essentially a remote office of the client, operated by an IT service vendor.

Chart 1: Presents the tools used in Product Designing and Engineering Services

Source: Frost & Sullivan

R&D/engineering spend is the potential market for the engineering services providers but not all the sectors are equally important. Frost & Sullivan has short listed industries as a potential engineering services market. These nine industries have a market share of 88 percent of the total global R&D/Engineering spend. India with its natural competitive advantage is likely to play a huge role in various segments of the engineering services industry. The Indian engineering industry is rapidly growing as a major outsourcing hub with a CAGR of more than 30 percent. Automotive, telecom and aerospace are the major verticals that spend large amounts on outosourcing engineering services.

According to Frost & Sullivan, by 2015, there would high outsourcing in the automotive and aerospace verticals, with a slight increase in telecom spend. This is the area in which India needs to concentrate and take advantage of.

Automotive
The global automotive industry is penetrating deep into the offshoring industry. It began with the sourcing of auto components and has now reached a stage of offshoring the entire process from design to finished product. However, the Indian engineering services industry for the automotive sector is at a growth stage compared to other sectors. Core functions like engines and power trains are still not completely outsourced. This is primarily due to the conservative approach of the automotive industry in India.

The Indian automotive engineering services outsourcing (AESO) market has never been so promising. The Indian domestic industry growth, alongwith global OEMs shutting shops, and turning towards low cost destinations, and Indian engineering service providers building core competence for the automotive product designing, have all resulted in creating a high potential for the engineering services markets such as India. However, the engineering service providers face stiff competition for survival and the automotive manufactures find ways to cut costs, reduce time to market and increase efficiency. Other reasons of restricting the outsourcing of engineering services are intellectual property rights and the labour union. Once these are addressed, the AESO market will grow substantially to tap the market’s potential.

Chart 2: Percentage share of different regions in global Engineering Services/ R&D spend (2007)

Percentage of Research &Development and Engineering Services Spend by Various Regions–2007

Source: Frost & Sullivan                 All figures are rounded

The Indian AESO market structure comprises four types of vendors for engineering services in India:

IT vendors: Large IT players who have leveraged their skills and project management expertise in
the engineering domain such as TCS, Satyam, Wipro, Infosys, Patni, etc

Captives: Fully owned units of international engineering and industrial majors such as Ford, Daimler Chrysler, Texas Instruments, Motorola, etc

OEM vendors: OEM players with sizable design departments that can offer outsourcing services such as Mahindra engineering, Tata Technologies, etc 

Specialist vendors: Firms focused on providing solutions in engineering outsourcing such as Neilsoft, Infotech Geometric, Ricardo, AVL, IAV, etc

Of these vendor groups, apart from the captives, subsidiaries of Indian auto OEMs are best positioned to offer end-to-end design and engineering services. This is on account of their domain
knowledge and financial muscle to invest in organic and inorganic growth to build capabilities.

Indian engineering services vendors serve a wide array of businesses ranging from automotive, aerospace, consumer electronics, telecommunication and construction to manufacturing. The work carried out for different industries includes product design, legacy conversion, new technology development, support for regular design work and PLM.

R&D/Engineering Services Market (2007-08)
Labour is the main area where operations are outsourced to lowcost locations like India and China. Arbitrage opportunities in labour wages are the highest. After labour, the second area where there is scope for of outsourcing is material and supply, which includes prototype building and initial testing. Typically, 48 percent of R&D expenditure is in the form of labour wages and 20 percent for materials.

Major drivers of the Indian automotive engineering services industry
The potential growth of this industry is forecast by examining the impact of various factors that
drives R&D/engineering spend.

Figure 1: Spend of Global Automotive Companies on Engineering services and Research & development-2007
S.No	Name of the Company	US $ Billion
1	Ford Motor, USA	8.42
2	General Motors, USA	7.05
3	DaimlerChrysler, Germany	7.01
4	Toyota Motor, Japan	6.73
5	Volkswagen, Germany	5.06
6	Honda Motor, Japan	4.17
7	BMW, Germany	3.86
8	Robert Bosch, Germany	3.63
9	Nissan Motor, Japan	3.55
10	Renault, France	2.81
11	Peugeot (PSA), France	2.67
12	Hyundai Motor, South Korea	2.46
13	Delphi, USA	2.31

Key challenges
Indian AESO has grown from designing individual parts. It has reached a growth stage of having a
globally launched car developed fully in India. The potential of the Indian AESO lies in a stage where globally shared platforms for various models will be developed and manufactured in India. Currently advantaging from cost arbitrage, the Indian AESO companies would get contracts on their development skills, core competence and proven track record and would govern the price market globally.

As the Indian AESO industry is expected to grow at a CAGR of 32 percent, the scope of work also
changes. The major work outsourced is for interior systems like dashboards and designing of seating systems.

The Indian AESO industry is set to move from the current stage to have more contracts of chassis and engine designing. The industry includes the power train, which holds considerable potential, and can reach up to 30-35 percent of power train assemblies given to engineering service providers.

India as a supply base
Readiness of any country as a supply base depends upon its macro environment, which includes political, economical, social, technological and demographical factors. These factors together create an environment conducive for industrial growth and sustainability. In the R&D/ engineering services market, India has tough competition from countries such as China, Russia, Czech Republic, Philippines, etc.

The India advantage
India is recognised as the premier destination for offshore technology services. According to a fact sheet on the Indian IT industry published by NASSCOM, the total combined Indian IT services and ITenabled services export market in fiscal 2007 was nearly $33 billion. The total Indian IT services and IT enabled services export market is projected to grow to $49 billion by 2009.

Figure 2: Indian Automotive Engineering services market forecast, 2006-12
Year	US $ Billion
2006	0.43
2007	0.51
2008	0.67
2009	0.89
2010	1.12
2011	1.62
2012	2.27
Compound Annual Growth Rate
2006-12	32 percent

Key growth factors
High quality delivery
Seventy-five percent of the world’s SEICMM Level 5 assessed development centres were located in India. SEICMM is the Carnegie Mellon Software Engineering Institute’s Capability Maturity Model, which assesses the quality of the organisations’ management system processes and methodologies. Level5 is the highest level of the CMM assessment.

Significant cost benefits
One of the major reasons of OEMs turning to India for outsourcing is that India has a strong track record of delivering a significant cost advantage, with clients reporting savings of up to 60 percent over the original cost base.

Abundant skilled resources
India has a large and highly skilled English-speaking labour pool. India produces approximately 2.5 million university and college graduates, including approximately 290,000 engineering degree and diploma holders annually. Frost & Sullivan believes that the large and growing pool of skilled professionals has been a key driver of the rapid growth in the Indian IT and ITES sector. India has the single largest pool of suitable offshore talent, accounting for 28 percent of the total suitable pool available across all offshore destinations and outpacing the share of the next closest destination by at least a factor of 2.5 percent.

The factors listed above also make India the premier destination for other services such as ITES, which are also referred to as business process management. Industry analysts have observed that business process management services of leading offshore technology service providers have strong prospects for growth, given the providers’ experience, proven track record and breadth of client relationships. These advantages apply to a majority of companies with offshore capabilities in India.

Internal capabilities for sustainable growth
There are additional factors critical to a successful, sustainable and scalable technology services
business. These factors include the ability to carry out the following tasks:

Effectively integrate onsite and offshore execution capabilities to deliver seamless and scalable services

Increase depth and breadth of service offerings to provide a onestop solution in an environment where corporations are increasingly reducing the number of technology services vendors

Develop and maintain knowledge of a broad range of existing and emerging technologies

Demonstrate significant domain knowledge to understand business processes and requirements

Leverage inhouse industry expertise to customise business solutions for clients

Attract and retain high-quality technology professionals

Make strategic investments in human resources and physical infrastructure (or facilities)throughout the business cycle

Competitive landscape: India vs other low cost countries
Frost & Sullivan 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 the 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. As the country develops its expertise in manufacturing, it will also look at enhancing capabilities to deliver services around engineering.

However, India’s edge in this market will be its ability to combine skills with cost and experience in the field of automotive and aerospace. In addition, India has a talent pool in the manufacturing sector.

A situation will arise where cross functional teams—IT engineers understanding design capabilities, and plant and process engineers trained in IT—will operate in this segment.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. However, other low-cost countries such as Philippines, Russia, Czech Republic and Ireland, etc are slowly emerging as alternative outsourcing destination.

Sustainability of the Indian advantage
To sustain the current India advantage and to realise this R&D/engineering services opportunity, India needs to develop a multi-pronged strategy for success. Some of the recommended actions are broader in scope, related to those required to sustain lead in ITBPO exports. Others are more specific, targeted at addressing the engineering services market.

Build the ‘Engineered in India’ brand

Build domain expertise through symbiotic relationships with experts

Focus on infrastructure creation and undertake initiatives to improve workforce

Leverage local industry ‘offsets’