It was the TCS' deal with Ferrari last year that grabbed media attention and since then offshore engineering services is being touted as the next big opportunity in the offshore IT services space. The export story in the engineering services space has been evolving over the last couple of years.

The expansion in the range of activities included in -engineering services and the corresponding increase in market -potential is visible today with a maturing vendor landscape; traditional EPC companies adapting to the global sourcing model, IT services firms expanding their engineering services practice, the emergence of specialized (non-IT) firms offering these services, and the distinction between the buyer organizations for these services with separate R&D and IT budgets. The scope of engineering services in its present state, that is, what is considered to be outsourceable currently, spans product design (both electronics and mechanical) plant design, process engineering, enterprise asset management, and plant automation services.

The maturity curve in the outsourced engineering services in India has originally evolved from outsourced product engineering (mechanical) services. Basic drawing conversions and CAD migration assignments have moved through 2D-3D modeling and digital mock-ups, conceptual design, analysis and validation; complete design outsourcing, manufacturing coordination, CPC/PDM; overall process quality improvement, e-engineering solutions, remote monitoring, and system architecture development over the last couple of years. Engineering services provided out of India today are primarily centered around the discrete manufacturing industry with an emphasis on product development services such as automotive engineering design.

The worldwide market for outsourced engineering was worth $69.8 bn in 2001 and is forecast to grow at a five-year CAGR of 12.2% to reach $23.9 bn by the end of this year, according to industry estimates. The worldwide opportunity in engineering services was valued at around at $7 bn. Currently, around 20% of the overall opportunity in engineering services is coming as offshoring to third party vendors in India, Taiwan, and China. These estimates still remain primarily focused on the design engineering and address only a part of the market potential for engineering services. The potential for process engineering, plant automation, and enterprise asset management services lies relatively unexamined. Industry estimates peg the market potential for process engineering, asset management, and industrial embedded systems at over $5 bn, taking the total offshore market potential to approximately $12 bn. This entire market is estimated to reach a size of $60 bn by 2008, according to industry research. Says Prashanth Chunduri, head, Marketing and HR, Neilsoft, “India is in a position to capture 4-5% of the $60-bn opportunity. Says Ravi Gopinath, VP (Engineering Services), TCS, “We estimate the current size of the market to be in the range of $650-700 mn.”

Product design engineering, which is where most of the action is presently, encompasses mechanical as well as electronic engineering disciplines. The services -offered extend from the early stages of idea generation, through engineering analysis and design, virtual simulation, documentation and conversion, prototyping and production, testing, knowledge-based engineering, and PLM solutions. Key phases in the product design (mechanical) include concept development, preliminary design, detail design, validation, pre-production, and production. The rest of the pie, which is really insignificant in comparison to product design engineering, is taken up by process engineering, plant automation, and enterprise asset management services. Few players like TCS have been able to establish a footprint in the entire pie.

While engineering services market has been picking up over the years now, the real hustle and bustle actually began around three years back. The last fiscal was significant enough for Indian players to look at special branding strategies in engineering services. Infosys, for example, is pitching heavily on innovation product lifecycle and engineering services.

There are several factors that are driving the steady growth in the export opportunity in engineering services, especially product development. One, as more manufacturers move to the next stage in their transformation journey and drive market differentiation and growth through innovation, there's an increased focus on design process. Two, while the focus on innovation will increase, the locus of innovation is moving beyond the confines of internal R&D in the organization. Product companies are also increasingly leveraging extended engineering across all stages of product development lifecycle. Supply-demand economics of engineering talent is playing a vital role in influencing companies to leverage outsourcing for design and engineering. All these factors are working in favor of engineering services moving to remote destinations. Finally, it's the cost arbitrage that is the main driver of this huge boom in offshore engineering services. Engineering cycle time can drop by 25-30%, in addition to 30-45% in cost; 20-30% improvement in production efficiency, and 15-20% reductions in maintenance cost. While these are the generic benefits of outsourcing engineering services, independent players promise better returns and margins. Infosys innovation in media product, for example, reduced the cost to 1/10th of its earlier avatar, according to company sources. Another innovation of the wireless simulator saved an Infosys customer close to $40 mn.

Riding on Automotive
It was the automotive industry that was the first to -realize the benefits of outsourcing engineering services to low-cost destinations like India. This is what saw the first wave of outsourcing to India through captives of auto majors like General Motor, Nissan, Toyota, and Johnson Controls.  Automotive design forms the largest segment, accounting for 65-70% of the market, according to a Nasscom report. The automotive segment spends an average of 3-5% of its annual revenues on R&D activities, and engineering design is a critical component. Design spends account for nearly half of an auto company's R&D spending and according to industry estimates, nearly $4.8 bn of this R&D budget is outsourceable.

Beyond the Wheels
Though aerospace segment holds a great potential for engineering design, the outsourcing in this domain is still low. A significant trend in this space is an increasing drive toward gathering domain knowledge and creating a USP for the customer. TCS and HAL have commenced collaboration to provide end-to-end engineering solutions to global aerospace customers. TCS has several years of experience working with many aerospace companies like AVIO, Boeing, B/E Aerospace, EADS CIMPA, Dunlop Aerospace, GE Aircraft Engines, SME Aerospace, Goodrich, Pratt & Whitney, and others. On the other hand, HAL works with Boeing, Airbus, Honeywell, BAE System, EADS, SNECMA group, Rolls Royce, and others. Bangalore-based QuEST is betting big on Aerospace and Energy and estimates both domains to occupy 70% of the market. Says Bejoy George, VP (Marketing & Business Development), QuEST Global, “Currently, the boom in aerospace and energy (Power Generation and Oil & Gas) sectors can be attributed to a shortage of skilled engineers in the West.”

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