Nasscom estimates that design spends of the top 10 players, who account for over 90% of the entire design spend in the aerospace industry amount to nearly $2.8 bn every year. The outsourceable portion of this spend is estimated to be at over $1 bn. Outsourcing in aerospace primarily revolves around four major sub-systems of the aircraft-structures, avionics, engine performance and analysis, and systems. Currently, aerospace constitutes 15-16% of the offshore engineering services pie, according to Nasscom estimates.

Electric and electronic machinery design constitute around 10-12% of the pie. Other key vertical segments considered good targets for outsourced engineering services include construction, utilities, pharmaceuticals, and heavy engineering.

Growing Exuberance
Offshore engineering services landscape in India can be divided into captives, IT vendors with engineering services practice, OEM vendors and specialist engineering services vendors. The first category comprises the captive 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. The second category comprises large IT players such as HCL Technologies, Satyam, TCS, and Wipro that 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 category consists of the OEM 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 fourth category comprises a relatively newer set of firms such as Nielsoft, Sierra Atlantic, Infotech Enterprises, etc. that are focused on engineering outsourcing. Companies such as Geometric Software Solutions or Rolta India have one of their divisions dedicated to providing these services. With the increase in sourcing options, several MNCs have adopted hybrid sourcing strategies and are working with outsourced vendors in addition to the work undertaken in their captive units in the country.

The overall growth in this space from the industries standpoint is around 30% year-on-year, according to -industry estimates. TCS's engineering services revenue in FY 2005–06 stood at Rs 940 crore, clocking a growth of 62%. This is far higher than last year's growth of 50%, which was calculated on a lower base. TCS' headcount in engineering services alone was 1,600 at the close of last fiscal and is expected to grow to 2,000 by the end of the current fiscal. For Infosys, product engineering services contributed close to 10% to total revenues and it employs approximately 5,000 Infoscions. TCS' engineering services arm contributed 7% of its revenues last fiscal. HCL Technologies' engineering services operations clocked a 40% growth rate and closed last fiscal at Rs 1,067 crore.

For boutiques players like Neilsoft, growth has been around 40% in the last fiscal. The company closed FY 2005-06 on a revenue of Rs 40 crore. Neilsoft has recently begun its next phase of expansion, wherein it plans to grow 10 times in the next six years. The short-term goal of this major expansion plan is to expand capacity to over 1,000 seats in the next 18 months (from the current 500 seats). QuEST is looking at 40-50% increase in revenues every year for the next three to five years.

Moving Up the Value Chain
The engineering services industry has seen good growth rates in the last few years, and more international companies have begun leveraging offshoring to improve their engineering efficiencies and cost structures. Says Chunduri, “There has been an increase in the number of engineering services outsourcing deals and also an increase in the size of the deals. As clients become more comfortable with the success of the global delivery model in engineering services, they outsource larger portions of their engineering value chain.”

Opines George, “Although the work coming to India has moved up the value chain from the initial days of CAD, we still haven't really seen new product development work (R&D) coming our way.” However, there's increasingly more work coming in product reengineering/redesign, product innovations, product lifecycle enhancement, and sustenance work, in addition to full product responsibility. As more and more of the activities, which are currently considered core activities, are seen as non-core to a customer, the higher end of work opportunity will be given to vendor partners.

For QuEST, one of the most significant deals has been with Rolls-Royce. Today, tasks vary in size from less than 100 hours to large data conversion programs-10,000 hours and more.  The scope of the work is drawn from across the Gas Turbine Lifecycle.  Skills in the office range from Component & Systems Design, Cost Reduction Design, Modeling & Detailing, Engineering Analysis, Gas Turbine Performance work, Experimental Engineering, Ground Support Equipment Design, and Technical Publications.

Says Gopinath, “Increasingly, Indian players are moving from offshore services to being global engineering partners delivering not only from low-cost locations but from their own premises as well, acting as extensions of their -engineering teams.”

Big vs Small
While engineering services in its current state is going great guns, increased opportunity is coming from newer areas like utilities, medical, and scientific equipment and marine. As competition heats up, it's really about how boutique players match up to the large IT vendors when it comes to grabbing a deal. Engineering services and IT services share some common attributes, but are different across many dimensions. With the IT majors betting on this area, we see more awareness and branding of this segment happening which is good in the long run. Says Chunduri, “The market size is huge and growing, and there's enough room for growth for everyone. Specialist engineering vendors, while smaller in size compared to large IT vendors, have the advantage of having engineering specific domain knowledge, culture, processes, and delivery model.”

“A large number of medium size companies ($500 mn to $5 bn in revenue) would prefer -focused companies like QuEST, for the speed of response, technical depth, and complete attention to engineering services, rather than the IT biggies that happen to have engineering services as a low single-digit percentage contribution to their revenue,” opines George. Counters Gunaseelam N, VP, Technology-Led Services, HCL Technologies, “The larger Indian players that have developed a complete set of end-to-end offerings spanning multiple technologies and different industries will move into more strategic partnerships with customers, which will not be limited to back-end product development and maintenance work.” Gunaseelam sees large players sharing a risk-reward partnership with their customers and engage at a level where direct value will be provided to the customer's end-customers. The smaller players on the other hand are likely to find it difficult to scale to this strategic level, as they'll lack the depth of domain expertise, the portfolio of IP, and the breadth of design and engineering expertise, according to industry biggies.

However, the present opportunity in outsourced engineering services remains big enough for everyone to smile back home. And, that indeed, is great news for the future of India's exports in IT.

Bhaswati Chakravorty
bhaswatic@cybermedia.co.in

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