The engineering services division of Tata Consultancy Services (TCS), Indias largest IT services firm, was making a sales pitch to one of its clients, an Italian aerospace company, which was looking at a new variant aircraft program for US and other global markets. TCS was trying to get the design work for a new manufacturing tool. The client, who was also looking for a cost-effective manufacturer, got an unusual proposal from TCS. The IT services firm said it could not just design the tool but could get it manufactured in India at a competitive cost and deliver the end product to the client. The client, though a little skeptical in the beginning, finally agreed, considering the background of TCS parent, the Tata Group. TCS quickly got into the act and roped in group company TAL Manufacturing Solutions, the groups contract manufacturing arm. The designing is over and TAL is manufacturing it in India.

TCS is calling it concept-to-manufacturing. India, which fast transformed itself from an agriculture-led economy to a services-led one, skipped the manufacturing wave almost completely. Many have argued that India could actually get into manufacturing through the services route. Critics, however, have dismissed the idea, calling it wishful thinking, far removed from reality. IT services, Indias main strength, they argue, has little synergy with manufacturing.

IT services, yes. Engineering services, no. Engineering design, which now has a sizeable base in India, is actually closely integrated with manufacturing.

And if TCS experimentation it is still early to call it a trend succeeds, the Indian dream of services to manufacturing may just become a reality.

The Next Big Thing
That does not mean that the ultimate measure of the success of engineering design off-shoring to India is whether or not it is able to turn India into a global manufacturing base. In its own right, engineering design services offer huge opportunity for India to tap. According to a study by Booz Allen & Hamilton for Nasscom, published in August 2006, the global spend on engineering services was close to $750 bn in 2004 and is growing. The study estimated that by 2020, India could earn close to $30 bn from offshored engineering services.

In hindsight (it was published exactly two years back), it seems even Booz Allen Hamilton had underestimated the potential. Of course, that was at a time when Nano was not launched and the Tatas had not acquired Jaguar/Land Rover. Both of these events have given significant boost to Indias image as an engineering powerhouse.

With a revenue figure of $2.5 bn (and we have not included software product engineering, semiconductor design, and other high tech/telecom engineering) in FY 08, the industry could surpass that $30 bn mark (which includes areas that we have excluded) by at least three to four years before 2020.

In FY 08, engineering services (excluding the areas mentioned above) accounted for revenues of Rs 10,110 crore ($2.5 bn), growing from a base of Rs 8,050 crore, or $1.8 bn. This was a growth of 25.6% in rupee terms and slightly more than 40% in dollar terms.

Already, engineering services account for the second largest area (after BPO) outside enterprise IT for most large IT services firms, which have ventured into this, including TCS, Satyam, and HCL. In terms of average revenue realization per employee, as of today, engineering services is comparable to IT services. However, considering the fact that an employee takes at least three years to be fully productive in engineering services (unlike IT, where it happens in six months and in BPO, where it can happen even in two month), and most companies have just begun their journey, both revenue realization per employee and margins will only better with time.

Engineering services share in the entire IT services pie has increased from about 4% in FY 07 to more than 7% in FY 08. Yet, many stakeholders believe unlike IT and BPO, the tipping point for engineering services is yet to be reached.

Broader Trends
Like in IT services and BPO, cost and access to engineering talent remain the top two drivers of off shored engineering services. So, many of the trends that have defined the evolution of the industry have been similar, with some exceptions.

Some of the broader trends over the years include the following:

Hybrid as the preferred approach: Unlike IT and large parts of horizontal BPO, which in organizations have been centralized for years and in many cases even outsourced to external agencies, engineering services has rarely been outsourced in large scale. So, unlike IT outsourcing and BPO, few have debated the captive versus outsourced model. In fact, some of the most prolific outsourcers like Applied Material, GM, Cummins, and EADS have taken the hybrid approach of outsourcing work to vendors in India while opening their own India design centers.

Emerging market opportunity as a driver: In the last few years, global growth for most consumer products including automobiles, appliances, and electronic equipment is being driven by emerging markets like BRIC and other Asian countries. The economic growth accompanying that has also driven demand for services such as telecom, real estate and aviation. All these markets expect products and services at a price significantly lower than those in the developed world. So far, most firms had tried to achieve those price points by manufacturing in low cost areas. But in many cases, these markets dont just need low-cost products, they need products that have a lower cost of ownership, and some of them like India, China and Brazil have significantly different needs, which demand radical changes in design. Manufacturers are realizing fast that those new design projects would be too expensive to carry out in the existing bases, countries like US, France and Germany. That has led to a proactive approach in looking for low-cost locations.

Outsourcing more complex work: Like in IT, but much faster than IT, engineering services firms in India have been able to demonstrate that they can increasingly do more complex work. But more than that, Indian players, especially tier-1 IT services providers like TCS, HCL, and Satyam have proved that they can scale very fast and smooth. This has resulted in companies entrusting more and more complex projects to Indian companies. Last year alone, two large deals, one awarded by Arvin Meritor to TCS and one by aerospace major EADS in a mega multi-sourcing deals to four Indian vendorsHCL, QuEST, CADES, and Satyamhave shown the level of confidence among the clients on Indian vendors.

Non-Indian services firms realizing India potential: It may have taken the non-Indian IT firms decades to finalize their offshoring plans, but many smaller companies in engineering services have already started flirting with India. While companies in the construction area, had started a little earlier, last two years have seen a lot of such firms in automotive and aerospace queuing up in India. Major names include EDAG (delivery in Gurgaon and Pune), Magna Steyr (Pune), COMAU (Pune), KUKA (Pune), Hosshin (Pune), and Black & Veath (Mumbai). While most of these are in automotive or construction, this year is likely to see activities in aerospace.

The New Drivers
In the last one year, a few significant external factors have driven the engineering design agenda of global companies in sectors such as automotive, aerospace, oil and gas, and utility areas. Some of them have far-reaching impacts on how engineering is done in the future. Some have more immediate impacts.

Indias defense purchase: In aerospace, which is one of the two top areas for Indian engineering services providers (the other being automotive), one single event is completely redefining how engineering is done. India has invited bids for buying 126 fighter aircrafts, in a deal that is estimated to be somewhere between $10 bn to $12 bn. Indias offset policy stipulates that foreign firms that sell products worth more than $600 mn will need to re-invest upto 30% of the total amount in India to create local ecosystem. For this deal, that amount has been raised to 50%. That means these firms will collectively spend somewhere between $4 bn to $5 bn in India. That is significant investment. While what should be included in that is still not clear at the time of writing (a new defense procurement policy is expected this year, that will replace the existing 2003 policy), engineering services is being seen as the best bet by the deal hopefuls to judiciously spend that money in India.

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