Not surprisingly, there are frantic deal making, partnerships, JVs, consortia, etc. Six hopefulsBoeing and Lockheed Martin from the US, four-nation European consortium EADS, Russian MiG, Swedish Saab, and French company Dassaultare trying to do all that is possible to bag a large slice.

It is a no-brainer that this will redefine the way aerospace engineering is done in India, and even the world.

Oil Prices: In the last year, oil prices have gone up to more than $140 a barrel before easing a little in the last few weeks. With no end to this problem in sight, both producers and users of oil have been doing a strategic rethinking of their projects. Most automotive companies, for example, now have put more thrust on fuel efficiency than anything else. Many have undertaken new research and have even made modifications to major existing projects to be able to tackle the challenge of high oil prices. Indian engineering services firms have already started getting feelers from their existing clients about these projects. This will significantly drive how automotive and aerospace engineering is done in the future.

Indias profile as an engineering base/market: Tata Motors Nano has made the world sit back and take notice of Indias engineering capability. At the same time, companies like Tata Motors and Mahindra & Mahindra are emerging in the global scene as major players in the automotive arena. In addition, due to rise of local demand, many global automotive companies such as GM, Ford, Chrysler, Honda, and Volkswagen and Renault/Nissan are not just setting manufacturing base in India, they are trying to design new India-specific models, which they can take to other emerging markets. This has brought many tier-1 components suppliers as well as design services firms to India and this has resulted in outsourcing as well as partnerships and joint ventures in this area in India.

In addition, a concern on environment is beginning to affect the engineering agenda of carmakers. Though a little early, many engineering services firms see the India-US nuclear deal as a major booster for the nuclear energy engineering work being done out of India.

The Dynamics
The industry can be broadly classified into two categories: the Indian players and the non-Indian players. The Indian players, which are closely studied in Dataquest research, account for close to 56% of the revenue accrued to India from this area, with estimated total revenue of Rs 5,688 crore. Of that, close to 93% of the market is held by the top 15 players.

The Indian players broadly come from three backgrounds: the large IT services firms that have pursued this area as a horizontal service line within their portfolio, the specialized IT services firms with focus on engineering services; and the spin-offs of Indian companies in engineering segments which have added to their capability by a mix of organic and inorganic means.

The top three firms in the list, TCS, HCL, and Satyam, belong to the first categorybroad-based IT services firms. So are some others in the list such as Patni, Infosys, and Wipro. The specialized firms include Infotech Enterprise, Geometric, Rolta, QuEST, and Neilsoft. The number of such firms in the industry is high, though most of them are very small entrepreneurial firms and do not show up in the radar yet.

The third category is led by Tata Technologies, which started as a small subsidiary of Tata Motors but grew really big with acquisition of INCAT in FY 06. L&T Infotech still a division of Indian engineering and construction company, Larsen & Toubro and Mahindra Engineering Services. The others who do not show up in the top 15 list include a Punj Lloyds group company, Simon Carves India and Hero Design Services, part of Hero Group. TVS, which had an engineering arm called Harita, sold the firm to KPIT Cummins.

The non-Indian companies, who contribute the other 40% revenue are largely consisted of the captives (see list), which account for the lions share. The non-Indian third party firms, which account for less than 3% of the total industry is led by the construction companies. Only Magna Steyr and EDAG have more than 100 employees each in the non-construction area.

With the industry growing and maturing, it is time to examine where it stands in terms of some basic parameters, many of them direct imports from the IT services industry.

Onsite-Offshore Ratio: The onsite-offshore ratio is fairly comparable to the IT services industry, starting with 65-35 (offshore-onsite), going up to 80-20 in some cases. Not surprisingly, large companies do better at this, with Satyam leading in some cases with even 85-15 ratio.

Acquisitions: Like their IT services counterparts, engineering services players have also done small but focused acquisitions to add to their skill, rather than scale (again something like the IT services firms). While many companies have done acquisitions in semiconductor space including Wipro (Newlogic), Patni (ZaiQ), and L&T Infotech (GDA); in the areas that we have included major acquisitions have been those of INCAT by Tata Technologies; Quantech by Wipro; Plexion and Engines by Mahindra Engineering; global engineering services division of Modern Engineering by Geometric Software, and Harita by KPIT Cummins. All these, with exception of Plexion and Harita are overseas acquisitions.

Partnerships: Acquiring skills in engineering services takes comparatively longer time than in IT. So, many companies have formed partnerships with specialized firms to address market needs immediately. Many specialized designed firms now find that their customers are demanding offshore delivery. Some of them have tied up with Indian firms to provide those services. Examples include Alten, a France-based tier-1 supplier to EADS, which has forged a partnership with Infotech Enterprise; Think 3, an Italian design firm, which has tied up with Mahindra Engineering Services, and Butler, which has tied up with Bangalore-based CADES. Even Italian firm Pininfarina, will have financial participation from Tata Group. Frog Design, owned by Aricent, could also leverage Indias capability.

Newer delivery locations: Unlike IT, engineering services have always remained concentrated around the manufacturing base, be it Detroit or the automotive cluster in Germany or around Airbus in France. So moving to India itself was a giant leap. In fact, what has helped of late is Indias emergence as a manufacturing base in automotive, if not in any other industry. The movement to newer low-cost locations may be challenging, but the industry is already in the lookout for such opportunities. TCS already has close to 60 engineers in its China facility working in this area and about 30 of them in Yokohama in Japan. It is setting up a center in Cincinati, Ohio. QuEST has about 55 engineers in Italy. Tata Technologies/INCAT is looking at a center in Mexico. The other options being considered are Eastern Europe and Vietnam. Eastern Europe has language and skill, but lacks scalability. Vietnam is low cost but does not have complex skills. In fact, one of the best engineering locations, Russia, is not attracting companies, as many of them are unanimous that the political situation is not conducive for doing business.

Indian firms are trying to move up the value chain by offering more complex engineering services. Companies like TCS, Tata Technologies and Mahindra Engineering Services are even trying to use the group expertise to help clients in more area such as components sourcing and design-to-manufacturing.

As Indian automotive, defence and civil aviation markets see more momentum, that will significantly affect the offshored engineering services industry in India positively because more and more specialized companies will come to India, building depth and negatively because the scarce engineering talent, already in demand because of IT services, will be a bottleneck. If anything has the potential to dilute the story, if not stall it, then it is supply of manpower. That will be a significant issue once the industry moves out of the market-India phase to scaling up phase. You have heard that somewhere!

Shyamanuja Das
shyamanujad@cybermedia@co.in

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