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Among the independent companies, a few companies worth mentioning are Pune-based Tooltech, Noida-based Axis AT&T, and Bengaluru-based AugenTech. Tooltech, which acquired two automotive engineering companies in SwedenIdeteknik and Aspinovahas transformed itself from a CAD company to a product engineering company. Axis IT&Tas the erstwhile IT&T is known after it acquired engineering services firm Axissaw 61% of its stake being acquired by BPL boss Rajeev Chandrasekhar through a company owned by his Jupiter Capital. According to sources, Axis IT&T is seriously looking at the construction equipment segment and if the industry grapevine is to be believed, Chandrasekhar is also keen on aerospace and may invest in a Bengaluru-based company with aerospace industry expertise. AugenTech, which with a revenue of Rs 16 crore in FY 09, is still small, is a company to watch out for.

The period also saw vigorous re-branding activities, largely among the specialized players. Tata Technologies, majority owned by Tata Motors, which had started rebranding itself as INCAT, after acquisition of the London-listed firm, did a U turn, re-branding again as Tata Technologiesa clear testimony to the fact that post Nano and post JLR, the Tata brand is a far stronger engineering brand globally. Vadodara-headquartered L&T Integrated Engineering Services, part of L&T, but often overshadowed by more high profile L&T Infotech too started doing focused marketing and branding exercise. It participated directly in our survey for the first time in three years that this research has been in existence. The Hindujas, which had promoted an engineering services firm, Ashley Design and Engineering Services, re-branded it as Defiance Technologies, after merging it with Defiance Testing & Engineering, a Detroit-based firm that group flagship company Ashok Leyland had acquired in 2007. Recently, they decided to demerge the combined entity from Ashok Leyland.

CyberMedia Research                                                                                              DQ Estimates

The list is still getting bigger. Also, we do not claim it is a comprehensive list as many small operations are not captured in this

While all this was happening, the most important event of last year in the IT industry had its impact on the engineering services segment too. Fall of Satyamwhich had a strong engineering services practice, the veracity of which is even acknowledged by competitorsled to a lot of good talent being available to the industry in general. And the industry did acknowledge it with hiring many ex-Satyamites to top positions. While the former Satyam engineering services head TS Krishnamurthy was roped in by Wipro to lead its not-so-successful foray into mechanical design, Defiance Technologies of Hindujas too hired former Satyam SVP and head, manufacturing and automotives vertical, Subu D Subramanian as CEO recently. Perot Systems too acquired an ex-Satyamite too head its newly announced engineering services business.

However, the year did not see too many large acquisitions, and certainly not by the large players. Some acquisitions like INCAT by Tata Technologies, Quantech by Wipro or Modern Engineering by Geometric which happened earlier had no parallel in FY 09, the only exception probably being that of Quest Global, which acquired ASE Technologies, a Cincinati-based engineering services firm with more than hundred engineers.

Sizing Up the Market
Like Dataquest has been doing for the last two years, this year too, our study on engineering services exports market in India does not include high tech segments, namely telecom, IT hardware, software, and semiconductor industries, while some embedded design work done by companies directly for automotive OEMs or other end users have been included. The idea behind omitting these segments out of the analysis is not to undermine their importance or to suggest in any way that they are not engineering, but to highlight the other areas like mechanical and construction engineering services which are newer areas for Indian offshoring.

This segmentengineering services exports excluding those done for high-tech verticalsrose by 30% in FY 09 to reach 13,128 crore. This was an accelerated growth as compared to 26% in FY 08. However, in dollar terms, the growth slowed down from 40% in FY 08 to 13% in FY 09. The total revenues in dollar terms stood at $2.82 bn.

The captives increased their share, even though the contribution of few non-Indian players that are active dropped further (See pie). Aerospace emerged as the #1 segment for Indian service providersinteresting considering that India does not have an active aerospace industry. While automotive continued to remain the #2and a segment that most companies (almost all the thirteen companies ranked here) have a presence inplant and industrial machinery saw a solid growth and is now a clear #3. The verticals that are picking up momentum are oil & gas, utilities, and construction, going by the growth expected in value terms. But those will be driven by a few companies. The most popular area that almost every company is excited about seems to be medical electronics and healthcare equipment followed closely by consumer products.

Of course, one major company that is missing from the ranking is Satyam, which we decided to drop, as the audited revenue figures are not available. However, the estimated Satyam revenue has been taken in the others revenue to compare with last years growth.

Trend 09: Moving Up
It is a little unusual at a time that is considered to be the most severe downturn in many decades, with the brunt on engineering-intensive industries being more severe than on any other, probably with the exception of financial services. But the engineering services exports segment in India chose this time to vault into the next phase in its evolution: marked not only by the re-branding execrcise and high pitch marketing that is only getting louder but also continuing its search for newer opportunities for growth as well as its effort to move up the value chain.

Interestingly, unlike IT services, and probably a little like BPO services, the industry did not act with a herd mentality of everyone running after the same opportunity but actually differentiating themselves not only in the way they position their services but also in targeting completely different verticals. While traditional areas of aerospace and automotive still contributed the highest share of revenues, many companies are trying to grow completely different areas. Infosys, #3 in our list, for example, draws 20% of its revenues from plant and industrial machinery, which #4 Tata Technologies hardly addresses. Quest Global, another fast growing pure play engineering services company, makes 59% of its revenues from utilities and oil & gas, which most others are just beginning to address. Neilsoft, a much smaller company, has chosen to grow its construction vertical and getting into areas like detailed engineering, more than modeling, the traditional strength of Indian engineers, which comes historically from taking a software-centric approach. Rolta has already formed a joint venture with Shaw, one of the top players in the nuclear engineering area, to tap the Indian market.

CyberMedia Research                                                                                              DQ Estimates

Five verticals, five different companies at the top; just shows how broad is the definition of engineering services

The differentiation is not restricted to targeting different verticals, though that kind of differentiation is more tangible to show. Companies are taking different approaches to move up the value chain and drive growth in higher value areas, that they already address.

Concept to Manufacturing: This is something that we identified last year as an experimentation with potential to become a trend. It has surely become more prevalent, if not the standard norm. Not only has TCSwhose success in convincing an Italian aerospace company to outsource end-to-end work from designing of a manufacturing tool to getting it manufactured in India at a lower cost, we elaborated last yeargot more such orders from the same customer, it has managed to sell the idea to many more customers. In the arrangement, the engineering services firm takes end-to-end responsibility from design to manufacturing and delivers the end product to the customer. Typically, the manufacturer (in case of TCS, a group company, TAL Manufacturing Solutions) delivers directly to the customer because of tax efficiency but the program management is done by the outsourcing firms like TCS and they get paid for that as service.

Since then, Tata Technologies, the other Tata company in our list, has also started pitching similar solution to its clients and is again banking on group companies to get the manufacturing done. Quest has gone a step further. It has started a manufacturing services business and has even set up a SEZ to do manufacturing. The idea, again, is to provide end-to-end services to customers. Hinduja-owned Defiance Technologies has also announced its entry into manufacturing services. The much-talked about Indias services capability fueling manufacturing is finally happening, though it is baby steps still. Wipro, while it has not got into manufacturing, has recently started a product testing lab, Tarang, with a high profile inauguration by former president APJ Abdul Kalam.

Creation of IP: Realizing that a pure manpower-intensive model would not sustain in the long run, no matter how much domain and software expertise a firm gets, many companies are moving in the direction of own IP creation. Today, most companies are trying to create some sort of standardize tools for reuse and many have already done so. But only a few have completely productized them. Clearly ahead in this game is Geometric, thanks to its experience in developing as well as implementing PLM products for global vendors like Dassault, combined with the engineering services experience. Neilsoft too has a few productized offerings. Tata Technologies is also proceeding on this path. We believe this is something that will become an industry norm sooner than latter. Since most firms have solid expertise in IT, this may well be the first standardized India advantage other than cost and availability of talent.

More end-to-end; emerging markets as the driver: While end-to-end and delivering a full program sounds fashionable, few Indian companies ever bagged a true end-to-end project, just a few years back. Since then, a few things have changed. The customers have become more comfortable with the idea of offshoring to India, partly because of better awareness about Indian capability, partly because of Indian companies maturing, and partly because of their own urgent need to cut costs. While the first two are part of a natural evolution and similar to what we have seen in IT and BPO as well, the last is a direct fallout of the severe downturn. For example, Chrysler has stepped up offshoring to its own captive in India as well as to most of its vendors here.

But this new desire to outsource end-to-end is not always because of cost reasons or change of heart. Increasingly, vendors that sell to consumers as well as small businesseslike car manufacturers, consumer appliance makers, medical electronics and surgical equipment companiesare looking at emerging markets for future growth. They have realized that it is not always possible to do a little modification to the existing products that have worked in developed markets and sell them in emerging markets. Most of them are creating products that are seeing work from grounds up. These are the projects where Indian engineering services vendors are being considered for an end-to-end contract. What is driving this trend are a few factors. One, these projects need faster development; two, they need lower development cost; and three, there is no cost of migration (including social cost) as these are greenfield projects. But what the service providers are also offering is field testing in India, not just one of the biggest potential market itself, but also a good microcosm for the emerging markets.

Apart from emerging market-specific products, in new areas like clean fuel and hybrid automotive too, a lot of new projects are being considered to be outsourced to India.

Managing Cost: In the last few months, when the slowdown became acute, many companies in the US and Europe looked at immediate cost cutting and that provided some opportunity for vendors who could quickly come up with a solution. A few engineering service providers like TCS responded and ended up winning a few value engineering and should costing (process of determining what a product should cost based upon various components and services that go into it) on projects. Today, what started as a reaction to a customer need is an established expertise within the company, with ability to charge a premium pricing and in some cases, even as a percentage of cost saved by the clientsurely, a move towards output based pricing.

The Infosys ExperimentPower of Process: Is engineering services very different from IT and BPO? Yes, say most of the vendors that we spoke to. No, says Infosys. The #2 IT services firm from India is betting on the same principle that has worked for it and others in IT services and BPO: the power of process efficiency. The principle sounds very simple and is familiar to most of us: de-construct the process in such a way that you do not require too many specialists and can easily move people from one type of project to another, while keeping a bare minimum of domain experts. While most engineering services firmsas well as engineering firms themselvesbelieve that it is not possible to move someone who has worked in aerospace for years to an automotive project, Infosys maintains the importance of domain is over-hyped and it is not the most important strength of an outsourcing company. It maintains that it is only by de-constructing a process well and running it well that an outsourcing firm can add value to the job. Otherwise, it would always be dependent on individual strength and not organizational strength. Infosys says that it has managed to convince a few clients on this, while admitting that it will take some time to change the mindset. For the time being, Infosys is alone to take a stand like this. It will be interesting to see how companies like TCS and Wipro react.

Whither Slowdown?
The positive signals from the Indian automotive segment and the quick return from bankruptcy of automotive companies notwithstanding, the world economy will be in a recessionary phase for some more time, especially in industries that engineering services firms target. The first signs that we have seen from the industry in terms of being able to handle it is encouraging. The biggest challenge, as the BPO industry has also seen, is neither a predominantly negative impact because of business slowdown nor a significant positive impact because of urgent need to drive down cost. It has been a slowdown in decision making, something that the industry veteran VK Magappu of L&T sums up nicely: it is like almost one year is written off. One hopes that will change this year.

Shyamanuja Das
shyamanujad@cybermedia.co.in

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