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While there have been many such cases in the semiconductor and telecom segments, it is beginning to spread to other industries. What is heartening however is that today this experimentation is going out of captive centers. Mahindra Engineering, part of the Mahindra Group, has designed a 20-seater mini bus for US truck maker Navistar for introducing in the Columbian market. TCS is also developing a new blood testing and analysis equipment for a client. Group company, Tata Technologies, which had worked on the Tata Nanothe product that gave the world the concept of frugal engineeringhas developed a framework, which is a standardized approach to cost engineering. Called Tata Innovation Value Framework (TIVF), the company is going to market with this framework.

It is more than just coincidence that the first few firms which are getting into this successfully initially, are owned by companies that are product makers in their own rightTata Group and Mahindra.

In fact, one trend that we have written about earlierboth in 2008 and 2009is that of concept to manufacturing, often called arts to parts. Increasingly, customers are expecting their engineering services partners to not just help them in design but in manufacturing and sourcing as well. In a typical arrangement, the engineering services firms do the engineering as well as program management for manufacturing and sourcing as well, though the suppliers bill the clients directly. While companies like TCS, Tata Technologies, and Mahindra Engineering that are part of manufacturing groups, have a natural advantage, independent companies such as Geometric have also seen such projects coming to them. But interesting is the case of QuEST Global, which has got into manufacturing services and started a manufacturing SEZ last year in Karnataka. It expects good traction from aerospace segment.

As manufacturing and sourcing gets combined with design, it is a double-edged sword for India. While it can surely build the manufacturing story for India, it also means that locations that are strong in manufacturing can come from that side and tap the design opportunity. No need for guessing who that contender could be. Not only has China as many or more engineers, unlike IT and BPO, communication by each member of the team is not such a great requirement for engineering. While at present India has an upper hand, the China threat is for real. Considering that it has a big captive market, it looks an even more lucrative option to global corporations. The only thing that can act against China is its track record in protecting intellectual propertysomething that is far more sensitive when you outsource something like engineering. We expect that the India versus China debate will dominate the engineering outsourcing discussion in the near future. In fact, it may well be a true Chindia expriment as well.

More interestingly, the tendency of many global engineering companies to look at end-to-end concept to manufacturing has started a new debate of how do companies address the market and what will be key to success. While the traditional engineering companies talk of concept to manufacturing, a few IT services firms, led by Infosys maintain that the domain knowledge is a little over hyped and what the suppliers need to do is to offer efficiency and scalability by applying their knowledge from IT and BPO. Last year, Infosys engineering head was the only top executive in this segment holding this point of view. But we have seen L&T Integrated Engineering Services CEO also endorsing the model. Many other executives have started acknowledging this. A few others maintain that these are not the only models. A third viable alternative is to create deep domain capability supplemented by creative/user experience capabilities, though few among the existing players are betting big on the model. We expect all these three modelsfull value chain, efficiency & scalability, and deep domain/creative excellenceto co-exist.

Industry Trends
In a slow year like FY 10, not much happened in terms of new initiatives from the companies. M&A, which was a major story in the earlier two years, were absent. Just one noteworthy acquisition happened. As speculated by Dataquest last year, Axis IT&T, a listed company, with 60% stake by Rajeev Chandrashekhar, acquired CADES, a tier-1 supplier to EADS and entered our ranking with a growth of 95%. It joins QuEST Global as a pure play engineering company in our list, though the later has now ventured into manufacturing services. QuEST remains the only large independent company that is not listed. But the company has already announced that it would go for a private equity placement rather than a listing. It is expected that it would go for a 20% stake. We expect the valuation to be anywhere between $250-400 mnthat is anywhere between three to five times its revenue.

While we had seen a lot of activity by some new players in early part of FY10, the market has not seen any impact from them. These companies include IBM, Accenture, Perot and Hinduja-owned Defiance Technologies. Last year saw many executives from Satyamtraditionally strong in engineering servicesbeing hired by almost the entire industry. Accenture hired the then Senior Vice President of manufacturing vertical, Kenneth Taromina, as the Managing Director of its Engineering Services business. Perot Systems roped in one of the top line leaders, Krishnan Badri as the Director, Engineering Services. CSC hired Srinivasa Rao Davuluri, a Sr Technical Relationship Manager serving TRW as a client at Satyam, as Director of Engineering Services. Venu Byna, another Satyam veteran, who also worked with Butler International as Director Engineering Services, offshore, also joined CSC. TSK Murthy, who headed the engineering services business in Satyam, was hired by Wipro. L&T hired Keshab Panda as the CEO for L&T Integrated Engineering Services. Panda headed Mahindra Satyams manufacturing business unit, when he left. Defiance to hired as its CEO, a former Satyam executive, Subu D Subramanian as its CEO.

As the markets pick up, we expect M&A to start again. Apart from new entrantsespecially Cognizantwe also expect Wipro to be active on this space on the mechanical engineering side.

By all accounts, FY 11 could be the year engineering services would turn to a businessrather than a service line. And frugal engineering may well lead the next wave. Thanks to Ratan Tata, the chief innovator. And thanks to Carlos Ghosn, the chief marketer.

Shyamanuja Das
shyamanujad@cybermedia.co.in

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