Engineering services are those that augment or manage processes that are associated with the creation of a product or service, as well as those associated with maximizing the life span and optimizing the yield associated with a product or asset. This not only includes design elements of the product or service itself, but also encompasses the infrastructure, equipment and processes engaged in manufacturing or delivering them.

Today, the engineering services industry is well matured as opposed to the past when it was aggregated either under IT services (as R&D services) or under ITeS-BPO (as engineering BPO).

Great Prospects
A report by Avendus (focused largely on the engineering design space), released in 2003, valued the worldwide opportunity in engineering services at $7 bn. The study further noted that there was a growing interest in offshoring these services, and estimated that 20% of the value was being outsourced to third party vendors in countries such as India, Taiwan and China. While no subsequent study seems to exist in the public domain, inputs from industry sources indicate a higher figure for the market potential-with the addressable market growing with increasing offshore penetration.

However, these estimates are primarily focused on design engineering and address only a part of the market potential for engineering services. The potential for process engineering, plant automation and enterprise asset management services lies relatively unexamined. Industry estimates peg the market potential for process engineering, asset management and industrial embedded systems at over $5 bn-taking the total outsourced/offshore market potential to approximately $12 bn.

This estimate takes into account the outsourcing opportunity that would arise from mechanical engineering design, construction engineering design, electrical engineering design, embedded systems and chip design, instrumentation and controls design, manufacturing and tool design, industrial design, product lifecycle management (PLM) and software product engineering.

Supportive Ecosystem
Engineering services outsourcing is the practice of sourcing some or all of a company's design and engineering requirements from external service providers, and a large number of environmental factors are facilitating the boom. Over the years, for instance, outsourced product engineering (mechanical) services have graduated from basic drawing conversions and CAD migration assignments, through 2D-3D modeling and digital mock-ups, conceptual design, analysis and validation; complete design outsourcing, manufacturing coordination, CPC/PDM; overall process quality improvement, e-engineering solutions, remote monitoring and system architecture development. Says Sanjay Dutt, associate VP, engineering solutions at Infosys, "Clients are no longer willing to do the design on paper." Today, increasing levels of digitization have resulted in much of the product development process being performed virtually using computing technologies. Further, the development of common enterprise management applications and technology platforms have driven information integration across the value stream to facilitate more efficient planning, deployment and management of capital assets and production.

Secondly, engineering design and services related work requires huge amount of bandwidth. Today there is adequate bandwidth available to provide the quality and scale of service that outsourced engineering technology services demand. In addition, regulatory authorities across the globe have started accepting data in the digitized form.

The India Advantage
Today, the vendor landscape has matured significantly in India. IT services companies like TCS and Infosys have perfected the global sourcing model and both IT services and specialized firms are in a position to tap this huge opportunity. Indian IT services companies have also successfully leveraged the skill sets, tools and experience from outsourcing IT software and services to gain a strong foothold in outsourced product design and engineering.

Offshoring engineering design and services to India has its advantages and a large number of global automotive majors, who were the first to realize this nearly a decade back, set up captive units in India. Says Ravi Gopinath, VP, engineering services, TCS, "The global automotive industry is extremely competitive, innovative and cost conscious. Typical spends on a car program runs into billions of dollars and a significant chunk of this spend is on engineering services. The automotive industry is always looking for opportunities to reduce cost." Offshoring a significant part of engineering design and services could mean benefits to the tune of 25-30% reduction in engineering cycle time; 30-45% reduction in cost; 20-30% improvement in production efficiency (quality, energy and throughput) and 15-20% reduction in maintenance costs. These benefits are not confined to automotive alone but hold true for all verticals.

Players like TCS and Infosys have been operating in the space for some time now-TCS, for over two decades and Infosys for nearly 14 years. Although the segment had started picking up in the last 7 years, the real action has actually happened in the last two. Last financial year saw some big-ticket deals from the likes of Ferrari, Airbus and Boeing. And it is not just cost arbitrage that is a decisive factor in favor of India. There is also a change in the mindset of customers and the overall nature of business. Take for example automotive. Observes Dutt, "Today, automotive manufacturers are increasingly becoming integrators and technology is playing a key role in facilitating this." In addition, clients are willing to make the vendor a part of the process right from the conceptualization stage, as opposed to the situation a couple of years earlier when conceptualization was strictly the domain of the client.

Cars and Bikes
As per current industry estimates, automotive design forms the largest segment, accounting for 65-70% of the market, followed by aerospace at 15-16% and electric/electronic machinery design at 10-12%. Other key vertical segments considered good targets for outsourced engineering services include telecom, utilities, heavy engineering and pharmaceutical.

The automotive segment spends an average of 3-5% of its annual revenues on R&D activities. Engineering design forms a significant part of these activities. Total revenues earned over the last years by the top 10 auto manufacturers are estimated at $850 bn. Assuming that design spends account for half of an auto company's R&D spending, this would amount to an annual design spend of over $12 bn for the industry. The portion of this spend that can be outsourced is estimated at $4.8 bn, and India could get a significant share of this. Says Gopinath, "We estimate automotive design services delivered out of India to be around $1 bn in the next two years."

Today, the car manufacturing development process is almost completely done using technology virtually. Substantial initiative for the standardization of CAD/CAM techniques has come from the automotive industry, like for neutral CAD data interfaces. Given its expertise in IT and an established reputation in the global IT industry, India is clearly the destination of choice.

Auto majors like Ford, General Motor, Cummins, Johnson Controls, Nissan, Toyota and BMW are already outsourcing engineering design work to India either through captive centers or third party service providers. A recent online survey of American automotive executives, conducted by AT Kearney, points out that India is right on top of the auto-outsourcing heap with 24% of the auto manufacturers giving it the thumbs up for outsourcing. Bigger automotive markets like China and Mexico lag behind at 15% and 13%, respectively, while other hubs like Brazil, Thailand and the Philippines corner just 10%, 2% and 3% of the actual outsourcing markets.

The other vertical driving the outsourcing boom is aerospace. Says Gopinath, "The aerospace industry has highly cyclical revenue patterns, high fixed operating costs and large capital expenditure." The aerospace market is getting highly competitive and with both the leading aircraft manufacturers announcing new launch programs, there is a need to outsource the engineering services component that has a strong bearing on manufacturing and air travel. "No player in aviation can ignore the fact that India is poised to become the third largest market in the next 10 years," adds Dutt. The offsets policy, under the given circumstances, ensures that an increasing number of private as well as public companies participate in the design work.

Aerospace industry has not been an early adaptor to the core product engineering outsourcing. However, companies in the aerospace domain (Commercial aircrafts) have started to realize that outsourcing is probably the only option for them to remain competitive. CAD CAE outsourcing in aerospace primarily revolves around four major sub systems of the aircraft, namely landing gear, engine, flight controls and devices. Apart from these sub systems, the fuselage, wings and flaps are the most commonly outsourced components at the airframe manufacturer (Boeing, Airbus) level.

Aerospace core technology outsourcing in India is still in its nascent stage when compared to auto or even aerospace IT outsourcing. Though many companies such as Boeing and Airbus etc have already been outsourcing software related work to India, CAD CAE outsourcing was pioneered by the Tier 1 companies. Companies such as Pratt & Whitney and GE aircraft engines have been outsourcing to India long before Boeing and Airbus had ever considered India as the outsourcing destination for CAD CAE.

The construction and agricultural machinery segment is another key segment for engineering services. According to industry estimates, the outsourced engineering design potential for the segment is valued at approximately $500-800 mn. Says Prashanth Chundri, head of marketing and HR at Pune-based Neilsoft, a dominant player in the construction space, "Currently, over 40% of our revenues come from the construction space."

The semiconductor equipment industry is part of the electric/electronic machinery design market and contributes over 4% of the worldwide engineering design market. Engineering services (CAD CAE etc) is of primary importance in the semiconductor equipment-manufacturing domain, more than in the chip making/foundry domain. The semiconductor manufacturing equipment companies' design, manufacture, and service semiconductor processing equipment are used in the fabrication of integrated circuits. Although semiconductor giants like Intel and Texas Instruments have a significant presence in India, the semiconductor manufacturing equipment companies have little or no presence in India. AMAT is among the major outsourcers in India in semiconductor manufacturing equipment apart from Axcelis, KLA Tencor and Teradyne.

The last 24 months have been particularly significant in terms of growth in offshored engineering design and services space, especially the last fiscal which witnessed some of the biggest deals in the industry. Agrees Dutt, "Not only are the number of deals increasing but even the size of the deals have gone up significantly since last fiscal." In December 2004, TCS and Scuderia Ferrari concluded a deal whereby teams of engineers and specialists from TCS will provide IT and engineering services for the development of the Formula 1 racing car for the next racing season beginning March 2005. In May this year, Infosys Technologies officially announced that it has worked with Airbus on the Airbus A380 program. Infosys also played a key role in developing tools and processes for product life cycle management. Infosys worked on the design and development of the top and bottom skin extensions within the inner fixed trailing edge for the Airbus A380. It also played a key role in developing tools and processes for product life cycle management.

In May 2005, ALSTOM announced its tie-up up with Infosys to set up an R&D center. This multi-year relationship will focus on high-end engineering services such as product development, engineering simulation, control engineering and Product Lifecycle Management (PLM). With an investment in excess of Euro 31 mn over three years and an initial manpower strength of 60 people, the center will grow to over 300 people in the next three years. Quest Global has recently signed a three year deal with Smiths Aerospace for a dedicated center, where Quest would provide engineering services in areas like engine system, flight control system, propellers, landing gear and hydraulic system and electro-mechanical actuation.

The Indian market for offshored engineering design and services has been growing at 25-30% in the last five years and is expected to see similar growth levels in the next five years, according to industry estimates. Most vendors are also growing at a significant pace especially the specialist vendors who have registered annual growth rates of over 100%. Quest has added 47 new clients in the last fiscal, 800 new employees, and closed the fiscal with revenues of $20 mn. The company is targeting $27 mn in revenues in the current fiscal and has expanded operations to China. TCS' engineering division registered revenues of $123 mn and grew by 50% last fiscal. India's largest IT company added 700 people to its existing employee base and plans to add another 1,000 this year. Satyam's Extended Engineering Solutions' revenues in FY 2004-05 registered a growth of 160% to close the year at $53 mn. Pune-based Neilsoft, an engineering technology company and a dominant player in the construction space, saw revenues rise by over 100% last fiscal. The company acquired 18 new customers and plans to add 200 people to its existing headcount of 350 at the closing of FY 2004-05. Plexion Technologies also clocked 100% growth in FY 2004-05.

Future Positive
Outsourced engineering services is one such space where Indian companies have begun to make a mark, successfully using the skill-sets, tools and experience from IT software and services, to evolve from providing basic data conversion, through 2D and 3D CAD/CAM/CAE, advanced simulation, prototyping, testing, PLM, product design (engineering), process engineering, plant automation and asset management services. Though most of the initial players in the segment have emerged from legacy IT services businesses, today the segment has matured with several of these firms having established an independent engineering services practice. Today Infosys is the first IT services company to join AUTOSAR, a network of automobile manufactures and hardware and software companies, to help build an eco-system that will set international benchmarks in automotive engineering for Indian players. Infosys has also signed an MoU with HAL to offer a better value proposition to its customers in aerospace.

Estimates indicate that the total value of engineering services currently outsourced to India is just $400-500 mn. This is as opposed to a market size of $7 bn, which indicates that we have barely scratched the surface. There is significant potential in areas like plant automation and enterprise asset management in addition to product development (mechanical and electronics) services. There is significant opportunity in styling as well. Merging sectors like oil and gas, medical devices, retail and consumer products are also going to contribute to the engineering design and services space in this fiscal.

Bhaswati Chakravorty