1 November 2006 Engineering Services Globalization and India In India, Engineering Services Outsourcing has grown significantly since the 1980's, from plain vanilla scanning and digitization of drawings, to new product development, value-engineering and engineering consulting. This publication contains copyrighted material. Please do not re-use or reprint anything within this document without written consent from Tholons, Inc.
Engineering Services Globalization and India Introduction: Engineering Services (ES) refers to the management of processes related to creation of a new product or service. It also refers to the processes associated with the enhancement of product-life-cycle and yield, for the product or service thus created. Starting from design of the product or service, ES go on to include design of the equipment, infrastructure and the processes involved in manufacturing the product, or delivering the service. ES are primarily used by manufacturing and construction related industry verticals (please refer to Figure-1 below), and can be broadly categorized into applications related to product design, technology development, process engineering, plant design and automation, plant operations and maintenance, and process re-engineering. These application areas can be detailed as below: 1. Product design and technology development: These services range from concept development, to analysis and design, simulation, prototyping and production, testing, and Product Lifecycle Management solutions. 2. Process engineering: These include the use of various tools and techniques to achieve efficiency through optimization of plant (production/delivery facility) set-up and operational costs. 3. Plant (production/delivery facility) design and automation: Starting from plant layout and design for the optimized production (or delivery) process, these services extend through development of automation systems for monitoring and managing production activities, and also to facilitate organizations make faster decisions. 4. Plant operations and maintenance: These services include monitoring, managing and maintenance of plant, equipment, and the associated automation systems. These services form a part of the Enterprise Asset Management services of an organization. 5. Process assessment and re-engineering: These are techniques to reduce operational inefficiencies through continuous performance assessment of the processes, and re-engineering them. 2006 Tholons 2 of 10
Figure-1 Engineering Services Application Areas across Major Industry Verticals Aerospace Auto Chemical Hi-Tech/ Telecom Minerals & Metals Pharma Utilities Others (Constru ction, Industrial etc.) Product Design and Technology Development Process Engineering Plant (Production / Delivery Facility) Design and Automation Plant Operations and Maintenance Process Assessment and Re-engineering Evolution of Engineering Services Globalization Economic advantage was considered the key driver in the nascent stages of outsourcing in general. Outsourcing has been in existence since the early 1960 s. In 1963, Electronic Data System signed an agreement with Blue Cross of Pennsylvania to perform some of its data processing activities. However, the real outsourcing boom began with Kodak moving a portion of its strategic Information Systems tasks to IBM, Digital Equipment Services and Business Land in 1989. [Source: Information systems outsourcing ISWorld Encyclopedia, Initiating author: Rudy Hirschheim] The U.S. tech industry began offshoring assembly and testing in the 1970s, followed by chip fabrication and much of system design work in the 1980s and 90s. Next went software development, followed by business process outsourcing (BPO). Now experts believe another offshoring wave looms: engineering design. [Source:http://news.thomasnet.com/IMT/archives/2006/10/offshoring_design_electronic_ engineering_.html?t=recent] Today, industry dynamics have resulted in globalization being regarded as a strategic tool for change. Traditional choices of outsourcing operations such as application maintenance and data entry have given way to intellect-based activities like research, design and product development, legal and financial analysis. Therefore, from IT- Services Outsourcing (ITO) and Business Process Outsourcing (BPO), we have witnessed the emergence of Knowledge Process Outsourcing (KPO), Design Process Outsourcing (DPO), Legal Process Outsourcing (LPO), and Engineering Services Outsourcing (ESO) to name a few. Till recently, ESO was aggregated with ITO activities. However, increasing demand for these services, and also the disintegration of core business activities making more of 2006 Tholons 3 of 10
ES amenable to offshoring, has led to a separate category status being provided to this segment. Some of the prominent differences between ESO and ITO could be listed as: ESO is highly iterative and collaborative process vis-à-vis ITO which has well-defined modular process characteristics - In case of ES outsourcing, synchronizing distributed designs is a big challenge ESO demands domain-specific engineering skills, whereas ITO needs more of IT skills and software quality processes ESO requires much higher degree of core knowledge transfer from client to service provider. ESO decisions thus need high involvement of corporate strategic planning as compared to the ITO decisions. Protecting IP is a major challenge for offshoring ES In India, ESO has grown significantly since the 1980 s, from plain vanilla scanning and digitization of drawings to new product development, value-engineering and engineering consulting. Texas Instruments was one of the first companies to source Hi-End ES activities from India. They established a captive center in Bangalore in 1985, to carry out chip design activities. Today, some of the other ESO captives working out of India are Bechtel, Caterpillar, Daimler-Chrysler, Ford, General Motors, Motorola, etc. Engineering Services Globalization - Industry Dynamics Most organizations always considered product development, innovation and other engineering functions to be part of their core activities. Thus, their business strategy never considered such activities for outsourcing/offshoring. However, with recent developments in the area of services globalization, organizations that spend significantly on ES are also finding ways to leverage on the advantages of this phenomenon. Apart from the pressure to reduce costs, increasing number of organizations are looking for ES globalization opportunities to optimize innovation resources increase capacity through access to global talent pools, improve productivity, and reduce time-to-market. A recent NASSCOM Booz Allen Hamilton study estimated global ES spending of about $750 billion in 2004, of which only $10-15 billion was offshored. Hi-Tech/Telecom, Automotive and Aerospace sectors have been the front-runners in terms of ES spending. In 2004, ES spending in the Hi-Tech/Telecom sector was $194 billion (26% of global ES spending across sectors), in Automotive $142 billion (19%), and in Aerospace $60 Billion (8% share excluding defense spending). In the Aerospace sector bulk of the ES spending goes into Defense related activities. Please refer to Figure-2 for sectorwise spending on ES. Lot of firms in these industry sectors, already offshore product development and related activities to cheaper markets like India and China. Many more are busy including such activities into their corporate strategy, to be offshored in the coming years. Software development, embedded software, manufacturing engineering and engineering analysis are the activities most likely to be offshored in the near future. In 2006, the global spending on ES is likely to be around $780 Billion. According to the Nasscom study, global ES spending is likely to cross $1.1 Trillion by 2020. 2006 Tholons 4 of 10
Figure-2 Engineering Services spends estimated for 2004 and 2006 $ Billion 0 20 40 60 80 100 120 140 160 Semiconductor Consumer Elec. Telecom 45 50 60 63 60 63 2004 2006 Computing Sys. Medical Dev. 15 17 15 17 Indl. Automation 7 8 Automotive 142 147 Aerospace 60 63 Construc./Indl.m/c 31 Utilities 22 22 Pharma 119 124 Chemicals Technology Industrial 31 Others 82 84 Source: NASSCOM Booz Allen Hamilton Study and Tholons The key drivers for offshoring ES in these industry verticals are to lower costs, access markets, access supply sources, access talent pools for capacity enhancement, improve productivity, and reduce time-to-market. Currently, some of the preferred destinations for ES offshoring are India, China, Mexico, Canada, Malaysia, Russia, and East- European countries. Engineering Services Offshoring Scenario in India Success in the areas of ITO and BPO has pushed India to move up the value chain for offshoring. Data entry and call centers have given way to high-end services such as research, analytics, and engineering. India has a dominant position in terms of the talent pool suitable for the offshoring industry. However, India s value proposition is not just in the army of over 400,000 engineers it produces every year. India s strengths lie in English language capability, lower cost structure, strong IT infrastructure, and also a 2006 Tholons 5 of 10
stable economic and business environment. Please refer to Table-1 below for a SWOT analysis of the Indian ES Offshoring market. Table-1: SWOT Analysis of India as a destination for ES Offshoring Strengths Largest pool of talent for services outsourcing Lower cost structure Strong vendor base and presence of global OEM captives in India English language skills Strong IT infrastructure Growing economy, and stable business environment Opportunities Strong foothold in ITO and BPO lets India venture into newer avenues of offshoring Growing trend of experienced Indian engineers returning home from the West Global firms perceive India as a much safer destination with respect to IP protection Weaknesses Relatively small internal market to provide trained resources specifically for ES Insufficient physical infrastructure Lack of significant investments in developing engineering-related infrastructure like testing labs etc. Low promotion of Indian capabilities so far, in the ES space Threats Emerging markets like China and Russia are competing with India as low-cost destinations, and may ramp-up in the longrun in terms of talent pool availability. China s strength in manufacturing may be leveraged to build strong ES capabilities Near-shore destinations may be preferred by the Engineering superpowers, eg. US may prefer to offshore in Mexico/Canada Germany/West-Europe may prefer Russia/East-Europe Japan may prefer China Some of the Large IT firms in India have been deploying increasing number of professionals into their ES practices, to leverage engineering domain expertise coupled with project management and service delivery capabilities. Both Wipro and TCS have sizable number of professionals catering to all the major verticals in the ES offshoring space. Global majors like Caterpillar, GM, Ford, Daimler Chrysler etc. have set-up shop in India for product development and manufacturing (please refer to Figure-3 for some of the major ESO captives in India). Some of the capabilities and ES offerings in India could be listed as below in Table-2: 2006 Tholons 6 of 10
Table-2: Some of the broad areas of ES capabilities available in India Manufacturing Civil, Architecture & Construction Engineering and Technology Consulting Also specific vertical related capabilities in: Product design & development FEA & Design Optimization 2D drafting and 3D modeling Ergonomic analysis Reverse Engg. Simulation and Validation Tool & Die design Architectural designs & drawings 3D Rendering and Walkthroughs Structural analysis Costing & Estimation Landscaping and interior design Engg. Software development Product lifecycle management Embedded technology development Prototyping Process improvements Best practices benchmarking Performance evaluation Quality measurement s Global sourcing and logistics Automotive Aerospace Chemical and Process Hi-Tech/Telecom Medical Minerals & Metals Etc. Digital & Electronic mfg. Indian OEMs are poised to take significant advantage from the offshoring phenomenon. Having both domain knowledge and financial power, they are well placed to offer end-toend ES solutions to global clients. Hero Global Design and Mahindra Engineering Services are two such companies, operating in this space. Table-3: Some of the ES deals signed by Indian Majors in 2005 TCS signed a contract with Scuderia Ferrari to provide IT and Engineering services for its Formula-1 Car development Infosys partnered with ALSTOM for providing R&D services like product development, simulation, PLM and control engineering HCL signed-up with Boeing to provide software development and support services for Boeing and its Tier-I suppliers Quest has signed a 3 year deal with Smiths Aerospace to provide ES related to engine system, flight control system, landing gear etc. 2006 Tholons 7 of 10
Table-4: Recent Acquisitions by Indian Companies in the ES space: Indian Acquirer Target Company Deal Size Patni Computer Systems ZAiQ $425,000 WIPRO NewLogic $56 Million WIPRO Quantech Global Services $10 Million + Earn outs for 3 years WIPRO Saraware Oy $32 Million WIPRO Hydrauto Group AB $31 Million Geometric Software Solutions Source: Engg. Services Divn. Of Modern Engineering Figure-3: Some of the major ESO Captives in India: $32 Million India could potentially face threats from countries like China, Russia, Mexico, Canada, Malaysia, Israel and East-Europe. China has demonstrated its strength in manufacturing of cell-phones, consumer electronics, durables etc. With global telecom services market poised to grow rapidly in the short-run, China can leverage their domain expertise in this sector to tap the ES Offshoring opportunity. Russia has one of the largest pools of scientists and mathematics graduates. Thus, it makes sense for Russia to break into the R&D, and defense markets. However, scalability in terms of available talent pool still remains a question-mark for both these countries. Mexico, Malaysia, Taiwan and East- European countries cannot compare with India in terms of scale. Israel has strong domain expertise in the aerospace sector, but may not be a threat to India due to lack of scale, and also because it s not a low-cost destination. Canada is also not a low-cost destination as far as offshoring is concerned. 2006 Tholons 8 of 10
Conclusion Starting with IT Services and then with non-core Business Processes, the success of globalization as a winning strategy has led corporations to think of ways to break-down core business processes into activities that can be outsourced. ES has thus gained significance as an offshorable option, for strategic as well as tactical reasons. Leveraging its strengths of large talent pool, English language capability, and IT infrastructure, India has so far been a strong contender for ES offshoring among lowcost countries. However, the combined scale of other low cost destinations, with superior Engineering talent and capability, could pose a serious threat to India s position and reputation as a preferred destination. India will thus need to quickly bridge gaps by developing requisite infrastructure, and investing on facilities required for building a large pool of trained engineers. The Indian Government should start by identifying regions or hubs in the country that may be developed into Centers-of-Excellence for ES offshoring activities. A thrust is needed in terms of creating the right business environment and the right legal framework for global corporations to feel comfortable in sending work to India. There has to be a joint effort of the government as well as India Inc. in creating the right value-proposition and pitching the country s strengths to global engineering giants in US, West-Europe and Japan. 2006 Tholons 9 of 10
About Tholons Tholons is a Services Globalization and Investment Advisory firm that combines "Best of Breed" consulting experience with deep execution expertise and investment insights to deliver truly effective services to its clients. Tholons offers a detailed understanding of business processes and combines it with practical hands-on expertise in executing the strategy. Tholons draws upon the considerable experience of a handpicked team, which has successfully formulated and executed globalization strategies to unlock value for Global Fortune 1000 companies. Service providers leverage Tholons expertise to optimize their global delivery model. Tholons advisors engage with government bodies to build compelling strategies for making countries attractive destination for outsourcing. Author Vinu B Kartha vinu@tholons.com Editor Avinash Vashistha Chairman & CEO For more details about Tholons' Services Globalization and Investment Advisory capabilities, please visit our website at www.tholons.com You may also contact: Jessica MacKenzie Murthy Director, Marketing and Public Relations jessica@tholons.com THOLONS Global Offices North America Office 31 Fairview Park Drive, Suite 500 Falls Church, VA 22042, USA Phone: +1-646-290-9320 Fax: +1-646-349-3546 Europe Office 2 Crawford Farm, Ray Mill Road East Maidenhead, SL6 8SU Berkshire, UK Phone: +44-1628-566140 Asia Office 2/10, 2nd Floor, 80 Ft Road RMV Extension Stage II Bangalore 560 094, India Phone: +91-80-23519760 Philippines Office 46th Floor, Yuchengco Tower RCBC Plaza, 6819 Ayala Makati City 1200, Philippines Phone: +632-894-9493 2006 Tholons 10 of 10