Engineering for others

Indian firms need to own products

The need for Indian information technology (IT) services to keep going up the value chain is being increasingly met by engineering services, which is responding to the trend in global engineering R&D operations to offshore more and more of their work. The worlds of engineering R&D and information technology began overlapping ever since hardware began to be designed on computers. Over time, as the number of embedded electronics systems in machines has risen, machines have become increasingly “intelligent”. Today, a good part of the value in a car is accounted for by its electronics. Through all this, offshoring of engineering R&D has become mainstream and offered a new high-value area of work for IT operations in India. As with the rest of IT, captive centres of global engineering firms like Siemens, Phillips, LG, Suzuki and Hyundai have set up large operations in India and offshore development centres offering dedicated service to customers have gone up by nearly four times in the last decade.

In the last financial year, when the global offshored IT services business was hit by the Great Recession and financial collapse, it is offshored engineering services which provided the much-needed support. From a low figure of $2-3 billion in 2006, last year (2010) engineering services exports clocked $7.9 billion. Over time, the share of traditional, low-complexity basic process support work has gone down as the share of medium- and high-complexity work has gone up. R&D operations are increasingly offshoring to get the benefit of flexible resource capacity and reduce the time to market. Operations in India are offering high-end value added services like full product development and designing from first principles or “frugal engineering”.

Indian engineering R&D services market (domestic plus exports) has gone up from a paltry $1.5 billion in 2004 to $8.3 billion in 2009, stacking up a staggering compound annual growth rate of 45 per cent. Nasscom, the Indian IT industry association, has now unveiled a study and a road map by the consultancy Booz & Co which has set the goal of $40-45 billion in engineering services exports by 2020. The important part of this target is the inclusion of a domestic demand of $4-6 billion. This is because designing for the Indian market is becoming increasingly important and IT vendors like TCS and HCL Technologies, which have a strong engineering services play, are targeting local demand. Simultaneously, as India becomes more of a base for manufacturing, we are witnessing an interesting phenomenon. The entire life cycle of an engineering product, from design to manufacture, is being done in India. But it is being done on behalf of global firms that remain the final owners of the product. This is particularly evident in aerospace where TCS may be designing something and HAL may be manufacturing something else, but a component or assembly with the relevant intellectual property owned by an Indian firm is rare or non-existent. The final challenge thus remains for India to grow a Samsung or Hyundai, which will conceive, design, manufacture and own a product and thus earn the maximum value.