After BPO, ESO to arrive with a bang................

The two keywords associated with outsourcing to India have been ITO and BPO services. Now a third opportunity in offshoring seems to be opening up for the country — Engineering Services Outsourcing (ESO).


THE MOOLAH MAGIC

Spending on engineering services was $750 billion in 2004 and is projected to grow to $1.1 trillion globally by 2020, according to a recent Nasscom and Booz Allen Hamilton study - Globalisation Of Engineering Services - the next frontier for India. While in fiscal ‘05, $10-15 billion of engineering services was offshored, the market is expected to grow to $150-225 billion by 2020.

Of this, Indian IT companies have a $40-billion opportunity by the year 2020 from engineering services, the report adds. The country’s share of offshored engineering services, which is currently 12%, is expected to increase to 30% in the same period.

This new emerging sector is still small in terms of revenue and job generation but as Nasscom Chairman and Satyam CEO B Ramalinga Raju points out, “the amount of exports from engineering services from India today is the size of the Indian IT industry (export-oriented) in 1998-99 period. The sector has now attained a size where it deserves special attention.”


WHAT IS IT

Engineering Services Outsourcing (ESO) includes product design, research and development and other technical services across sectors like automotive, aerospace, hi-tech/telecom, utilities and construction/industrial machinery.

The market is highly fragmented by industry with automotive sector contributing 19%, aerospace at 8% and utilities at 3% in 2004. The Nasscom and Booz Allen Hamilton study says that the high tech/telecom is the dominant and fastest growing sector with 30% of the market.


THE GROWTH DRIVERS

“The main factors for growth in ESO in India would be price pressure, competition and more complexity in designs,’’ opines Ramesh Emani, president, product engineering solutions, Wipro Technologies. Explaining, he says, “Companies are feeling the pressures on margins due to increased competition. There is also the aspect of time-to-market. And with the emerging markets like India, China growing, the rates they can get from here will decrease.”

An opinion which Ajay Chamania, senior vice president, product engineering services, Patni Computer Systems shares. “More and more companies are convinced that R&D or engineering work can be done from a remote location. Earlier, foreign companies were worried about IP issues and kept their core engineering development in house. This is now changing.” Mr Chamania adds that the opening up of centres by several MNCs themselves has been responsible for the change in mindset.

“Established quality and service levels and the strong track record of Indian vendors in BPO and ITO is also likely to boost the confidence of would-be global clients in India’s capabilities,’’ opines Nasscom Vice President Sunil Mehta, adding that the supply base with established delivery capabilities and an adequately experienced workforce and middle-senior management can be leveraged by the engineering sector.

Explaining the latter point, Mr Mehta says, many of the vendors who will evolve into engineering services providers are likely to already have a great deal of experience winning and retaining BPO and ITO contracts. The delivery models are well established and after a decade or more in business, these vendors are likely to have developed the ability to maintain a very high level of quality control.

Another aspect of ESO is the linkage with the domestic market. This interest in the local market is due to the booming economy in the country. Economist Intelligence Unit forecasts that by 2015, India’s GDP is likely to have grown to 2.5 times its current size, with a strong emphasis on personal consumption — a boon for consumer products companies.

Nasscom’s Mehta says that this trend may prove to be a powerful additional incentive for potential ESO clients to use Indian engineering services as a way to increase their presence in the Indian market. The increasing GDP may also become a useful lever for policymakers who may be able to make a commitment to increase local sourcing of engineering services as part of a larger deal to increase the company’s domestic market access.

Mr Chamania says that 5% of Patni’s total revenues in product engineering services comes from Indian and MNC companies catering to the local market. `Its not a huge market but the opportunity is there. These include products like X-ray machines, cars, etc. Even the defence sector in India is opening up to it,’’ he adds.

Companies seeking to increase sourcing of value-added services in India include Intel, Texas Instruments, Philips in hi-tech/telecom sector; General Motors, Daimler Chrysler, Visteon, Bosch in automotive sector; ABB, Bechtel in utilities and Caterpillar, John Deere in industrial/construction machinery segment.

However, just like the ITO and BPO sectors, ESO also is likely to face the talent crunch. “This is a hard core engineering field and unlike in IT, you can’t just scale up a business. This is not due to shortage of orders on the table but because of lack of qualified people,’’ opines Mr Chamania. He adds that the training for a fresher in this industry takes an average of 12-18 months.

Agrees Mr Emani of Wipro who says that while freshers can be trained even though it takes more time and investment, there is a lack of senior and mid-level personnel. ``Its a question of building confidence and the ability to deliver.’’

“To truly deliver its potential in terms of market share, we may require as many as 2.5 lakh engineers. While India today employs about 35,000 people in engineering services, India may not have enough trained professionals to handle the projected volume of work as the ESO space develops,’’ says Mr Mehta. Nasscom’s research indicates that shortages will be most acute in sectors other than hi-tech, telecom, like computer science, electronics and electrical engineering.

http://economictimes.indiatimes.com/articleshow/msid-1988677,curpg-3.cms


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