Engineering services : In the Limelight, Finally

Labeling FY 09 a tough time would be a huge understatement. The automotive

industry, traditionally one of the two largest verticals for the Indian

engineering services exporters, was going through one of the most turbulent

times in its history, with many large manufacturers queuing up to file for

chapter 11. Quite a few of them ultimately did, though only in April-June 09

(and most of them came out of in surprisingly short time, but that is another

story). The list included OEMs like GM and Chrysler as well as tier-1 suppliers

like Visteon and Lear Corporationall significant practitioners of offshoring to

India, both through the captive and outsourcing models.

It is in this context that the performance of engineering services exports

has to be seen. So, while the rupee growth at 30% over last year actually saw

acceleration as compared to 26% in FY 08, that was more due to the exchange

rate fluctuations. The dollar growthprobably a little better indicator of the

market realities at 13% was surely not spectacular, but surely modest,

considering the turbulent times in not just the automotive industry but the

global economy in general and developed market economies in particular.

CyberMedia Research    DQ Estimates

*DQ Estimates. Does not include revenues from telecom, IT, semiconductor segments Last Years #4, Satyam is missing from the list, while Infosys has come in as the new #3. The huge others includes Satyam revenues

Focus Re-branding



Ironically, this was a period in which engineering services received all the

attention at homepartly due to the slowdown, and partly despite it. At the

industry level, Nasscom also became more active and thought a little re-branding

with a little more hype could helpnot just in attracting customers and more

players, but also private equity, a key ingredient for healthy growth in an

emerging opportunity area. The result is a new annual forum that Nasscom is

organizing in Pune, which should be on by the time this issue reaches your

hands. It is also releasing a new full study on the potential of engineering

services, three years after it released the first engineering services study by

Booz Allen & Hamilton.

CyberMedia Research  DQ Estimates

Even with most engineering segments severly affected by the downturn, engineering services to India acclerated, thanks to the increasing pressure on margins

At the individual company levels too, many IT firms finally decided to

address it as a focus area. While for some it was a completely new target, many

others had earlier addressed it in fragmented ways, often clubbed with

traditional IT services in a vertical, and had never even measured it as a

special horizontal, let alone do focused business development. Infosys is a case

in point. It started measuring engineering services separately and the figures

that it arrived at made it jump to third position in our ranking, just a little

behind #2 HCL. In fact, Infosys response to our survey also reflected this

change. For the first time in three years of this survey, Infosys returned our

form filled in all respects, with all the information, something that it does

usually when it comes to IT services and BPO.

CyberMedia Research    DQ Estimates

While the share of captives is falling in BPO and IT, engineering services still sees significant interest in this model

Interestingly, after keeping away from the area for a long time, large

non-Indian IT services firms too started looking at this area seriously. IBM,

which had the capability but hardly spoke about it, started focused activities.

Accenture started building its capability in India while Perot Systems too

announced its foray into engineering services. Some of them are looking at

acquiring a specialized company and while the number of potential target

companies is small, we may see one or two announcements this year.

If you thought that meant the game was fast being decided in favor of IT

services firms, there was more zealous, though not as high profile, movement

among the specialized services players tooowned by large automotive groups as

well as niche independent companies. In the former category, Hinduja-owned

Ashley, M&M-owned Mahindra Engineering Services stepped up their activities

while Hindustan Motors entered the space. While Ashley went for a re-branding,

Mahindra Engineering Services acquired an Italian motorcycle design firm Engines

Engineering SpA to enter that space. Hindustan Motors, apart from its Chennai

center, set up an onshore center in Japan, a market that has not been tapped in

a big way by Indian companies. It is understood that Mitsubishi Motors, a

partner of HM for selling its vehicles in India, is an initial client of the

company.

Among the independent companies, a few companies worth mentioning are Pune-based

Tooltech, Noida-based Axis AT&T, and Bengaluru-based AugenTech. Tooltech, which

acquired two automotive engineering companies in SwedenIdeteknik and Aspinovahas

transformed itself from a CAD company to a product engineering company. Axis

IT&Tas the erstwhile IT&T is known after it acquired engineering services firm

Axissaw 61% of its stake being acquired by BPL boss Rajeev Chandrasekhar

through a company owned by his Jupiter Capital. According to sources, Axis IT&T

is seriously looking at the construction equipment segment and if the industry

grapevine is to be believed, Chandrasekhar is also keen on aerospace and may

invest in a Bengaluru-based company with aerospace industry expertise. AugenTech,

which with a revenue of Rs 16 crore in FY 09, is still small, is a company to

watch out for.

The period also saw vigorous re-branding activities, largely among the

specialized players. Tata Technologies, majority owned by Tata Motors, which had

started rebranding itself as INCAT, after acquisition of the London-listed firm,

did a U turn, re-branding again as Tata Technologiesa clear testimony to the

fact that post Nano and post JLR, the Tata brand is a far stronger engineering

brand globally. Vadodara-headquartered L&T Integrated Engineering Services, part

of L&T, but often overshadowed by more high profile L&T Infotech too started

doing focused marketing and branding exercise. It participated directly in our

survey for the first time in three years that this research has been in

existence. The Hindujas, which had promoted an engineering services firm, Ashley

Design and Engineering Services, re-branded it as Defiance Technologies, after

merging it with Defiance Testing & Engineering, a Detroit-based firm that group

flagship company Ashok Leyland had acquired in 2007. Recently, they decided to

demerge the combined entity from Ashok Leyland.

CyberMedia Research                                                                                              DQ Estimates

The list is still getting bigger. Also, we do not claim it is a comprehensive list as many small operations are not captured in this

While all this was happening, the most important event of last year in the IT

industry had its impact on the engineering services segment too. Fall of Satyamwhich

had a strong engineering services practice, the veracity of which is even

acknowledged by competitorsled to a lot of good talent being available to the

industry in general. And the industry did acknowledge it with hiring many ex-Satyamites

to top positions. While the former Satyam engineering services head TS

Krishnamurthy was roped in by Wipro to lead its not-so-successful foray into

mechanical design, Defiance Technologies of Hindujas too hired former Satyam SVP

and head, manufacturing and automotives vertical, Subu D Subramanian as CEO

recently. Perot Systems too acquired an ex-Satyamite too head its newly

announced engineering services business.

However, the year did not see too many large acquisitions, and certainly not

by the large players. Some acquisitions like INCAT by Tata Technologies,

Quantech by Wipro or Modern Engineering by Geometric which happened earlier had

no parallel in FY 09, the only exception probably being that of Quest Global,

which acquired ASE Technologies, a Cincinati-based engineering services firm

with more than hundred engineers.

Sizing Up the Market



Like Dataquest has been doing for the last two years, this year too, our

study on engineering services exports market in India does not include high tech

segments, namely telecom, IT hardware, software, and semiconductor industries,

while some embedded design work done by companies directly for automotive OEMs

or other end users have been included. The idea behind omitting these segments

out of the analysis is not to undermine their importance or to suggest in any

way that they are not engineering, but to highlight the other areas like

mechanical and construction engineering services which are newer areas for

Indian offshoring.

This segmentengineering services exports excluding those done for high-tech

verticalsrose by 30% in FY 09 to reach 13,128 crore. This was an accelerated

growth as compared to 26% in FY 08. However, in dollar terms, the growth slowed

down from 40% in FY 08 to 13% in FY 09. The total revenues in dollar terms

stood at $2.82 bn.

The captives increased their share, even though the contribution of few

non-Indian players that are active dropped further (See pie). Aerospace emerged

as the #1 segment for Indian service providersinteresting considering that

India does not have an active aerospace industry. While automotive continued to

remain the #2and a segment that most companies (almost all the thirteen

companies ranked here) have a presence inplant and industrial machinery saw a

solid growth and is now a clear #3. The verticals that are picking up momentum

are oil & gas, utilities, and construction, going by the growth expected in

value terms. But those will be driven by a few companies. The most popular area

that almost every company is excited about seems to be medical electronics and

healthcare equipment followed closely by consumer products.

Of course, one major company that is missing from the ranking is Satyam,

which we decided to drop, as the audited revenue figures are not available.

However, the estimated Satyam revenue has been taken in the others revenue to

compare with last years growth.

Trend 09: Moving Up



It is a little unusual at a time that is considered to be the most severe

downturn in many decades, with the brunt on engineering-intensive industries

being more severe than on any other, probably with the exception of financial

services. But the engineering services exports segment in India chose this time

to vault into the next phase in its evolution: marked not only by the

re-branding execrcise and high pitch marketing that is only getting louder but

also continuing its search for newer opportunities for growth as well as its

effort to move up the value chain.

Interestingly, unlike IT services, and probably a little like BPO services,

the industry did not act with a herd mentality of everyone running after the

same opportunity but actually differentiating themselves not only in the way

they position their services but also in targeting completely different

verticals. While traditional areas of aerospace and automotive still contributed

the highest share of revenues, many companies are trying to grow completely

different areas. Infosys, #3 in our list, for example, draws 20% of its revenues

from plant and industrial machinery, which #4 Tata Technologies hardly

addresses. Quest Global, another fast growing pure play engineering services

company, makes 59% of its revenues from utilities and oil & gas, which most

others are just beginning to address. Neilsoft, a much smaller company, has

chosen to grow its construction vertical and getting into areas like detailed

engineering, more than modeling, the traditional strength of Indian engineers,

which comes historically from taking a software-centric approach. Rolta has

already formed a joint venture with Shaw, one of the top players in the nuclear

engineering area, to tap the Indian market.

CyberMedia Research                                                                                              DQ Estimates

Five verticals, five different companies at the top; just shows how broad is the definition of engineering services

The differentiation is not restricted to targeting different verticals,

though that kind of differentiation is more tangible to show. Companies are

taking different approaches to move up the value chain and drive growth in

higher value areas, that they already address.

Concept to Manufacturing: This is something that we identified last year as

an experimentation with potential to become a trend. It has surely become more

prevalent, if not the standard norm. Not only has TCSwhose success in

convincing an Italian aerospace company to outsource end-to-end work from

designing of a manufacturing tool to getting it manufactured in India at a lower

cost, we elaborated last yeargot more such orders from the same customer, it

has managed to sell the idea to many more customers. In the arrangement, the

engineering services firm takes end-to-end responsibility from design to

manufacturing and delivers the end product to the customer. Typically, the

manufacturer (in case of TCS, a group company, TAL Manufacturing Solutions)

delivers directly to the customer because of tax efficiency but the program

management is done by the outsourcing firms like TCS and they get paid for that

as service.

Since then, Tata Technologies, the other Tata company in our list, has also

started pitching similar solution to its clients and is again banking on group

companies to get the manufacturing done. Quest has gone a step further. It has

started a manufacturing services business and has even set up a SEZ to do

manufacturing. The idea, again, is to provide end-to-end services to customers.

Hinduja-owned Defiance Technologies has also announced its entry into

manufacturing services. The much-talked about Indias services capability

fueling manufacturing is finally happening, though it is baby steps still. Wipro,

while it has not got into manufacturing, has recently started a product testing

lab, Tarang, with a high profile inauguration by former president APJ Abdul

Kalam.

Creation of IP: Realizing that a pure manpower-intensive model would not

sustain in the long run, no matter how much domain and software expertise a firm

gets, many companies are moving in the direction of own IP creation. Today, most

companies are trying to create some sort of standardize tools for reuse and many

have already done so. But only a few have completely productized them. Clearly

ahead in this game is Geometric, thanks to its experience in developing as well

as implementing PLM products for global vendors like Dassault, combined with the

engineering services experience. Neilsoft too has a few productized offerings.

Tata Technologies is also proceeding on this path. We believe this is something

that will become an industry norm sooner than latter. Since most firms have

solid expertise in IT, this may well be the first standardized India advantage

other than cost and availability of talent.

More end-to-end; emerging markets as the driver: While end-to-end and

delivering a full program sounds fashionable, few Indian companies ever bagged

a true end-to-end project, just a few years back. Since then, a few things have

changed. The customers have become more comfortable with the idea of offshoring

to India, partly because of better awareness about Indian capability, partly

because of Indian companies maturing, and partly because of their own urgent

need to cut costs. While the first two are part of a natural evolution and

similar to what we have seen in IT and BPO as well, the last is a direct fallout

of the severe downturn. For example, Chrysler has stepped up offshoring to its

own captive in India as well as to most of its vendors here.

But this new desire to outsource end-to-end is not always because of cost

reasons or change of heart. Increasingly, vendors that sell to consumers as well

as small businesseslike car manufacturers, consumer appliance makers, medical

electronics and surgical equipment companiesare looking at emerging markets for

future growth. They have realized that it is not always possible to do a little

modification to the existing products that have worked in developed markets and

sell them in emerging markets. Most of them are creating products that are

seeing work from grounds up. These are the projects where Indian engineering

services vendors are being considered for an end-to-end contract. What is

driving this trend are a few factors. One, these projects need faster

development; two, they need lower development cost; and three, there is no cost

of migration (including social cost) as these are greenfield projects. But what

the service providers are also offering is field testing in India, not just one

of the biggest potential market itself, but also a good microcosm for the

emerging markets.

Apart from emerging market-specific products, in new areas like clean fuel

and hybrid automotive too, a lot of new projects are being considered to be

outsourced to India.

Managing Cost: In the last few months, when the slowdown became acute, many

companies in the US and Europe looked at immediate cost cutting and that

provided some opportunity for vendors who could quickly come up with a solution.

A few engineering service providers like TCS responded and ended up winning a

few value engineering and should costing (process of determining what a product

should cost based upon various components and services that go into it) on

projects. Today, what started as a reaction to a customer need is an established

expertise within the company, with ability to charge a premium pricing and in

some cases, even as a percentage of cost saved by the clientsurely, a move

towards output based pricing.

The Infosys ExperimentPower of Process: Is engineering services very

different from IT and BPO? Yes, say most of the vendors that we spoke to. No,

says Infosys. The #2 IT services firm from India is betting on the same

principle that has worked for it and others in IT services and BPO: the power of

process efficiency. The principle sounds very simple and is familiar to most of

us: de-construct the process in such a way that you do not require too many

specialists and can easily move people from one type of project to another,

while keeping a bare minimum of domain experts. While most engineering services

firmsas well as engineering firms themselvesbelieve that it is not possible to

move someone who has worked in aerospace for years to an automotive project,

Infosys maintains the importance of domain is over-hyped and it is not the most

important strength of an outsourcing company. It maintains that it is only by

de-constructing a process well and running it well that an outsourcing firm can

add value to the job. Otherwise, it would always be dependent on individual

strength and not organizational strength. Infosys says that it has managed to

convince a few clients on this, while admitting that it will take some time to

change the mindset. For the time being, Infosys is alone to take a stand like

this. It will be interesting to see how companies like TCS and Wipro react.

Whither Slowdown?



The positive signals from the Indian automotive segment and the quick return

from bankruptcy of automotive companies notwithstanding, the world economy will

be in a recessionary phase for some more time, especially in industries that

engineering services firms target. The first signs that we have seen from the

industry in terms of being able to handle it is encouraging. The biggest

challenge, as the BPO industry has also seen, is neither a predominantly

negative impact because of business slowdown nor a significant positive impact

because of urgent need to drive down cost. It has been a slowdown in decision

making, something that the industry veteran VK Magappu of L&T sums up nicely: it

is like almost one year is written off. One hopes that will change this year.

Shyamanuja Das



shyamanujad@cybermedia.co.in