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: Spurred by the recent developments in the global financial markets, Indian IT service providers are actively scouting for business opportunities beyond the banking, financial services and insurance (BFSI) vertical. Engineering services outsourcing (ESO) is one such segment that is fast catching their attention. Though this segment caught the fancy of Indian IT service providers a few years ago, good news is that it is seeing an increased focus now.

According to a Nasscom-Booz Allen Hamilton study, the current market for ESO in India is around $2 billion. It is expected to touch $38-50 billion by 2020. This could be 25-30% of the global offshored engineering services market. (Though the top players in the IT industry like Satyam, Wipro, Infosys, TCS and HCL have a significant presence in ESO, most are upping their focus as new players pull up their socks to foray into the market.)

Consider this. India’s fourth largest software exporter, Satyam Computer Services, generates around 9% of its revenues from engineering services. Buoyed by the prospects, the company is now aiming at cornering a 10% share of the market by 2012. Ruias-promoted Aegis has also stepped up its focus on the significant sector. The group has moved around 1,000 people to Aegis Engineering Services, which will cater to engineering design in infrastructure, power plants and petrochemicals sectors.

Another strong player in the arena is Hyderabad-based Infotech Enterprises, which is drawing up plans to acquire three companies this fiscal in the engineering services domain. The company has earmarked Rs 300 crore for this purpose. At present, Infotech Enterprises gets over 90% of its revenues from engineering design and IT services. Interestingly, Tata Consultancy Services (TCS) and Tech Mahindra are believed to be closely eying the design services unit of Flextronics, which is on the block. “TCS has recognised Engineering and Industrial Services (EIS) as one of the growth engines as the engineering services is the next emerging market after IT and BPO,” says Regu Ayyaswamy, vice-president and global head, EIS, TCS.

As per industry estimates, the engineering services market is in the range of $3.5 billion and $3.7 billion, including the captives. While 55% of the market is controlled by Indian IT service providers, 40% is with the captives, and the rest is catered by the niche players. While engineering services as a segment is multi-disciplinary, automotive, aerospace, high-tech/telecom, utilities, and construction/industrial are the major thrust areas. Aerospace, auto and telecom verticals comprise around 55-60% of the market.

Nasscom president Som Mittal informs that engineering services offer immense scope for the IT sector as the product life cycles have reduced and there is a shortage of design people around the world. “Companies are now trying to provide end-to-end solutions, which includes testing, prototyping and manufacturing, instead of doing one or two parts of the chain,” he insists.

An interesting trend that catches one’s attention is that most of the IT companies are focused on one or two key areas, instead of catering to the entire spectrum. For instance, HCL Technologies is gung-ho on the hi-tech vertical, which contributed nearly 30.7% to HCL’s revenues in the last quarter, more than 27.3% that the financial services accounted for. Similarly, Infosys focuses on product engineering, process engineering and plant operations, along with lifecycle management across industry verticals. On the other hand, TCS had $330 million revenue from EIS in 2007-08.

According to Wipro general manager Sachin Mulay, product engineering is one of the five focus areas for the company. The segment contributes around one-third of the company’s revenues. However since the past one year, the company has also started mass manufacturing semi-conductor chips and set-top boxes. “Many semi-conductor chip companies are mulling setting up a base in India. If that happens, it will give a major fillip to the industry,” says Mulay.

“India is slowly becoming the centre of gravity for infrastructure and engineering services, with many multinationals setting their centres here to cater to the global demand,” says Christopher Liew, vice-president, Asia South, Bentley Systems. The US-based company specialises in the infrastructure domain and is planning to set up a centre of excellence in the country.

According to KPMG director of sourcing advisory services, Viral Thakkar, India has several advantages in the engineering services arena which is being leveraged by companies that are making India the hub for other emerging and developed markets. “The country boasts of a good engineering talent, which is becoming a scarce resource in the rest of the world. It also has a language advantage, which is important in getting the idea across,” he says. However, TSK Murthy, senior vice-president, Satyam Engineering Services says it is a capacity and a competency play, rather than being a pure-cost play. “However, the cost factor does play a part in making destination India more lucrative,” he stresses.

Meanwhile, even as engineering services outsourcing to international companies is emerging as a big business, the domestic market in itself is seen to be huge. However, it is difficult to put a number to it as it is largely funded by the government, says Murthy. “The manufacturing boom in the country has followed the IT boom. For instance, India is slowly becoming a manufacturing hub for auto companies. Players like Intel and Motorola also have their units here. This is driving the domestic ESO market,” says Vikash Jain, associate principal, Everest Group.

Moreover, companies with engineering not as a core function are increasingly outsourcing it to third parties. Others are doing it to optimise their engineering spends. Industry experts opine that despite the global meltdown, there is a remote possibility that engineering services will be subject to a slowdown in cuts. “If you look at the last 15 quarter results of top-10 IT companies, the BFSI vertical has seen a drop of 30-60%, whereas in engineering services, it has only been 7-12%,” informs Murthy.

Experts are of the view that however bad the global scenario may turn out to be, engineering services will offer a lot of opportunities. For instance, the emission norms in automotives will continue to get stringent. There will be a greater focus on eco-friendliness of products as usage patterns will continue to change. Moreover, cheaper products with more features will be the order of the day. All these will drive the engineering services boom.

In particular, the recent go-ahead given to the India-US nuclear deal is poised to give a major boost to engineering services in the aerospace and defence sector. Ernst & Young partner Milan Sheth insists that until now, Indian companies had a limited role to play in hardware manufacturing vis-a-vis China and others. However, this could change and well emerge as a major market opportunity in the near future.