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ESO SPECIAL ESO: A $40 billion opportunity

A $40 billion opportunity Engineering services outsourcing (ESO) is the next logical step for India, moving from low-end BPO work to
high-end ESO. But the road to success is dotted with potholes and craters, much like the roads in any of the
Talent Crunch Acute for metros. A brief analysis
......... Shashwat Chaturvedi

Case Studies
It sounds like the proverbial pot of gold at the end of the rainbow. But unlike the proverbial one, the
Aircraft C abin Electronics
Engineering Services Outsourcing (ESO) pot is quite within the reach. A recent report ‘Globalization of
System Software
Engineering Services’ published by National Association of Software and Services C ompanies (Nasscom)
C ar Audio System and Booz Allen Hamilton predicts that India has the potential to garner around 25 per cent of the global ESO
pie, worth around $40 billion by 2020.
Front End & Bumper
Design for Automobile The engineering services space is currently exploding, thanks to robust growth across Europe, Asia and the
US. According to the report, the total engineering services market was worth $746 billion in 2004 and will
VoIP PBX for Networking
touch $1,100 billion by 2020. Of this the outsourced component could be worth around $200 billion.
Automobile seating Currently, the ESO market is worth around $15 billion with India garnering a healthy 12 per cent share.
systems & Interiors
Hi-tech/telecom (30 per cent), automotive (19 per cent) and aerospace (8 per cent) are the major verticals
Jet Engine Turbine going by the sector wise spend. According to the report, in 2020, there would not be any major shifts in the
Exhaust C ase vertical spends, with a slight increase in hi-tech/telecom spend. This is where India could make a killing.

Engineering Standard
With the fastest growing mobile market in the world and an established knowledgebase in electronics and
Work for Aero Engine
hi-tech, India has the capacity to account for around $14-18 billion in 2020 from less than $1 billion as of
Noise & Vibration Analysis now in the hi-tech/telecom vertical space.
for SUVs
Automotive is another big opportunity for Indian players. The reports states, “Automotive engineering
RC Design of C ommercial service is a true ‘knowledge-based’ industry with a viable future, as opposed to ‘call centers,’ which are
C omplex more on arbitrage play that could possibly dissipate with time. A few Indian players in this space have
already made a splash in the international space, like Tata Technologies with the acquisition of Incat.
Offshore Engineering for
Diesel Engine
Meanwhile, auto majors like General Motors, Ford, Toyota, BMW and others are already outsourcing
engineering work to India through captive centers or third-party vendors. Last year, TC S had won a
contract to provide IT and engineering services to Scuderia Ferrari for the development of its Formula 1

What are the factors driving this shift? Not surprisingly, they are the very same that made India an ITO (IT
outsourcing) and BPO (business process outsourcing) major, namely, costs and talent-pool. But this is
where the similarity between ITO and BPO, and ESO ends.

Cost arbitrage is not the key factor in ESO space, while it may be a major one. The wages are on the
upswing in India, but as the shift happens towards premium services, the higher rates will compensate for 1/4
01/04/2011 CIOL
upswing in India, but Special
as the shift -Talent
Acute fo…
services, the higher rates will compensate for
the increasing labor cost. The country is also blessed with a huge number of educated professionals:
currently around 35,000 engineers are working in engineering services.

In fact, India has an edge over its competition (read C hina and Russia) because of this scale-up (in terms
of people numbers) factor. As already mentioned, ESO is quite a different ball game altogether. Wherein
quality factors many notches over sheer numbers, the quality of the engineers coming out of around 1400
institutes could be a crucial issue in the coming years.

Infrastructure is another key inhibiting factor. Somehow, countries like C hina, Thailand, Malaysia and
Singapore have scored a march over India. To cater to international engineering demands, a robust and
thriving manufacturing sector that will give the exposure to Indian engineers is required. Also, the facilities
and overheads required for ESO are more hi-tech and more hi-end in comparison with BPO and ITO.

The report goes on to provide “six key steps to make Indian an attractive, viable destination for
engineering services.” They are: building up ‘engineered in India’ brand; improving domain expertise;
creation of infrastructure; improving the quality of work force; aligning government priorities with business
development; and leveraging local business and local demand.

There is also the caveat in the end, the clock is ticking and the lucky chance would not be available
indefinitely. The market will get progressively difficult to break into with each passing day and the loss could
also possible impact current service relationships in ITO and BPO segments.

Quite a few players like Neilsoft are campaigning for engineering services to be segregated and formed as
different entity like BPO to give weightage to the segment. Nasscom has also formed an ES forum in 2005
with 15 members, and promises to hold road shows across different cities to popularize ESO.

The moral of the ESO fairytale is simple and succinct, if there was ever a time to make that dash, it is now.
And who knows? There really might be a pot of gold at the end of the rainbow, a pot worth $40 billion.

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