However, emergence of tech captives in India poses the biggest threat to this growth story. Domestic firms have to provide differentiated offerings to stay ahead of the game, says EIIR Trend founder Pareekh Jain
Engineering services space remains a growth spot in the technology industry despite the current slowdown. Most Indian pure-play engineering services companies and engineering wings of Indian IT firms have been posting better results in the first three quarters of current financial year. As outsourcing to India increases, this growth momentum is likely to sustain in coming quarters. In a conversation with the Bizz Buzz, Founder of Pareekh Consulting and EIIR Trend, Pareekh Jain said that Indian engineering services industry is expected to grow their revenues by three times in the next three years. According to Jain, outsourcing in the engineering services space is growing and Indian players are likely to be major beneficiaries of this trend. He, however, pointed out that technology captives coming up in India poses the biggest threat to this growth story and domestic engineering service providers have to provide differentiating offerings to stay ahead of the game
Engineering services remains the only growth spot in the IT industry at a time most other segments are going through a slowdown. What are the reasons behind such resilience?
The reason behind the growth is because of the latent demand for engineering services globally. Currently, only 5 per cent of the engineering services work is outsourced. Secondly, despite the slowdown in the technology industry, many R&D programmes continue unabated. Thirdly, earlier outsourcing was less in the engineering space as they thought it can’t be outsourced to offshore locations. This has changed post Covid as companies have realised that geography is not a constraint. Moreover, overall outsourcing was less in engineering services as those were core to enterprises. That perception has changed post Covid. Due to current macroeconomic situation, companies are facing a lot of cost pressure. So, outsourcing has increased due to cost reasons. That is the reason that we see more growth for engineering services providers. It seems engineering services is now at a place where IT services used to be 10-15 years back. What happened in late 2000 for IT services, that is happening for engineering services now.
Will such momentum sustain in coming years or is it just a hype phase?
It will sustain for a decade at least. Though there can be quarterly bumps or company specific issues but growth will continue. This is because the outsourcing pie in the engineering services space will grow. Companies now realise that they can outsource to India and save the cost. So, even the outsourcing pie increases to 10 per cent from current 5 per cent, it will translate into a lot of growth prospects. Also, offshoring is very less at this point of time in the engineering services space. This is certainly going to grow in coming years. The size of Indian engineering services players can be three times in the next 10 years. So, growth prospects seem bright for the next 10 years.
Will the new growth come from traditional manufacturing sector or from emerging areas? What are your views on this aspect?
There are two sides of it. In traditional manufacturing area, newer technologies are coming. For instance, in automotive, electric vehicles (EVs) are coming. Similarly, autonomous vehicles are coming in this space. In aerospace, companies are working on new kind of aircraft for fuel saving. In traditional manufacturing sector, there are new technologies that have come.
The other part is the software part of it. The backbone of every digital transformation is the digital engineering. Similarly, all cloud movement happens on the backbone of cloud engineering. For data analytics work, the backbone is data engineering. As generative AI grows, engineering work will increase. Moreover, software is coming to every industry. Today, cars are being sold on internet. Of course, there will short-term challenges. But within a decade, there will be adoption. We have seen that across industries over the years. Be it 5G, smart factories, robotics or electric vehicles, we can expect fast adoption of these new technologies in the next 10 years.
Indian engineering services companies have been performing consistently in recent years. Some reports indicate market share gain of domestic players in the global engineering space. How do you see this space playing out in coming years?
Definitely, the performance of Indian engineering services companies has improved. Earlier, outsourcing was less. Now, the growth has happened because of more outsourcing. Moreover, cost has played an important role in these outsourcing decisions, which was not the case earlier. India is best place to get right talent at right cost. This has generated more work for domestic players providing engineering services.
Secondly, the competition of Indian players is with the East European players. These players are not growing for the last one and half years. That is the reason that more work has come to Indian engineering service providers. But there is more competition with GCCs (global capability centres) now than east European players. Interestingly, all global service providers of engineering are now opening centres in India. But the fact remains as the pie of outsourcing grows, there is space for every player to grow.
India is slowly emerging as a manufacturing hub with China plus one playing out across industries. How do you view India as a potential market for engineering services players?
Currently, India is witnessing higher investment in the manufacturing sector owing to China plus one theme coupled with huge market opportunities. Earlier, GCCs of global enterprises were working as global support centres but now, these are working for coming up with innovation for Indian market. Therefore, GCCs are impacting the business opportunities for engineering services companies as of now. That is the reason we see more R&D centres by automotive, and other manufacturing firms in India. Of course, it will slowly trickle down to Indian engineering services companies.
What kind of challenges Indian engineering services firms can face in coming years?
There are no large deals seen in the engineering services space though deal size is certainly increasing. Therefore, engineering companies have to find ways to scale up in the absence of large deals. Secondly, engineering services firms have to maintain the growth rate through the transition period. For example, many of the new age electric vehicle players may not survive. So, maintaining the constant shift as the technology landscape evolves can be a challenge.
Also, the biggest threat comes from GCCs (global capability centres). If the engineering services companies are only betting on their talent base, then GCCs can find the same people from the talent pool. Therefore, engineering service providers have to provide differentiating services to enterprises for getting outsourcing work. For scaling up, companies need clear differentiators.
Thirdly, as large deals are difficult to come by, engineering service providers need to have an active M&A engine. They need to acquire companies to grow inorganically. That is the reason they need to have an active strategy on acquisition. Last but not the least, companies require an agile sales force and deal making strategies for scaling up.