Growing Demand for Engineering Services Creates Opportunities for Emerging Economies
Companies look beyond cost control to find skilled work forces, access to expanding markets.
NEW YORK, August 3, 2006 – Global spending on engineering services is large and rising – constituting about 2% of global GDP, and companies are increasingly moving these high-value services to emerging markets as the next step in globalization, according to a new study by Booz Allen Hamilton for National Association of Software and Service Companies (NASSCOM), the trade body and the chamber of commerce of the IT software and services industry in India.
Competition for these high-end, desirable opportunities is expected to be fierce, led by India and China. Although companies have previously focused on cost reduction in offshoring lower-value business services, decisions about locating engineering capabilities will turn on strategic drivers, such as access to growing markets and an expanded pool of skilled labor.
The NASSCOM/Booz Allen study, “Globalization of Engineering Services — The Next Frontier for India,” is the first to take a systematic and comprehensive view of the role of emerging markets in engineering services, assessing the evolution of the engineering market from 2005-2020. The study examined product and component design, plant design, process engineering and plant maintenance operations, for industries including Automotive, Aerospace, High Tech, Utilities, Construction and Industrial machinery. Key findings of the study include:
Engineering services is a growth market. Current spending on engineering services ($750 billion in 2004) is projected to increase to $1.1 trillion by 2020. The market is highly fragmented by industry, with Automotive at 19%, Aerospace at 8% and Utilities at 3% in 2004. High-Tech/ Telecom is the dominant and fastest growing sector, with 30% of the market.
CEOs are increasingly viewing offshoring as a way to counter market forces that are exerting pressure on engineering services. While cost control remains a concern, companies are also seeking access to a high quality talent pool that can grow engineering capacity and increase productivity. Locating engineering services in emerging markets also provides access to a growing market of customers, and can decrease time to market. While today only $10-15 billion of engineering services is offshored, the market is expected to grow to $150 -225 billion by 2020.
India’s current revenue base in the offshored engineering services market is about $1.5B – relatively small as compared to its information technology and business process outsourcing sectors. The study also found that India is well-positioned to increase its market share of engineering offshoring from 12% to 30% by 2020. The potential engineering market in India could exceed $60 billion by 2020.
“The Indian IT and software industry is continuously renewing itself and seeking to grow by addressing newer service lines; the latest one being engineering services. Companies in India have developed capabilities and skill sets, and invested in technology platforms to leverage this opportunity,” said Kiran Karnik, President NASSCOM. “The growth in engineering services signifies the need for global corporations to expand their R&D pool beyond their home countries.”
“The demand for engineering talent is growing, and emerging market countries such as India will play a vital role in expanding capacity,” said Kevin Dehoff, Vice President at Booz Allen. “This isn’t a case of substituting jobs in low cost countries for those in the developed world – these are core capabilities that provide a competitive advantage in the global marketplace.”
However, other nations, led by China, pose a competitive threat to the growth of engineering services in India. A recent survey of the attractiveness of offshoring locations found that 46% of companies identified China as a future resource, compared to 26% for India, 13% for Latin America and 9% for Eastern Europe.
“The offshoring of innovation poses unique challenges not found in IT or business process outsourcing,” said Vikas Sehgal, Principal at Booz Allen. “The emerging markets that can meet the needs of global corporations for infrastructure, skilled labor and a positive business environment will capture the largest growth in market share.”
“Over the next 15 years, the global supply base will be very dynamic. Vietnam and Eastern Europe will become the low cost providers as operating costs in China and India near those of developed countries during that time.”
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