On August 3, 2006 NASSCOM, in concert with management consulting firm Booz Allen Hamilton, unveiled another goldmine of opportunity called ESO or Engineering Services Offshoring in a report that pegged a $40 billion market and a job pool for 2,50,000 engineers in India. Optimism is rife that India is well-positioned to ramp up its slice of the ESO pie from 12 per cent to 30 per cent by 2020. So what might poop the party? Speaking to Pratima Harigunani of CyberMedia News, Sunil Mehta, VP, Nasscom spoke about the scope of ESO for India. 

Excerpts:

The report projects the total offshore engineering spends to hike to $150-$225 billion by 2020. Does the $50 bn opportunity for India factor in the investments in captive centers?

Yes, currently captives account for around 55 per cent of the 12 per cent piece of the $10 to 15 bn currently being spent in ESO. But I think if we take into consideration the extent of growth outlined, there’s a lot of headroom for third party vendors too. If we draw parallels with the BPO industry, the share of captives in BPI was around 95 per cent initially. It came down to 70 per cent in four years and has stabilized at 65 per cent for the last three years. We can expect the same stabilization to iterate for captives in ESO space too, though it’s difficult to conjecture anything now.

Why India? How critical a driver is the cost arbitrage here?

Companies like Intel, Motorola and TI have been doing their chip design functions in Bangalore for the past many years that have laid down a good track record on this turf. Secondly, the Indian success with IT services and BPO is also well known. Also, the outlook is strengthened by the quality of third part vendors here who have an average of 7.5 years in terms of vertically wide work experience. And why not India? India commands 28 per cent of the 6 mn graduate talent pool for offshore ES and BPO. It churns out four times the number of technologically skilled workers than those produced by US.

But would this opportunity be limited to the design stages or would we move ahead to the high-end of value curve like plant automation, processes etc?

In the earlier phases, ESO was limited to converting 2D to 3D as Indian engineers were required to digitize the technical drawing boards. Today, we are also designing aircrafts, chip designs and moving up on the chain. However, we are still a few years’ away form Plant management opportunities.

How critical are concerns over IP and risks of investment and exit for companies that choose to outsource their engineering processes?

IP is certainly the biggest concern area. But security standards followed by companies here are robust enough. Though we had some unfortunate BPO cases in this aspect, they were good from a long-term perspective. What’s most noteworthy is the fact that enforcement was visible and ultimately the perpetrators were caught. The pace of legal system still remains a worrisome area and hence we are recommending special cyber cells to address the issue better.

From a vertical perspective the report states that India is strong in the automotive and telecom areas that promise a $25 billion opportunity by 2020, while Aerospace is still the most untapped area despite its potential for expansion. Can concerns arising from defence sector be ironed out?

Commercial Aerospace is not an issue but that’s not the case with defence aircrafts. We are trying to address that area by bringing attention to ‘strategic offsets’. The problem is that India has still not realized the fact that it wields significant clout as a buyer. I opine that in the next 15 years or so, India will turn the second largest buyer of commercial aircrafts. We have culled a list of suggestions from our member companies and will be shortly tabling our recommendations to the Ministry of Defence and Civil Aviation. Our purpose is to highlight that India can ask for some quid pro quo in business for some percentage of the value of deals it strikes.

How debilitating can the gap on talent supply be, given the fact that even old-economy industries need engineering talent in significant numbers?

Today we have around 1400 engineering colleges with a capacity of 4,50,000 engineers and a current output of 300,000 engineers. In 2005, around 220,00 engineers with 4 year degree graduated in addition to about 1,05,000 engineers with a 3 year diploma. Yes, engineering talent is required by old economy sectors too. I think the crunch is more acute on the quality dimension rather than on the quantity dimension. We need skill sets and competencies that are compatible to current industry requirements. Colleges should be liberated form bureaucratic hurdles and be empowered to alter curriculum with an industry-friendly perspective. Engineers today are lacking in learning things that the industry needs and this results in high obtaining costs.

Is NASSCOM doing something to address the talent issue?

ESO is the sue of IT in the end-to-end spectrum of products, and it ranges from designing to managing a product that can be anything –an aircraft, an excavator, a chip or a real estate product. We will start sensitizing engineers on the opportunity in this area that allows them to grow laterally (manufacturing and IT both). We have started talks with some private colleges in Karnataka and are speaking to some member companies who are already present in the ESO sector. These companies would go to engineering colleges to talk about the career opportunities in ESO. We will also address issues like faculty training and curriculum changes. We are working on setting up 8 to 10 centres of excellence across the country in the next six to nine months. Here students will be exposed to high-end ESO technologies and we are talking to some Hardware vendors for support too.

Any estimates on the nature of ESO contracts? Would they tow the BPO line and be piecemeal instead of long-term value?

I guess most of these would be multi-year contracts. On the marketing front, Nasscom is organizing international conferences in US, Germany and Japan wherein existing customers can share their experiences and potential clients can be persuaded to start pilots.

From BPO to KPO to OPD to ESO, what next does the Indian IT cornucopia holds?

Interestingly we have still not scratched the surface even if we take into account all offshore countries taken together. We have barely addressed 10 per cent of the global IT market and only 8 per cent of the global BPO pie. ‘What next’ is not an issue, we are free to choose and gain from any area and there’s no dearth on the demand side. But unless problems on the supply side are taken care of, we still have a long way to go.

What kind of competitive threats can India foresee from China, Vietnam or Nigeria?

Countries like Costa Rica, Nigeria, Vietnam and Eastern Europe face the issue of scale where only China stands as an exception. But companies are willing to pay a higher price for data security and IP protection that would be an area of improvement for China. India also scores higher than China on language skills, cultural compatibility besides a robust political and legal system.

Would you like to share any other concern areas on the ESO opportunity?

India can rake in only 30 per cent of the opportunity that beckons its unless action is taken on these areas: Besides, talent availability, India’s weak engineering and physical infrastructure can be a roadblock. ESO has close links with manufacturing unlike BPO and in absence of proper ecosystems, ESO cannot function the way BPOs did by starting ‘standalone’ facilities to de-risk themselves. We need strong business and political leadership and India must equip five to seven cities with cutting-edge infrastructure by 2020. We need to augment fill the gaps in engineering education and market the Indian advantage effectively. 

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