ESO : A $50 billion opportunity

CIOL Bureau
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Shashwat Chaturvedi


It sounds like the proverbial pot of gold at the end of the rainbow. But unlike the proverbial one, the Engineering Services Outsourcing (ESO) pot is quite within the reach. A recent report Globalization of Engineering Services published by National Association of Software and Services Companies (Nasscom) and Booz Allen Hamilton predicts that India has the potential to garner around 25 per cent of the global ESO pie, worth around $50 billion by 2020.

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 touch $1,100 billion by 2020. Of this the outsourced component could be worth around $200 billion. Currently, the ESO market is worth around $15 billion with India garnering a healthy 12 per cent share.

Hi-tech/telecom (30 per cent), automotive (19 per cent) and aerospace (8 per cent) are the major verticals going by the sector wise spend. According to the report, in 2020, there would not be any major shifts in the vertical spends, with a slight increase in hi-tech/telecom spend. This is where India could make a killing.


With the fastest growing mobile market in the world and an established knowledgebase in electronics and hi-tech, India has the capacity to account for around $14-18 billion in 2020 from less than $1 billion as of now in the hi-tech/telecom vertical space.

Automotive is another big opportunity for Indian players. The reports states, “Automotive engineering service is a true knowledge-based industry with a viable future, as opposed to ‘call centers,’ which are 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.

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, TCS had won a contract to provide IT and engineering services to Scuderia Ferrari for the development of its Formula 1 car.


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 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 China 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 China, 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 $50 billion.

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