I- Day special: Basking in ESO sunshine

As India completes its 60th year of Independence, there are indeed a number of reasons to celebrate. The vibrant growth seems completely unstoppable and is aggressively pushed ahead by a population that is hungry to savor the huge opportunities that are now before it. India, now, seems to truly have access to opportunities it has never had before. These opportunities that have long been deprived to the Indian population have only made every Indian aggressively ambitious to pursue personal, social and corporate growth and wealth creation. This hunger, that is now a way of life across the country is perhaps the most powerful reason to believe that this growth is sustainable in the long term.

This article seeks to give a background of the evolution of the Indian engineering industry Independence and its role in shaping the ESO (Engineering Services Outsourcing) industry in India.

History

The early days of Indian Independence, with a strong governmental mindset of leading the country into prosperity, saw some visionary decisions. Enormous investments went into large engineering and manufacturing infrastructure. The Government took strong strategic steps of setting up various bodies such as CSIR, PSUs, DRDO, Civil Public Work Commissions etc. Massive projects in the areas of power, defense and R&D were started. India's hydel projects, railways and the steel industry were early examples of the country's engineering prowess. All these set a base for a good engineering base to evolve.

While all the above were strong steps that were essential and indeed praiseworthy, Indian policy makers erred when it came to supporting the private sector. Consequently, while the engineering industry did grow despite the license raj, innovation, technical excellence, and implementation of manufacturing Best Practices - all these suffered and India lagged way behind even countries that were much smaller. Complex Labor law, complex company laws, quota system for manufacturing and lack of support for entrepreneurs left India at a stage of only having to play the catch up game rather than ever taking a lead.

However, with factors such as a huge foreign currency debt looming large, the Indian government finally decided to take steps to liberalize the economy in the early 90s. Two dramatic fallouts of this were:

•  GDP and, as a consequence, per capita income began to grow. As a result purchasing power of India went up pushing demand levels to new highs.
•  Competition ensured that quality levels were constantly pushed up.

As a result of the above, no serious player could afford to ignore the large Indian market that was emerging. This led to the raise in local manufacturing of white goods, machinery and most visibly the latest automobiles. What this did was to rapidly usher in the Global Best Practices into R&D and manufacturing in engineering organizations. Soon, the Indian work force became familiar and comfortable with engineering design.

As engineering practices evolved, the success of IT as an offshore service and the large talent pool in India made ESO a logical area for evolution. Currently NASSCOM reports suggest that ESO is really the next big wave waiting to hit India after the success in IT. There are already successes witnessed in the market that confirm that the outlook is indeed extremely attractive. NASSCOM suggests that this market is poised to become a $12 Billion market by 2020 and that India is well poised to lead in this space.

Factors that will contribute to the high growth of ESO:

There are a number of factors that will contribute to the strong growth of ESO in India. While at a very broad level, there are so many industry verticals that will grow in this industry such as telecom, avionics, embedded systems etc, for the purpose of this article; only factors that influenced the emergence of core mechanical engineering industry and aspects of product development are discussed. Factors that contributed to the emergence of ESO include:

• Growth of the domestic Auto industry
•  Pressures on the global Auto industry
•  Aerospace industry
•  Other manufacturing industries
•  Workforce availability in India
•  Mature offshore practices

ESO- not an easy pie

Unlike IT Services Outsourcing, ESO is extremely complex. Some of the challenges of this market are outlined below.

•  Complex nature of engineering design. Sound engineering services delivery revolves around sound technical skills, domain expertise and ultimately sound engineering judgment.
•  Engineering design work centers on product IPs of manufacturing companies. Most of the services outsourced are related to design services around patented products, design specifications or customized interiors of a total engineering solution. Companies wait to develop a comfort zone before collaborating to set up industry Best Practices at offshore centers.
•  Sales cycles are fairly larger compared to IT services due to various complex processes involved.
•  Continued availability of quality manpower

Sustainable advantage of the Indian engineering services industry

Maturing Engineering Industry: As the Indian economy was opened up, many companies entered India and set up manufacturing plants, JV's and design centers. Our own indigenous industry rapidly started adopting global best practices to adapt to the changing scenario. It started with the automotive industry and moved into almost every sphere including heavy engineering, architecture and plastics and now to the current hot favorite, the aerospace industry. The world is recognizing the potential of India in providing quality design engineering and analysis. India will soon employ about 250,000 engineers for this space. Today, there are around 2000 automotive suppliers of which 500 are major manufacturers with a turnover of $10 billion and they're growing exponentially at >15% every year. 18% of their output is for the export market. This has provided space for our technology to grow, to make our R&D better, have more space for design engineering etc.

Talent pool: Cost benefit is not the only primary reason that companies outsource their engineering projects, unlike, perhaps, in the IT sector. The talent pool that is available in India is immense with 35,000 engineers passing out each year. Domain knowledge available among the Indian workforce is considered quite good. While most developed countries are facing an increasing problem of an ageing workforce and an acute shortage of high technology skills, the ready pool of quality talent in India is a strong attraction to companies worldwide. People who are well trained not only in the high technology tools but also with domain expertise are available with relative ease at a fraction of the cost of such skills elsewhere. However, it must be added that there is a time element involved in reaching the productivity factors of the West.

Highly evolved best practices and methodologies: Companies that offshore hugely benefit by getting access to the highly evolved best practices and methodologies provided by their service partners. Time to market is reduced and clients see the ability to ramp-up their teams/operations faster and at significantly lower costs. Companies who have long-term relationships with their engineering service providers find an extension of their company in them as deep understanding of the technical aspects is developed by the offshore entity.

It is also clear that India today has all the right ingredients to become a large and a significant player in the Global Market in this space.

There can be no better time for ESO than now. The Automotive, Aerospace and other engineering sectors are brimming with activity with all major players lining up with strategic and grand "India plans". While 60 years ago we fought for our freedom from overseas invasion, India is now ready to exercise its freedom and soar to great heights in the engineering services market. ESO in India is poised to become the next big "wave" after the "IT wave" and, this time, India can take pride in the fact that, unlike at the time of the colonial invasion, overseas players today are coming into our country with a healthy respect for our strengths.

The author is CEO, CSM Software Pvt Ltd