Nasscom Booz Esr Report 2010

8/8/2019 Nasscom Booz Esr Report 2010

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Global ER&D

Accelerating Innovation withIndian Engineering



Executive SummaryIntroduction

The IT-BPO industry has enjoyed rapid growth – in just one decade, India has invented, transormed

and reinvented the global sourcing industry several times over, staying ahead o all trends. The industry

has moved up the value chain, continuously growing the overall global sourcing pie and its share

in it. This industry has built a unique service-led export-oriented model away rom the traditional

product-based play. However, we are now entering a period in which it is clear that the current model will

drive limited growth and to progress urther, tomorrow’s global companies need to expand their view o

success and redefine it in terms o lasting positive impact or business, society and the environment.

The recent economic downturn signaled the start o a new world order and a paradigm shit in the

way the world thinks and operates. Conglomerates viewed this crisis as an opportunity rather than a

threat and hence, there was limited impact on the global ER&D spend as companies earmarked ER&D

budgets to innovate so that they could drive growth in times o economic recovery.

In order to achieve innovation-led growth, the industry is targeting new growth engines, driving

globalisation o the ER&D structure across verticals and gaining a oothold in ER&D services ofshoring.

The Indian ER&D services ofshoring industry has grown dramatically since 2005-06 due to the

shit in the sourcing strategy o customers. Revenues have more than tripled in the last ew years

and the industry is poised or urther growth due to global interdependencies and linkages that isimpacting purchasing and investment activity across the globe. As the Indian supply base becomes

more global and entrenches itsel deeply within the customer value chain and plays an integral role

in customer strategies, it is required to augment its existing capabilities to engage in end-to-end

product development initiatives – develop their capabilities as ODMs, enhance their domain/vertical

and product/process specialisations, develop end-to-end networks across the entire product chain

(research labs-manuacturers-testing acilities-local market), establish global best practices, etc.

Global ER&D Landscape

Over the past decade, global ER&D spend has been growing steadily – continuous ER&D investment

is considered an imperative by companies, not only to pursue innovation or new markets and new

products but also or margin enhancements. Global ER&D spend increased rom USD 980 billion in



The current economic recession has had varying impact on diferent sectors. Co

such as Automotive, Telecom, Computing Systems and Consumer Electron

related sectors such as Industrial Automation, Energy, and Construction/Heavy

impacted as consumers reduced spending and corporates cut back on new exp

These sectors are expected to rebound over 2012 and 2013. However, Aerospace

and government ER&D and Medical Devices, due to a robust and growing h

minimum impact o the recession on ER&D spend.

Emerging markets have evolved to being the prominent players in the recent

increasingly dominant in the uture. This trend is reflected in the Asian ER&D spe

rom 1 per cent in 1990 to ~7 per cent in 2009 and is expected to contribute ~

ER&D spend by 2020. India’s ER&D spend in 2009, at about USD 12-15 billion

CAGR o 24 per cent over the last 4-5 years with Automotive, Commodities

Pharmaceutical industries accounting or a major share. In contrast to globa

government accounts or 60-65 per cent o the total ER&D spend in India and

balance. Going orward, the Indian Government is expected to provide a boost t

its investments in Inrastructure and Energy, amounting to over USD 350 bill

Perspectives on ER&D Services Offshoring

ER&D has been one o the early adopters o the globalisation phenomenon. It

o oreign ER&D sites o companies will increase rom 72 per cent in 2008 to

impact can be elt on the ER&D services market as companies are no longer ofs

but are increasingly utilising ofshoring to achieve flexible resource capacity

with cyclical engineering workloads and short product liecycles), to reduce

develop localised products or emerging markets.

The increasing sophistication and maturity o the ER&D services industry h

change in customer perception o service providers. Customers have begun to v

strategic partners owing to greater confidence in their ER&D capabilities. Comp

services rom basic process support to high value-added services such as ul

In addition, customers have started looking to their Indian partners and com

design their products rom first principles (Frugal engineering).

While customers still leverage their supply base largely or sustenance and m



High complexity services like product development and middleware development will account or

~25 per cent by 2020. This proportion will be even higher in Hi-tech verticals like Telecom, Semiconductors,

Consumer Electronics, Computing Systems and Medical Devices.

ER&D services sourcing is now a global industry with the emergence o several new low-cost destinations

in addition to India. China has a large presence o captives driven by its manuacturing capabilities,

ollowed by Central and Eastern Europe, ASEAN, Brazil, South Arica and North Arica, among others.

While these locations are building up ER&D capabilities, India has the unique advantage o a strong

and diverse service provider pool with capabilities across verticals and a range o business models to

suit the diverse requirements o global corporations.

Indian domestic companies have typically retained ER&D in-house. It is estimated that less than

5 per cent o the companies utilised ER&D service providers in 2005-06 and the number grew to

~10 per cent by 2009-10. However, as Indian companies move rom manuacturing products or the local

market to catering to the global market, the complexity and amount o ER&D workload will increase. Asa result, outsourcing will in all likelihood become more prevalent. However, within the Indian market,

drivers or outsourcing are quite diferent rom global drivers o ofshoring. Indian customers will

outsource to gain access to flexible ER&D capacity to reduce time-to-market, new technologies and

global industry best practices.

ER&D Services Opportunity Assessment

2020 landscape would be significantly diferent rom the current landscape, driven by global trendssuch as shiting centres o economic activity i.e., emergence o Asia, demographic challenges in mature

economies, greater technology convergence and major shit in industry structures. Simultaneously,

growth in the Indian domestic market, inrastructural investments by the Indian Government and

efective ofset policies will drive growth in the domestic ER&D services outsourcing industry.

Based on the 11 major verticals analysed, India’s ER&D services market size is expected to be between

USD 40-45 billion by 2020. O this, the export market (ofshoring) is estimated to be USD 35-40billion and the domestic market is likely to contribute about USD 4-6 billion. This estimate has been

revised upwards compared to the NASSCOM-Booz estimates o 2006, due to a shit in ER&D activities

closer to emerging markets, increasing confidence in supply base capabilities, ER&D support that can

be provided to a large and vibrant local market and emerging new verticals supported by avourable

government policies



the Japanese market (driven by focused investments of the Indian supp

cross-cultural and language barriers) and the rest of the world will contrib

Hyundai, Philips, Siemens and LG are examples of some of the major cap

been set up by East Asian and European companies

• In 2020, Automotive, Telecom and Consumer Electronics are expected to rem

generating verticals. Consumer Electronics would exhibit significant poten

base invests to compete with ODM’s from China, Taiwan and South Asian

• The offshorable opportunity of USD 35-40 billion is spread across all serv

use of electronics and embedded components could contribute almost US

revenues (both software and hardware chip design), accounting for about

market size in 2020. High value-added activities like prototype building, t

validation, core product development and design are expected to add anot

Indian ER&D revenues

The Indian domestic market is expected to contribute almost 10-15 per cen

market in 2020. Three major sources o revenues have been identified or th

growth o domestic market/companies, meeting ofset requirements in the Ae

investments in Inrastructure (roads, highways, ports, bridges, etc.) and Energy

(power plants, T&D, etc.) by both the Indian Government and corporates. India

strong process and product capabilities that can be leveraged to support this

Indian ER&D Services Supplier Assessment

The Indian ER&D services market has exhibited a CAGR of more than 45 per

USD 1.5 billion in 2004 to USD 8.3 billion in 2009. India has established itself

for offshore ER&D services and has played a strategic role in globalising the

attractive value proposition and capabilities are gaining popularity across the c

suppliers to strengthen their engagement in customer processes and product

Engineering-intensive industries such as Telecom, Semiconductors and Auto

revenue generators with embedded software design contributing almost 40

base. Over the years, Indian service providers have focused on proactively inve

their capabilities in order to provide compelling value propositions to the



period of time, higher number of experienced professionals in the workforce, and investments by Indian

service providers in research and IP development has resulted in increased customer confidence.

Manufacturing-focused verticals such as Automotive and Construction/Heavy Machinery were some

of the first industries to engage in ER&D offshoring and now have a mature supply base in India.

Indian ESPs have since expanded their capabilities across new verticals – namely, Medical Devices,

Consumer Electronics and Aerospace due to the need for low-cost solutions, critical time-to-market

and easy transferability of skills respectively. Within verticals, capabilities vary across sub verticals,

some exhibiting greater maturity than others. At the product development level, high level capabilities

exist in the areas of Automotive interiors and exteriors, aerostructures and propulsion in Aerospace,

access networks, core networks, devices in Telecom and development of small-medium size products

in the Construction/Heavy Machinery vertical.

A large engineering base, with an estimated installed base o ~1 million engineers, remains one o

India’s key strengths. The majority o this workorce has been employed by large Indian conglomerates.

Less than 15 per cent o the installed base works in the ER&D ofshoring industry, either or captives

or service providers; however, the number o engineers employed in the Indian ER&D services market

is ahead o China and has grown at 40 per cent CAGR since 2006. In 2009, 35-45 per cent o the

English-speaking engineers graduating rom Indian engineering institutions were in high-demand

disciplines, such as, Computer Science, Mechanical Engineering and Electronics, which was also in

proportion to the demand rom the global customers. However, India still aces major challenges with

respect to productivity o an engineering graduate and domain expertise.

Indian service providers have invested in expanding their global footprint to service geographically

distributed customers. They have established sales teams in North America and Europe, and delivery

centres in China and Japan, for closer interaction with customers in the former and to coordinate efforts

with existing manufacturing facilities in the latter. Within India, companies have begun to move to

Tier-II cities to take advantage of lower costs of operations and to access a large graduating pool

of engineers.

Currently, India is the only country that ofers a flexible business model or customers. There are over

300 captive ER&D acilities in India employing about 85,000 engineers. The leading 20 independent

service providers that serve multiple verticals employ over 60,000 engineers. Though the overall market

in India (USD 8 3 billion) is roughly evenly split between service providers and captives 60 per cent o



The availability of a skilled talent pool with strong communication skills and Engl

is another reason for India’s attractiveness. Over the last five years, India’s

pool has more than doubled – over 350,000 engineers were added to the en

2009. India has the world’s second-largest English-speaking population, at 72

second-largest number of engineering graduates, after the US. While India

enrolment and usage of internet in schools, the quality of its educational syste

average and the quality of mathematics and science education is considered

The government has played a significant role in developing India as an ofshori

a decade, the government has provided the industry with dedicated export z

and an investor-riendly tax policy.

India has a well-established public R&D infrastructure with about 300 natio

300 R&D institutions in the public sector and nearly 400 universities. However, t

innovation policy to guide public and private R&D and there is minimal inter

between institutions. Though overall Indian policy lags compared to peers

IP protection standards offered by the outsourcing industry to their custom

best in the world.

India is expected to remain a leader in 2020 though strong competition will eme

Europe, Brazil and Taiwan. While India’s competition varies based on the vert

Europe still remain the fiercest competitors.

Roadmap for the Future

While the IT-BPO industry has been the engine for growth during the 1990s,

the key driver going forward for the next 10 years. With focus and right investm

the Indian economy can build on the current success of the capable supply b

offering and build a robust knowledge-based economy. Such a planned de

tremendous boost to the economy, helping the GDP grow at a much healt

9 per cent for the next 10 years.

The ER&D services sector has a four-fold impact on the India economy. Inves

has strategic benefits to the country in terms of creating self-reliance and

industries critical for national security (Aerospace, Automotive, Construction,

S ill ) I ld l h I di ’ b l h h h d i



In order to reach the USD 40-45 billion market size by 2020 and maintain its edge over emerging

competition, India’s ER&D services sector will need to adopt a our-pronged strategy:

• Enter new markets: Invest in building capabilities in new markets such as Europe and Japan, while

simultaneously deepening penetration across existing markets. A unique set of investments

and value propositions are required to capture the domestic Indian outsourcing market. Since

cost is no longer an advantage, service providers must have strong technical capabilities, flexible

capacity, know-how about how global ER&D networks are organised and so on to build a compellingvalue proposition

• Enter new industries: Invest in new, fast growing verticals in the market like Infrastructure and

Energy. Though the ER&D services market will be dominated by Telecom, Automotive and Consumer

Electronics, faster growth is expected from the newer verticals

• Enter new service offerings: Invest in building end-to-end ER&D capabilities in select verticals. As

service providers mature, the focus should be on building vertical-centric capabilities as opposed toservice-offering-centric capabilities. For some verticals like Consumer Electronics and Computing

Systems, integrating design and manufacturing capabilities can produce significant benefits to

service providers

• Strengthen existing business: Build collaborative infrastructure and ecosystems through a network

of partnerships and alliances. These include testing facilities, prototyping facilities, laboratories,

design houses, centres of excellence, training facilities and academic institutions (the last two

specifically to maintain, refresh and build domain capabilities)

Vertical Deep Dives

This report has undertaken a detailed analysis o 11 major verticals that are expected to generate

USD 40-45 billion in Indian ER&D services revenues by 2020. These include the traditional verticals

(Aerospace, Automotive, Telecom, Semiconductors, Consumer Electronics and Construction/Heavy

Machinery) and emerging verticals (Computing Systems, Energy, Inrastructure, Industrial Automationand Medical Devices).

Global corporate ER&D spend o these 11 verticals amounted to USD 320-340 billion in 2009, a share

o about 55-60 per cent o total corporate ER&D spend. O this, currently ofshored revenue is ~USD

38 billion and India’s share in this is ~21 per cent – USD 7.9 billion. Globally ofshorable revenues are



Across most verticals, India and China are the leading destinations or ofsho

capabilities, cost arbitrage, manuacturing base, local demand, and large tale

destinations include Taiwan (Computing Systems), Ireland (Medical Devic

(Construction/Heavy Machinery), etc.

In line with these emerging opportunities, Indian ESPs are continually movin

ofering high-complexity services across verticals. In the Aerospace industry, crom basic CAD/CAM, sotware development, homologation, etc. to comp

analysis, and digital prototype assembly. Further, capabilities are being develo

areas o core/advanced R&D (e.g. – materials, that involve undamental research

development (environmental compliance), crash simulation, etc. Indian ESPs

d i k lik i t i d i i lik Ai b d B i I



Until early 2000, Semiconductor service providers were oering low-end services like system

integration, testing o PCB design and verification o VLSI design. However, in the last 4-5 years,

Indian ESPs have begun ofering services such as digital/analog IP, embedded solutions, post-silicon/

pre-silicon validation services. Indian ESPs are not only helping Semiconductor companies reduce their

design services costs but are also supporting them in areas like power reduction and perormance

improvements on next-generation chips. The Indian supply base in Computing Systems is currently

most competent in communications, networking, servers and storage – they are expected to makemaximum traction in advanced computing and servers and storage through 2020. In the last ew years

Indian engineers have started supporting high-end ER&D activities such as product conceptualisation

and end-to-end product development. With increasing supply capabilities, service providers are also

getting an opportunity to work on complete product ownership models.

In Consumer Electronics, Indian ESPs have significant coverage o the entire product development

value chain rom low, mid to high-end services. ESPs have moved up rom services like user interace

design and testing, design evaluation, etc. to complete development o embedded components, product

conceptualisation, chip design, etc. Some ESPs are mature enough to provide end-to-end services

including low volume production. In the Medical Devices sector, India currently has a number o ER&D/

design ESPs with capabilities ranging rom design support, embedded sotware to hardware design.

Some o the ESPs have moved up rom low-end services like specifications development, electronics

engineering, analysis and simulation to high-end services like industrial design, concept exploration,design and code reviews, test engineering, risk analysis, etc. By 2020, Indian ESPs are expected to

provide services or devices rom imaging to cardiovascular technologies.

In the Energy sector, Indian ESPs have been largely providing low-end services rom conversion to

process support. Very ew ESPs are capable o providing services across the value chain (Upstream,

Midstream, Piping, Process). However, companies are expected to ofer high-complexity services

including easibility/conceptual studies, geospatial applications, GIS mapping, RoHS compliance, etc.Infrastructure activities have shited rom CAD and drawing/drating work to higher level analysis and

design. Over the next decade, services will include complex activities like architectural conceptualisation

services, welding/materials engineering, etc. Ofshore services in Industrial Automation consisted

mostly o debugging, testing, and low-level mechanical design. Currently a large amount o sotware



Conclusion

ER&D is strategic to India and has the potential to bring a steep change to the Ind

services market has played an important role in developing the ER&D capabilitie

now an emerging epicentre o the global ER&D market with more companies e

or uture growth. It is important or major stakeholders o this industry – In

associations including NASSCOM and the industry – to ensure the growth tr

and moving it to the next level o product development.

Concentrated nature o engineering sets the ER&D services market apart rom

Globally, 400-500 customers account or 80 per cent o the ER&D spend. The

urther varies by vertical – there are ewer companies with large ER&D spend in

compared to Automotive, Semiconductors and Consumer Electronics. This m

service providers in India to ocus on building engineering ecosystems to suppo

in specific verticals.

The success, in the space however, varies across verticals – Aerospace, Telecom

Inrastructure engineering have perormed at par or better than expectation

such as Consumer Electronics, Semiconductors, Medical Devices and Autom

behind expectations. Verticals such as Semiconductors and Consumer Electro

o globalisation, and require product and system level solutions that can be

domain knowledge as well as supporting ecosystem – absence o such a pr

revenues in these verticals. In order or India to continue to be the preerred pa

across all industries, it is imperative or the Indian supply base to invest in and

value proposition.

Moving orward, stakeholders will have to take a ocused and clear appr

competitiveness in the ER&D services industry. Building innovation clusters/eco

development, investing in new emerging technologies in industries o strateg

growth o engineering talent in the country in terms o capacity and capabthat mandate minimum share o ER&D services to meet ofset requiremen

and showcasing Indian engineering talent, scale, scope, and delivery models

actions that have been identified or the market growth in the near term.



Documents

Nasscom Booz Esr Report 2010