What is common between General Motors, Ford, Toyota, Suzuki, BMW, DaimlerChrysler, Rolls Royce and Volkswagen? Apart from being auto companies, they have outsourced designing, product engineering and high-tech diagnostic systems overseas. Taking the value chain of outsourced services forward, the offshoring industry is looking to tap the $750 billion-a-year global engineering services industry. A product may be “Made in China” or “Made in U.S.A.” but it’s the “Engineered Globally” tag that is up for grabs.

Is Engineering Services Outsourcing (ESO) an IT activity or an engineering activity? Both industries admit it is a lot of both. Nevertheless, some engineering services players think of themselves as an unique category. “IT and ET (engineering technology), are very different, they are two different animals,” says Ketan Bakshi, Chairman and Managing Director, Neilsoft, an India-based outfit that specializes in engineering services.

ESO is very different from IT Outsourcing (ITO) or Business Process Outsourcing (BPO) in the sense that it requires strong domain expertise on the engineering side. But there’s more. When you outsource engineering services, you give away your product design, your competitive strengths and company’s secrets. That’s why ESO did not catch on like a wave for a long time unlike BPO services which caught on immediately after it came to India during mid 1990s.

The late 1990s was when western companies really started contemplating outsourcing engineering services. There are scores of things that have to go before the product is designed. The core is definitely not more than 15 to 20 percent of the whole and the other 80 percent, if managed properly, could be outsourced.

So, it was in around 2000 that ESO really took on. But the automobile sector, which is characteristically design-intensive, still lagged in adopting outsourcing. The primary reason was that no third-party company could offer true end-to-end vehicle design; they could engineer the parts, but creating the whole system required far superior expertise. Hence, the auto companies chose to go captive.

Major Players

IT Firms TCS, Infosys, Wipro, Satyam, HCL, Patni, Infotech Enterprise, Rolta, Geometric, Neilsoft, Quest, L&T Infotech, eServ, Auriga, DataArt, Satyam, EPAM, Infotech, KPIT Cummins

Engineering Companies Spin-offs Hero, Mahindra, Harita, Ashley, Tata Technologies

Captives Caterpillar, Delphi, Ford, DaimlerChrysler, GM, Siemens, Bosch, BMW, Toyota, Suzuki, Rolls Royce, Volkswagen

Engineering firms Bechtel, Flour, Lurgi, Butler

Source: Global Services

Money spent on engineering services was $750 billion in 2004 and is projected to zoom upward to $1.1 trillion globally by 2020, according to a 2005 study by Nasscom and Booz Allen Hamilton. And according to the same study, the total value of global outsourced engineering services — either through captive engineering centers, joint ventures with local companies or through traditional outsourcing deals — will continue to grow at a double-digit rate from a total of about $40 billion worldwide in 2007 to $80 billion in 2010.

What's Your Pick: Captives or Third-party Provider?
There are three things that the auto companies look out for — quality, value and domain expertise. Well, one would wonder what comes first: Is it quality or is it value? The first thing to look for is quality and the value follows as latter doesn’t matter without the former. The other thing they look out for is domain expertise. Domain expertise is really the key factor. To put it simply, engineering is a bunch of processes. So what do the carmakers prefer while outsourcing?

“Global players would use third-party providers to test the waters before setting up their own captive units. The third-party units, with their risks more spread out among customers, are more viable,” informs Lance Travis, VP, AMR Research.

Contradicting his view points, A.K. Jain, Venture Director, Westbridge Capital Partners, said, “A lot of engineering design is done in-house and not outsourced, accounting for the high number of captive centers.” 

Interestingly, even the auto companies seem to be divided on this view. General Motors, which has 11 design centers across the world, is of the view that design is one of the most crucial elements of their business. “And therefore, we will create facilities that provides our designers with the location, atmosphere and tools they need to maximize the creative process and design our future vehicles,” said Carl-Peter Forster, president of GM Europe.

However, in a bid to cut costs, Ford Motor Company (FMC), the world’s third largest car maker, had stepped up outsourcing of components, engineering services and IT-related services from India with their partnerships with Indian providers like Rico Auto.

At the same time, software outfits entering engineering services feel their advantage lies in being able to provide end-to-end services, including any software-tweaking requirements, and that, this would be to their advantage against the pure engineering companies. “Domain knowledge can always be hired,” says Ravi Gopinath, CEO & MD, Geometric.

TCS, which won a deal from Scuderia Ferrari for providing IT and engineering services for the development of Ferrari’s Formula 1 racing car, also has the concept of Global Engineering Design Centers (GEDC). These centers are a “seamless extension” of the customer’s own engineering arm in India.
For the present, however, both the models will subsist.