India has evolved from being a zone offering cost arbitrage opportunity to a zone offering value.
Engineering services outsourcing is very different from IT outsourcing or BPO in the sense that it requires strong domain expertise which is considered to be the core difference. You are really getting into the product design of a company, giving away your product design, your competitive strengths and company’s secrets. So, engineering services outsourcing was something that did not catch on 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 about outsourcing engineering services to India. The change in the outlook of companies towards outsourcing engineering services to India had a strong reason behind. In engineering, there are hundreds of things that have to go before the product is designed. The core part is definitely not more than 15-20% of the whole and the other 80%, if managed properly, could be outsourced.
So, it was in around 2000 that engineering services outsourcing really took on. But the automobile sector was slow to pick up. Auto industry has not outsourced engineering services to India well. The primary reason being the Indian companies couldn’t offer true end-to-end solution and were concentrating only on the low-end part and not really on integrated solutions. They lacked the expertise to take care of the entire subsystem design which the auto industry wanted.
There are three things that the companies look out – quality, value and domain expertise. The first thing these companies look for is quality because cost really doesn’t matter without quality. There are two ways of looking at it. Is it price or is it value? The first thing to look for is quality and value follows. It is unfortunate that sometimes the industry is driven by price. Price is very important, but the company’s reputation in terms of quality is at stake. The other thing they look out for is domain expertise. Domain expertise is really the key. To put it simply, engineering is a bunch of processes. First you conceptualise the product, then put it on paper, you do the analysis and enhancements. You can do these processes one at a time. Indian companies do these processes as good as the US companies and at a cheaper rate. But what the companies which outsource really look out for is the value offered by the service provider.
All Indian companies meet some or the other ISO standards while most US companies barely have ISO certifications. Still they produce better products than us. Certifications matter but because producing a quality product should be in the mindset of every engineer. Sometimes having a certification actually is negative because you are spending too much time on paper to get yourselves a certification. So companies should concentrate on providing quality services, value and develop domain expertise.
It is not like you can write a specification and you get the final product exactly the same. It is the same in all industries. Being in any technology industry you don’t know what you want to make exactly. You start implementing it and you make course corrections. First is how you manage the process. It is important that client engineers sit with us. Second thing is choosing projects carefully. Third is the global delivery model where we set up our locations accessible to the client. Working closely with the client to establish a relationship will help in solving problems to a great extent. It is also important to know how to communicate the changes to the clients. We have to build good processes with our clients. So, it is the relationship and how closely we work with the client which really addresses the issue.
Further, it is better if we do not take up projects which require a lot of iteration. Companies consciously try to educate clients initially and there is nothing wrong in telling them about the things that we shouldn’t do. But there are some things that can be done very well which should be pursued aggressively. So, choosing projects carefully and efficient process management will help in meeting clients’ expectations effectively.
Yes, it has been a big problem. Yes, we don’t have good infrastructure like China. A tier III city like Chengdu in China has got better infrastructure than Delhi, which probably has the best infrastructure in India. But we have to live with it and really being entrepreneurs and entrepreneurially driven companies, we don’t have a choice but to find a way out and we are doing that. For example, the road outside our company is bad but the infrastructure we create inside our compound is very good. We find ways around the infrastructure. Companies like Bharat Forge, TVS etc., within their factories are as good as any other company in the world. We cannot change the whole infrastructure of India. Bottlenecks occur primarily during the import/export as our roads and ports are not in great shape. Those are things that are outside an entrepreneur’s control. In my opinion, it is fact that within our control, we’ve created world-class facilities. Improvements in infrastructure don’t happen quickly but things are changing. It is a problem, but the problem will get solved and in the mean time we are finding ways out.
Ten years ago, when people first started to come to India, they were thinking of cost arbitrage opportunity. Five years later, the cost arbitrage opportunity became more of a value-based opportunity - India also has a lot of domain expertise, there is a lot of process expertise and manufacturing expertise. So, our engineers have to have that touch, they have to come from a manufacturing background. This became the value proposition. India has just not only cost advantage, it also scores on value, in terms of some high-end work. Today, India has become a big business opportunity i.e. it has become a buyer and a seller. So, companies like Ford and Toyota are not just looking at sourcing components from India or getting engineering services done here because it is cheap; they are looking at it as their next big market. So, when people look at this from both directions, the perspective becomes very different. There are clients who are trying to do India-specific designs. That is the primary evolution as we went from a cost arbitrage to value to a business opportunity. When people look at it as a business opportunity, they do lot more things. They want to look at it as a place where you create more value not just source.
Threat from countries such as China and Taiwan: In the engineering services market, these countries are absolutely no way near India because domain expertise is one thing lot of people talk about but at the end of the day it is very tough. Engineering design is very complex and complicated and these countries are not yet equipped enough to take on us. That is the reason why we need to focus on processes. If we can do the design part and outsource the dying, casting and fabrication part to the Chinese, then may be it’s a good opportunity for us.
Shortage of qualified engineers: It is estimated that only 20% of the 30,000 engineers produced are qualified. So, not all of us get the best engineers. So what we do is design a very robust training process. Companies like ours spend good amounts on training. When we hire freshers we train them, send them to a few manufacturing places, send them to some shop floors and make them see how manufacturing is done.
Consolidation will happen and it’s only a matter of time. The domain expertise lies with the companies in the Western Europe and North America, but the action is happening in India. So it makes sense for any Indian company to buy a western company and vice versa. There are lots of good companies in this sector, but it is very fragmented. So consolidation has to happen and will happen in a similar way as it has happened in the IT industry.
I think it will change dramatically in the next few years. Indian companies have started with some low-end jobs but didn’t stop there. They have moved up the value chain. We’re doing some good work. We are doing a lot of electronics work, we are doing components, but we are also doing subsystems and assembly. However, pure conceptual design is something which will take some time. I think we will see a lot of high-end work being outsourced to India in the near future, in the next 2-5 years. Companies are not looking at India as a mere supplier but as an opportunity (market); they will go above and beyond to make sure it happens. They are keen on building a brand name by doing work here. It is not easy as we have bottlenecks. I think engineering services is a sort of slow evolution it comes down to fundamental issues like clients, IP etc. In my opinion, companies have started doing it and the only way we can continue to do this is by focussing on the things like domain expertise, process expertise and value.
:: Interview conducted by Vinaya Kumar Mylavarapu and Aala Santhosh Reddy ::
Keywords: Engineering services outsourcing, Automotive Engineering Services, Outsourcing, Business Process Outsourcing (BPO), Outsourcing market, Cost arbitrage, Indian Engineering Services, Domain Expertise
