Engineering Services: An Emerging Niche Market Opportunity

Transcription

1 January 2007 Engineering Services: An Emerging Niche Market Opportunity The engineering services outsourcing market is going to become increasingly difficult to break into over time, especially as cost is not likely to be the most important factor in sourcing a project design. That is good news for the countries that can capture the market early and keep it, but not great for those who wait for the market to mature. This publication contains copyrighted material. Please do not re-use or reprint anything within this document without written consent from Tholons, Inc.

2 Engineering Services: An Emerging Niche Market Opportunity Engineering services refers to the creation of a new product or processes. This includes designing equipment, infrastructure and processes involved in manufacturing these kinds of products or services. In order for companies to remain competitive they must be dynamic and open to change. Engineering-services outsourcing has doubled since the 1980s from scanning and digitization of drawings to new product development, valued engineering and engineering consulting. Engineering services outsourcing is a large market. Tholons estimates that the spending on engineering services of $750 billion in 2004 has grown by about $30 billion to $780 billion in 2006, and is projected to reach $ 1.1 Trillion by Engineering services outsourcing (ESO) is already being done today on a global basis, like many other business functions. Engineering Spend by Sector (2006 & 2020) Others Industrial Technology Chemicals Pharma Utilities Construction Aerospace Automotive Industrial Automation 8 11 Medical Developments Computer Systems Telecom Consumer Electronics Semi Conductor Spend (in Billions) Source: Tholons 2007 Tholons 2 of 9

3 Thirty-six percent of companies surveyed by Booz Allen Hamilton and Duke University s Center for International Business Education and Research sent some of their engineering offshore, while 31% offshored some Research and Development (R&D) and 16% outsourced a portion of their product design. The competition for these advantageous opportunities is expected to be fierce among Asian countries, especially between India and China. Previously, companies focused on cost reduction by offshoring lower-value business services. Now, decisions about locating engineering capabilities will turn to strategic drivers to access growing markets and an expanded pool of skilled labor. This will help increase productivity on the whole. Locating engineering services in emerging markets also provides access to a growing market of customers, and can decrease time to market. For example, in the automotive sector companies such as GM use offshoring as a strategic tool to help reduce overall costs. Companies such as Toyota, on the other hand, view the globalization of product development as a way to help open new markets and boost overall productivity and quality. This strategic view is expected to become more popular as a reason for outsourcing in the future. Executives in many industries are starting to believe that sending product development offshore is a smart way to reduce the price tag of creating new products. In turn there is an increased speed to market and an addition to the total quantity of innovation. Areas of Application 1. Product design and technology development: These services range from concept development, to analysis and design, simulation, prototyping and production, testing, and Product Lifecycle Management solutions. 2. Process engineering: These include the use of various tools and techniques to achieve efficiency through optimization of plant (production/delivery facility) set-up and operational costs. 3. Plant (production/delivery facility) design and automation: Starting from plant layout and design for the optimized production (or delivery) process, these services extend through development of automation systems for monitoring and managing production activities, and also to facilitate organizations make faster decisions. 4. Plant operations and maintenance: These services include monitoring, managing and maintenance of plant, equipment, and the associated automation systems. These services form a part of the Enterprise Asset Management services of an organization. 5. Process assessment and re-engineering: These are techniques to reduce operational inefficiencies through continuous performance assessment of the processes, and re-engineering them. Looking at the market today, the cost differential between professionals in both advanced and developing countries is declining. Wages for highly skilled professionals are rising in most of the emerging markets. This is important as it highlights the fact that outsourcing vendors will have to 2007 Tholons 3 of 9

4 compete without a drastic cost advantage against service providers in other low-cost countries and with countries such as the U.S.A., Germany, and Japan. There are some similarities between engineering services outsourcing, ITO and BPO; however, engineering services outsourcing requires a highly specialized talent pool. Therefore, increasing the number of engineers to deal with a problem is not a solution. For example, an aeronautics engineer has a different kind of expertise than an automotive engineer, and neither would be able to aid in the designing of a utility plant. Thus, vendors must develop programs around the needs of particular sectors, and planners will have to correctly anticipate what kinds of expertise will be needed most. Global spending on engineering services has been growing at an increasingly fast pace in order to keep up with the augmented emphasis on new product development and innovation. The high consumption of engineering services is a function of growing demand, higher number of engineered parts (for example, electronics in cars, products to improve safety in the automotive and aerospace sectors) and a consumer base with ever more demanding consumers. The engineering-services market can be broadly divided into six sectors: Automotive, Aerospace, Naval, Hi-Tech/Telecom, Utilities and Construction/Industrial. These sectors together represent a high percentage of the funds spent on global engineering. Oslo Krakow Dukovany Moscow Petah Tikva Suez Beijing New Delhi Ulsan Nanchang Taipei Shenzhen Guangzhou Chennai Samutprakarn Bangalore Rayong Singapore Sao Benard do Campo (Sp) Pretoria Automotive Engineering Aerospace Engineering Naval Engineering Hi-Tech Telecom Utilities Industrial/Construction Engineering Automotive engineering encompasses the designing, manufacturing, operation and maintenance of automobiles, buses and trucks and their respective engineering subsystems. Some of the top cities for automotive engineering outsourcing are: New Delhi (NCR), India Rayong, Thailand 2007 Tholons 4 of 9

5 Sao Benard do Campo (Sp), Brazil Take for example Rayong, Thailand. It is one a superior cities for automotive and mechanical manufacturing. Thai workers are known to be fast-learning and adaptive. The mechanical engineering industry in Thailand, which deals with design and development of industrial devices, has improved significantly over the last 30 years and is moving towards a world-class standard. This strongly supports the growth of the automotive industry which currently attracts huge foreign investments. General Motors and Honda have manufacturing and design units in Rayong. Aerospace engineering includes research, design, production, manufacturing and operation of aircraft, spacecraft, aerospace equipment, satellites and missiles. This sector can be sub-divided into defense, engine, avionics and structure. Some of the cities that are superior for aerospace engineering outsourcing are: Moscow, Russia Nanchang, China Pretoria, South Africa Russia is associated all over the world with airplanes, and this is not without good reason. Moscow manufactures and designs the largest number of airplanes in the world and also exports them the world over. Half of all Russian students major in science and mathematics, which is 20 % more than in China and around 50% more than those in India and the USA. Moscow has more personnel working in R&D than any other country. Boeing and Airbus have R&D units in Moscow. Kravchenko, Sukhoi, Antonov and Tupolev are a few of the airplane manufacturers in Moscow who export airplanes and airplane parts all over the world. Naval engineering includes the conception, designing and construction of ships, offshore structures, and other marine vehicles. A few top cities for outsourcing of naval engineering are: Guangzhou, China Oslo, Norway Ulsan, South Korea Guangzhou, China is one of the three biggest shipbuilding bases in China. It is also one of the places where the ship building industry is developing the fastest in the world. There are several advantages that make Guangzhou one of the primary cities for shipbuilding, including its location. It is the central city of the big Pearl River Delta that encompasses Hong Kong, Macao, and the Guangdong Province. Guangzhou's shipbuilding industry possesses good physical conditions and human resource foundations. Its shipbuilding industry has strong technical capacity. Caterpillar is one of the companies that has a shipbuilding unit in Guangzhou. Others include the Guangzhou Shipyard International Co., Ltd. (GSI), Guangzhou Wenchong Shipyard Co., Ltd. (GWS), Guangzhou Huangpu Shipyard Co., Ltd. (GHS), and Guangzhou Marine Engineering Corporation (GUMECO) all of which build ships for the rest of China and other countries like Japan. Hi-Tech/Telecom is one of the sectors leading the growth of spending, and is driven by the high pace of new product introduction and the global nature of their products. Hi-tech or electrical 2007 Tholons 5 of 9

6 engineering is the application of the laws of physics governing electricity, magnetism and light to develop new technologies. These technologies are then used to create computer technology and software, neon lights, cordless telephones and refrigerators. Electrical engineering includes the following different areas or specialty: Communications, Computer, Electrical, Electromechanical Systems, Electronic Systems and Software. The top cities for hi-tech are: Krakow, Poland Shenzhen, China Taipei, Taiwan Krakow's service sector is growing rapidly and the city of just under a million people is fast becoming a very important scientific, educational, administrative and financial centre. The city's scientific and research potential is huge. It has 15 tertiary colleges and over 140 research centers, around 100 R&D institutes and 160,000 university students. The Krakow Special Economic Zone - Krakow Technology Park (SEZ KTP) epitomizes the city's drive to become a key European center for hi-tech industry. The tech park was set up to offer special incentives and tax breaks for investors in the sectors of IT, telecom, engineering, health care, medical and genetic engineering, biotechnology and environmental protection. Monster.com opened a customer-support center in Krakow, and online marketplace ebay is rolling out a new Polish Web site to take advantage of booming demand for online shopping in the region's largest country. IBM also has an R&D center in Krakow. A few of the top outsourcing locations for telecom are: Bangalore, India Petah Tikva, Israel Shenzhen, China Bangalore, India is a great location for telecom outsourcing. Moderate climate, good labor relations, excellent education and research institutions, good telecom connectivity, and investor perception are just some of the reasons that make Bangalore a popular destination. Nortel, Alcatel, Nokia, & Cisco are just a few the big names in the telecom sector with large facilities in Bangalore. Utilities, or mechanical engineering as it is commonly known, are concerned with the design, construction and operation of power plants, engines and machines. This can be divided into heat utilization and machine design. Heat utilization involves the generation, distribution, and use of heat for boilers, heat engines, air conditioning, and refrigeration. Machine design is concerned with hardware, including that which makes use of heat processes. The utilities sector is largely private, while a little less than 50% of construction/industrial machinery is private with the rest being government sponsored. Some of the top cities for utilities engineering are: Dukovany, Czech Republic Singapore City, Singapore Suez, Egypt 2007 Tholons 6 of 9

7 Singapore already has become a BPO offshoring hub, whose spokes extend to India, China and the Philippines, and some day could reach out to Sri Lanka and Vietnam. Singapore has a far smaller population but it has deeper ties to the West, including a free trade agreement with the U.S., and a highly advanced transportation and internet infrastructure. Singapore also has sophisticated managerial talent attuned to Western standards and provides a standard of living that is more attractive to expatriate Western managers than some locations in India. There is a large number of power supplying companies in Singapore, which primarily provide power and energy to many parts in the US. Some of these companies are, APS Energy Services, Caltex Energy, WPS Resources Corporation, and Dayton Power & Light Co. Industrial/Construction engineering encompasses the planning and management for construction of structures such as highways, bridges, airports, railroads, buildings, dams and reservoirs. It also involves the design of structures, temporary cost estimation, planning and scheduling, procuring materials, selecting equipment and cost control. A few of the top cities for industrial and construction engineering outsourcing are: Beijing, China Chennai, India Samutprakarn, Thailand Chennai, the capital Tamil Nadu, is not a new player in the outsourcing industry. Some of Chennai's plus points include high connectivity, land availability, and a low attrition rate of 7-13% (compared to % in cities like Bangalore, Mumbai, and Hyderabad). India's IT sector has grown at 28% annually, while Chennai growth has been 60%. Much of this success can be attributed to the Electronic Corp of Tamil Nadu (Elcot), which is the state government's main agency for promoting IT investments in Chennai. Tamil Nadu has an IT friendly government and was the first state in the country to come out with an IT policy in It has set up IT parks and made space available for expansion. Infrastructure facilities in the state capital of Chennai are among the best in India. Being one of the best connected states, with a fiber optic network of more than 14,000 kilometers, it holds an enormous amount of attraction for investors. Larsen & Toubro Limited is one of India's leading engineering and construction companies, and its Engineering Construction and Contracts Division (ECC) is India's largest construction organization. L&T s ECC with its track record of sustained leadership over 60 years, provides Engineering Services to the international market through its Global Engineering Services (GES). GES is expanding its offshore Engineering Centre in Chennai to cater to increasing international market needs. As the demand for engineering talent grows, emerging market countries such as India and China will play an important role in the expansion. Aside from the cost-cutting factor, the primary focus of companies is to gain a competitive advantage in the marketplace. However, other nations piloted by China present a viable threat to the growth of engineering services in India. A recent survey of the attractiveness of offshoring locations found that 46% of companies identified China as a future resource, compared to 26% for India, 13% for Latin America and nine percent for Eastern Europe Tholons 7 of 9

8 Within the developing world, a number of countries are likely to take part in the growth of engineering process outsourcing. Countries that can provide low-end services are likely to include countries like Nigeria and Vietnam that are new to the BPO market. When it comes to high-end, complicated tasks, however, the most likely scenario is that India and China will take home the most contracts. Certain cities in Thailand such as Bangkok and Rayong have developed a strong cluster of automotive players, and are in a good position to obtain future automotive engineering outsourcing. Israel has the required skill set but is severely lacking in terms of scale. Other growing countries that could become possible competition for India and China in the future include the Czech Republic, other countries of Eastern Europe, and Russia because they have the required skill sets especially for product design and R&D. However, it will take some time before other countries can become serious competition for India and China due to lack of scalability. China is likely to be a formidable competitor for India. India has the advantage in terms of English-language skills, cultural compatibility with the West, a robust political and legal system, and relatively strong protection of intellectual property, while China has a much stronger infrastructure and a well-developed manufacturing base. Conclusion Until the recent past, engineering services offshoring was combined with either IT services or BPO services. However, the increased demand and disintegration of core activities being ready for outsourcing translates into this segment needing special treatment. The current $750 billion industry is set to become a $1,100 billion industry by As with any market, the engineering services outsourcing market is going to become increasingly difficult to break into over time, especially as cost is not likely to be the most important factor in sourcing a project design. That is good news for the countries that can capture the market early and keep it, but not great for those who wait for the market to mature. Some countries, like India for instance, are under a lot of pressure to enter and retain the engineering services outsourcing market. If they are not able to enter the market early and keep it, they will lose their relationships in the ITO and BPO sectors as well. Companies will only see India as an intermediate cost-saving measure, and will therefore look for other cheaper alternatives. While cost control remains a primary concern, companies are also looking for access to a highquality talent pool that can grow engineering capacity and increase productivity. Locating engineering services in emerging markets also provides access to a growing market of customers, and can decrease time to market. Offshoring of engineering services is different from BPO. The emerging markets that can put infrastructure, skilled labor and a positive environment into place will be able to grow and obtain the largest market share Tholons 8 of 9

9 About Tholons Tholons is a Services Globalization and Investment Advisory firm that combines "Best of Breed" consulting experience with deep execution expertise and investment insights to deliver truly effective services to its clients. Tholons offers a detailed understanding of business processes and combines it with practical hands-on expertise in executing the strategy. Tholons draws upon the considerable experience of a handpicked team, which has successfully formulated and executed globalization strategies to unlock value for Global Fortune 1000 companies. Service providers leverage Tholons expertise to optimize their global delivery model. Tholons advisors engage with government bodies to build compelling strategies for making countries attractive destination for outsourcing. THOLONS Global Offices Author: Skanda Janakiram Editor: Avinash Vashistha Chairman & CEO For more details about Tholons' Services Globalization and Investment Advisory capabilities, please visit our website at: You may also contact: Jessica MacKenzie Director, Marketing and Public Relations jessica@tholons.com US: North America Office 3130 Fairview Park Drive, Suite 500 Falls Church, VA 22042, USA Phone: Fax: Europe Office 2 Crawford Farm, Ray Mill Road East Maidenhead, SL6 8SU Berkshire, UK Phone: Asia Office 2/10, 2nd Floor, 80 Ft Road RMV Extension Stage II Bangalore , India Phone: Philippines Office 46th Floor, Yuchengco Tower RCBC Plaza, 6819 Ayala Makati City 1200, Philippines Phone: Tholons 9 of 9