India’s outsourced engineering R&D sector set for strong growth

Global spending by engineering groups on research and development (R&D) is expected to rise this year, and that trend will trickle down to India’s sizeable outsourced engineering research and development market, according to a new report by NASSCOM and Deloitte.

The report, which canvassed the views of over 100 leaders in the engineering space from 19 countries, found that 80 percent of the surveyed companies expect their global engineering R&D spend to increase this year. More than 8 out of 10 also indicated a continued upward trajectory in budget over the next three years.

Respondents came from a range of capital-intensive sectors that reply on R&D to optimise their engineering and innovate, including automotive, transportation, hardware, electronics, energy, aerospace, and telecom.

The rise in spending is expected to be between 3% to 5% per year on average, with more than half of surveyed companies expecting their 2024 spend level to be between 10-20 percent higher than the level in 2021, as companies navigate a wave of disruption (for example: supply chain issues) and technological advancements (for example: Industry 4.0), while accommodating for changing consumer and industrial preferences.

While a liquidity crunch was the top challenge facing engineering groups last year, this year supply chain disruption leads the pack, followed by two factors that stem from the accelerating pace of change companies have to deal with: rapid technological progress and the need for shorter innovation cycles.

From an investment perspective, short-term priorities, such as employee safety, focus on core business, and cost optimisation that companies were devoting their attention to during the height of the Covid-19 pandemic, have now been replaced with more long-term and holistic goals, such as customer centricity, innovation and sustainability.

From India to the world

When it comes to outsourced innovation services, India is a global leader. According to NASSCOM’s and Deloitte’s study, 85% of the companies surveyed use a Global Capability Centres for engineering R&D, while nearly half make use of an Engineering Service Providers. India is alongside China among the top destinations for outsourcing.

“India continues to be the destination of choice due to the availability of key skills and talent at scale. India also has favourable government incentives, eminent universities to source talent from, and a cutting-edge start-up culture,” said KS Viswanathan, Vice President of Industry Initiatives at NASSCOM.

With the expansion of engineering research and development no longer primarily based on cost arbitrage, India has been able to expand its advantage vis a vis other markets. “Companies expect their Global Capability Centres and Engineering Service Providerss to take ownership of end-to-end product management lifecycle, effectively moving them up the value chain,” said Viswanathan.

“In India, local institutions are driving end-to-end innovation, product strategy and development, and manufacturing products from India for the world.”

So what are global companies outsourcing to India? Research, software engineering, systems integration, and mechanical design and engineering are the top factors, with artificial intelligence, machine learning, big data, engineering analytics, cloud computing and internet of things the most sought after digital engineering capabilities.

With global demand on the up, India-based players are preparing for growth. About 72% of Global Capability Centres plan to step up their spend in 2022; of these, 50% plan to increase this spend by more than 10%, which is a higher than the rise in global R&D budget. Nearly 52 percent of India-based Engineering Service Providers plan to increase their spend in 2022, and of these, 50% plan to increase spend in the range of 10% to 25%.

Keerthi Kumar, a Partner at Deloitte, said, “The Indian engineering R&D market is projected to grow at a CAGR of 12% to 13% until 2025 and this growth story has been well reinforced by the findings of this study.”

“Globally, engineering R&D in many organisations have started prioritising building a technology ecosystem, developing key skills and talent, and improving the performance by digitalising the end-to-end product development lifecycle. What is interesting to note is that about 40% of such companies, plan to route investments for these initiatives to their Global Capability Centres and Engineering Service Providers in India.”

“India is thus poised to be at the forefront of this revolution, playing a crucial role in augmenting the overall R&D strategy of global companies.”

Co-creation

Building in-house remains the most favourable strategic choice for 70% of the surveyed companies to accelerate their R&D initiatives. However, 80% respondents that have ER&D organisations in India are poised to adopt a co-creation model with start-ups, academia, or competitors to accelerate their initiatives across sectors.

“This co-creation approach has the potential to become a mainstream operating model in the future. This trend is driven by the increasing pressure from the rapidly evolving technology landscape, accelerating innovation cycles, and the rising demand for faster time-to-market,” explained Kumar.

NASSCOM and Deloitte concluded that some caution needs to be taken – both at a global and India level – due to the impact of the Russia-Ukraine war and the resulting pressures on economies and supply chains. “Such Black Swan events have the potential to affect the expected growth trajectory of the engineering R&D industry as seen in the past.”