A $100 bn opportunity for engineering R&D

India has an expected business potential of US$ 100 billion in the engineering R&D sector in the coming years, which could create additional employment for 1-1.25 million people. In order to capitalise, India needs to build its expertise in digital technology  and establish its credentials as a destination for software product sourcing.

R&D in any sector improves the current technologies and develops innovations that help a firm strengthen its position in the marketplace. To put it plainly, the competitive worth of a product depends heavily on the research that goes into building it.

As IT services are moving towards cloud-based strategies to deliver services and engage customers, they face rising competition to stay relevant in the world. Innovation has become key to survival and success. The level of competition can be imagined from the shrunk lifespan of S&P 500 companies from 36 years to a projected 12 years in 2027 according to Innosight’s Bienniel Corporate Longevity Forecast. The solution that companies are striving to sustain in this era of creative destruction is innovation. In this context, the role of engineering R&D services becomes extremely critical across industry verticals.

The global scenario

Global expenditure on Engineering R&D stood at US$ 1.36 trillion in 2019, which is projected to grow at a CAGR of over 7% to reach US$ 2.2 trillion by 2025. Driven by software and internet vertical segment growing by 21% with US$ 196 billion worth of spending by giants like Amazon, Alphabet, Microsoft, Facebook, and Oracle, the ER&D arena has left the IT sector way behind. Despite being a sub-segment of IT-BPM (Information Technology- Business Process Management) segment, it won’t be too off-the-mark if we changed the nomenclature of IT-BPM to IT-ER&D, in fact, it would be more realistic.

The global legacy ER&D spending which was US$ 899 billion in 2013 has risen hardly by a percent. But the digital engineering spending component rose at a CAGR of 12% from 2013-2019, and is projected to rise at a CAGR of 19% till 2025. By the year 2025, it is expected to form 53% of ER&D spending; making it a key driver of growth in the sector.

Data source: Zinnov Zones 2019 ER&D Services, Figures in US$ billion

The surge in the eminence of digital engineering is unsurprising, given the need for firms to create a differentiated product irrespective of the vertical. The spending in digital engineering increases velocity in product development, enhances product ownership experience of the customers, and helps firms in generating alternative sources of revenue along with a product portfolio that allows them to stay relevant. Furthermore, a surge in tech giants and start-ups working in the digital space, and technology growth that’s in pace with innovations in business models has resulted in an increased emphasis on digital products, services, and solutions.

Data source: Zinnov Zones 2019 ER&D Services, Figures in US$ billion

Where is India in this race of ER&D?

India is the largest exporter of engineering R&D services in the world. The recent NASSCOM projection of engineering R&D crossing US$ 1.5 trillion by 2025-2026, with US$ 200 billion coming through outsourced services, brings in hope for better days ahead. This could come as a US$ 100 billion opportunity for this largest exporter of ER&D services.

Despite the COVID-19 reversals throughout the world, India’s ease of doing business, IP protection, technical excellence, a large pool of engineers, demographic advantages and quality infrastructure have helped it retain a competitive edge in the sector. This became clear when India surpassed China in attracting funds for ER&D in 2019. Out of a total US$ 100 billion spent globally on outsourced ER&D, India received close to US$ 32 billion and manifested as a better ER&D destination than China. Ascribe it to our English speaking, engineering talent that gives a cost as well as a quality advantage, but India is a haven to more than 1,250 global capability centers (GCCs). Some of of the largest MNCs have established their R&D operations in India, including Samsung, Intel, Airbus, Bosch, and Boeing.

In 2019, India employed 700,000 people in ER&D sector. But the projected surge of US$ 100 billion in the coming five years can result in an additional employment for 1-1.25 million people. But this target will require India to focus on accelerating its capability building in the arena of digital engineering – the key driver of ER&D space. English proficiency has definitely acted as an advantage, but restricted access to the English world.

In order for our innovation to find space in foreign lands like Japan and Germany, fluency in their native languages apart from English is a must. To become a global powerhouse of ER&D services and innovation, and to move up the ladder on global innovation will also require quality engineers capable of creatively applying the latest and emerging technologies. India also requires a product culture for which the availability of skilled talent in product management will be value addition. Lastly, India which has an image of being a service outsource destination requires to establish its credentials as a product destination as well.