After a lull of almost three years, multinationals are back to spending on engineering research and development (R&D). The impact of this is showing on the Indian captive engineering R&D centres’ growth.
In last one-and-a-half years, about 39 captive centres were set up by MNCs in India. Some of these were MNCs like Hitachi, Panasonic, Ricoh, Faurecia, Peugeot among others, said a study by Zinnov Management Consulting.
According to the study, ‘Engineering R&D: Advantage India’, India is one of the leading offshore destinations in delivering engineering R&D services with a market share of 22 per cent. The market in India is expected to grow at a compound annual growth rate of 14 per cent from $14.7 billion in FY12 to $42 billion by 2020 and is also expected to outpace the information technology growth rate in India.
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“The period of 2004-08 saw the maximum growth of captive centres in India. At least 15-20 captive centres were being set-up every year. But since 2008, several companies went slow on capex spends, with many putting it on hold. Over the last one year we are seeing spends back, especially to target growth in the emerging market,” said Sundaraman Viswanathan, manager (consulting), Zinnov.
Pari Natarajan, chief executive officer, Zinnov said the current shift to set up captive centres is because of strong focus on emerging nations as target markets across major verticals. For instance, while Europe and North America are currently the leading markets in Aerospace, this is likely to change significantly by 2030, with countries outside these regions expected to own about half the commercial aircraft service.
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Even in the telecom sector for that matter, deregulation in India and China is fuelling the future growth prospects of the industry. Similarly, in the medical devices and consumer electronics segments, markets like India and China are expected to lead the consumption, said the study.
Viswanathan added that the captive centres are also growing in maturity. “Several companies are now setting up centres of excellence for specific verticals. From a services provider landscape, earlier they would depend on certification as a selling point. But now they are moving beyond and looking at partnering with business houses and driving decisions,” he added.
Some of the instances where companies are using their India unit for core research include GE, which has been focusing on areas like material design, electromagnetic analytics, among others. General Motors is focused on smart system modelling, vehicle structure and safety and chemical reaction modelling.
While MNC captives today drive the Indian Product Engineering growth story in almost all verticals except Aerospace where service providers have a 76 per cent share, service providers are upping their game and in fact grew faster in FY2012, at 16 per cent CAGR compared to 11 per cent growth for captives. Rather the product engineering business at the top Indian IT services players like TCS, Wipro and HCL Technologies is already a $1 billion business.
“India is well-poised to contribute to Global ER&D as the ecosystem of captive centres, service providers and startups, increasingly work together to drive innovation. As relationships mature, service providers and customers will enter into pricing models based on market outcomes. Further, with emerging nations growing in importance as key markets, MNCs are set to leverage the inherent competencies in India to build products for local and global markets,” said Viswanathan.