With engineering R&D (ER&D) service providers in India investing in enhancing capabilities, there has been a marked change in customer perception towards service providers. Companies are no longer offshoring to leverage the cost benefits, but are also working with their service providers to leverage and design their products, a concept which is known as frugal engineering.
“Local product development is a crucial ingredient to success. A company that wants to do business in India cannot just take its home-grown design and deploy it in India. They have to design for India. This is where frugal engineering comes into play,” says Steffen Lauster, partner Booz & Co.
It is estimated that the share of foreign ER&D sites of companies will increase from 72 per cent in 2008 to 85 per cent in 2015. Industry players say while customers still leverage their supply base largely for sustenance and maintenance of existing products, with the shift in growth towards emerging markets, they are increasingly looking to their supply base as an innovation hub. This is evident from a shift in the Indian service providers' portfolios.
In 2005-06, 95 per cent of the portfolio was dominated by traditional ER&D services. By 2009, 20 per cent of the portfolio consisted of higher-end, non-traditional services such as proto-typing, tooling, manufacturing support, programme management and supplier management. Low complexity services like CAD, CAE accounted for 70 per cent of the portfolio in 2005-06 which came down to 50 per cent in 2009. This is expected to further drop to 40 per cent by 2020. High complexity services like product development and middleware development is expected to account for 25 per cent by 2020. This proportion could be even higher in verticals like telecom, semiconductors, consumer electronics, computing systems and medical devices.
Some examples of companies designing products for local markets are LG's washing machine with speech recognition, Samsung's washing machine with sari cycle and Nokia's handsets with flashlight for rural markets. “Earlier, the word ‘frugal’ had negative connotation but is now an important concept,” says Lauster. Industry players say that the concept is gaining prominence since it provides benefits like low cost design with targeted content, value chain optimisation and capital efficiency.
According to a report on global ER&D by Nasscom and Booz and Co, in addition to India, China, central and eastern Europe, Asean, Brazil, South and North Africa are the preferred destinations for ER&D services sourcing. Indian companies have typically retained ER&D in-house. It is estimated that less than 5 per cent of the companies utilised ER&D service providers in 2005-06 and the number grew to 10 per cent by 2009-10.
However, as Indian companies move from manufacturing products for the local market to catering to global market, the complexity and amount of ER&D workload is expected to increase.
“Within the Indian market, drivers for outsourcing are quite different from global drivers of off-shoring. Indian customers will outsource to gain access to flexible ER&D capacity to reduce time-to-market and new technologies,” says the report.
