Engineering Services Sector Remains The Bright Spot Despite Near-Term Challenges

Indian engineering services companies are witnessing a mixed set of demand environment. While segments like sustainability are showing growth uptick, others like automotive, a critical vertical for most engineering services, are caught in a slowdown. However, due to slowdown in sales, automotive players are looking at spending cut. For instance, reports indicated that German major Volkswagen is considering closing several plants back home and slashing salaries by 10 per cent as the ailing auto giant pursues a drastic cost-cutting measure. Towards this, Europe's biggest carmaker has been negotiating for weeks with unions over its plans to overhaul its business and lower costs. Apart from Volkswagen, many other European automakers are also braving slowdown as Chinese carmakers are aggressively bulldozing into the European market. This problem has been aggravated with less than expected pick up in the electric vehicle space. Many automakers had transitioned into EV space aggressively on the expectations of faster adoption by buyers, which, alas, has not been happening. The adoption level of EVs is rather tepid across several geographies including India.

Against this backdrop, many engineering, research & development (ER&D) players have started to witness client-specific issues. This has been flagged by key engineering services players in their second quarter earnings. “The mobility industry, especially the automotive sub-vertical, has been under pressure to keep up with the changing regulations, reduce cost of vehicles and meet demands of the ever-changing consumer preferences in recent times,” said Kishor Patil, co-founder and CEO of KPIT. Many other engineering services companies like L&T Technology Services and Tata Elxsi, among others, have also raised concerns over slowdown in key segments. Even cyclicality has started to play a role in recent quarters. That is the reason for many engineering services companies caught in ramp downs in other verticals. Despite this growth slowdown, overall revenue growth of Indian engineering services companies remained better than the IT services companies. After all, engineering services segment is a bright spot in the overall IT industry. As more software applications get embedded in electronics items, the growth of engineering services industry is likely to stay in the coming years.

That is the reason why many IT biggies have built up their capabilities in the engineering services space through acquisition. For instance, Cognizant has acquired Belcan for $1.3 billion, while Infosys has acquired German automotive engineering firm, in-tech for $480 million. Similarly, HCLTech has acquired German automotive engineering firm ASAP for $280 million. Not to be left behind, many mid-tier firms have also built up capabilities through acquisition. In the meanwhile, semiconductor space has emerged as the new growth area for engineering services companies in recent time. Infosys’ acquisition of InSemi is an indicator of the level of interest placed by IT firms in tapping this emerging area. Mid-tier engineering services company Cyient has carved out a separate unit focussed on semiconductor sector. In this perspective, it can be safely said that engineering services sector remains a growth spot, albeit some near-team headwinds.