Zinnov released an interesting whitepaper on the ‘R&D Engineering Services Market in the U.S’. The whitepaper pegged that the Annual R&D spend of companies headquartered out of North America stands at USD 255 Billion, making it 41 percent of the total Global R&D spend and continues to outpace other geographies. It also added that the West Coast dominates the R&D spending in US and presents larger opportunity for ER&D services.
Telecom, ISV and Automotive are the most mature and competitive verticals amongst service providers. The Zinnov whitepaper listed top trends that are redefining ER&D Outsourcing in the U.S and highlighted:
1. On the sell side, The US Market still presents a large growth headroom for Product Engineering Services (PES) companies, with only USD 12Bn being currently addressed across PES companies from India, local US, China and Europe.
2. Indian PES companies have more than one-third share of this market and engage in highly mature outsourcing models such as ODCs, Managed Services and Solutions delivery. Also,many of them have developed strong IPs/Frameworks/ Solutions to accelerate Product Development lifecycle and Time to Market for customer products.
3. Local US companies address about half the market but bulk of this is purely staffing work for customers. These companies will witness heavy headwinds in the future as their customers explore mature outsourcing options and also with their competition such as Indian, Eastern European PES companies setting up US delivery presence augmented by a local staffing engine as well.
4. European PES companies who lead the PES companies pack globally are conspicuous in their minor US market presence. Some of them are taking steps to address this by growing organically and inorganically through acquisitions in this space. A coherent, serious push by any of these European players is yet to be seen but is something that could give the established players tough competition in select areas in the medium term
5. Accelerated time to market is the prime reason for outsourcing and thus outsourcers are preferring vendors with strong IP portfolio. Companies headquartered outside US especially in the Automotive and Aerospace verticals are scaling up their technology centers in USA and driving outsourcing through US centers: Traditionally Insular Companies are investing in US Technology centres and driving R&D Services Outsourcing through US technology centres.
6. Large partnerships to support product localization in emerging/newer markets are being forged between outsourcers and service providers: Enterprises are collaborating with Global Service providers to build localized products for Emerging markets through : ODCs Captive Set ups Joint Ventures.
7. Select PES players are investing in building long term relationships with R&D spenders through 360 degree multi product partnerships: 360 degree partnerships with vendors where Service Providers are directly involved with client in an immersive co-engineering relationship. Also, involved in selling and post sales support of customer products.
Commenting on the US ER&D market, Sidhant Rastogi, Partner-Zinnov, said, “The charm and scale of US as the largest PES outsourcing market still remains. There is also significant headroom to grow. However the growth will not be driven by traditionally mature outsourcing verticals like Telecom and Semiconductor but in verticals that are witnessing secular trends such as Automotive – embedded and software is changing the complexion of R&D within the companies, O&G – the consistently low crude prices will force the oil majors and oil services companies to finally engage in mature outsourcing models and not just local staffing companies".
"On the sell side, Indian PES companies are also waking up to the need and necessity of having local onshore delivery (near customer locations) along with a staffing engine to place people in proximity or at customer locations. They have seen some early success in gaining share from the local companies who currently have half the market share, he added.”
In conclusion the US market is extremely attractive but at the same time very complex. On one end, customers expect proximity with engineering teams as they are increasingly working in ‘Agile’ mode. On the other hand customers are demanding both mature engagement models such as outcome based models and also expecting PES companies to come in with accelerators or IP based solutions. The market will also witness a growth of companies from the China and Europe market. The winner will be one who can pick the right segments to go after and back it up with the winning delivery models. Definitely a market to watch closely
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