India's Growing Influence in the Global ER&D Sourcing Market

The global ER&D (Engineering Research & Development) market was valued at US$ 1,811 billion in 2022 and is positioned to achieve US$ 2,672 billion by 2026, according to a report by Zinnov. This increase highlights the sector's resilience amid economic challenges and its critical role in fostering innovation across industries. A significant driver of this growth is the surge in Digital Engineering spending, growing at an impressive 20% annual growth rate, reflecting the industry's shift towards integrating advanced technology like AI and cloud computing into the engineering processes. Amidst this evolving landscape, India has grown to be a key player in the global ER&D ecosystem. With over 1,440 Global Capability Centres and close to 3 million skilled engineers, India offers a combination of a vast talent pool, cost competitiveness and a strong government support for Research and Development (R&D). These are gradually evolving into innovation hubs leading to innovation in the automotive, healthcare and manufacturing sectors.

The global ER&D landscape

The global ER&D market caters to a range of services, including software, embedded, and mechanical engineering for the design and development of products for commercial sales. Key players include large corporations and GCCs, which contribute to the advancement of product and process development. Digital Engineering, for instance, has gained prominence. Valued at close to US$ 810 billion in 2022, businesses are investing in the latest technology like IoT and AI, cloud solutions to enhance efficiency and grab the competitive advantage in the market.

Several trends distinctly mark the global ER&D market. First, there is a strong focus on sustainability wherein enterprises work towards energy-efficient designs and clean energy transitions to realise their ambitious goals of carbon neutrality. Shrinking innovation cycles are forcing faster product development, compelling firms to streamline processes and use advanced engineering solutions. Products are becoming increasingly complex; meeting the evolving consumer expectations will require sophisticated engineering approaches. Moreover, Generative AI is constantly changing the landscape. This enables better engineering efficiency for intelligent products that adapt to users' needs. As industries face macroeconomic headwinds like inflation and geopolitical tensions, strategic commitment to resilience calls for sustained investment in ER&D. This focus on innovation not only drives technological advancements but also plays a crucial role in fostering global economic growth.

Source- Zinnov, E- Estimated

India’s position in ER&D

India’s emergence as a major hotspot in the ER&D sector started when liberalisation in the early 1990s opened up the country to foreign investment and technology. This shift allowed Indian companies to establish Global Capability Centres (GCCs), capitalising on the country's vast pool of skilled engineers and IT professionals. Over the years, initiatives such as "Make in India" and "Digital India" have whetted India's position by promoting manufacturing and digital transformation, making it a hub for ER&D outsourcing.

Current statistics highlight India’s leading role in the global ER&D landscape, with projections indicating that it will contribute around 22% to the global ER&D sourcing market by FY30 (according to Hindu Business line). This will increase the market size from US$ 44-45 billion in 2023 to US$ 130-170 billion by FY30, growing in the software, automotive and semiconductor industries. With an estimated CAGR of 8-9% in ER&D spend between 2023 and 2030, India will be well-placed to capitalise on the emerging demand for digital innovation and sustainable solutions.

Compared to other countries, India stands out for its strengths in software development and digital engineering, especially as industries worldwide shift toward software-driven solutions. While China leads in hardware and manufacturing, particularly in electric vehicles, India focuses on enhancing its design capabilities through initiatives like "Design in India". In the future, we will see important international collaborations. This will allow India to combine software skills, become a challenger in the ER&D landscape and position itself as a prospective Global ER&D hub.

Source- Mordor Intelligence

The Indian ER&D services market is projected to grow from US$ 121.27 billion in 2024 to US$ 197.66 billion by 2029, reflecting a compound annual growth rate (CAGR) of 10.26% during this period. This growth is partly supported by India's good educational infrastructure, its significant supply base of skilled engineers, and government initiatives toward manufacturing and digitisation under "Make in India" and "Digital India.” Besides that, the demand for ER&D services is increasing across industries, especially the automotive sector, where continuous efforts toward electric vehicles and the development of connected technology is boosting the pace of investment. Some key players in the market are HCL, Infosys, L&T Technology Services, Tata Technologies and Wipro, among others that contribute to the growth of the sector.

Government support

The Indian government made significant strides in promoting R&D across various sectors, including ER&D. This commitment is reflected in the steady increase in R&D expenditure, which rose from 0.6% of GDP in 2014 to approximately 0.8% in 2020, although it still lags behind the global average of 1.7%. Initiatives such as "Make in India" and "Digital India" have been pivotal in fostering a conducive environment for innovation, encouraging local manufacturing, and enhancing digital capabilities. Additionally, the establishment of the National Research Foundation aims to streamline funding and support for R&D projects, bolstering India's position in the global ER&D landscape.

To further strengthen this ecosystem, the Interim Budget for 2024-25 announced a substantial corpus of Rs.1 lakh crore (US$ 12 billion) dedicated to enhancing research and innovation across the country. This funding intends to address the challenges of low private sector involvement, which currently contributes only 36.4% of the total R&D expenditure. The government has recognised the need for stronger collaboration between academia and industry, launching programs to bridge this gap.

Future trends and opportunities

• Emerging technology:
  • A rapid evolution in ER&D, driven by digital engineering, AI, IoT and renewable energy.
  • India is positioned to leverage these trends through digital solutions that enhance efficiency and innovation.
• Growth sectors:
  • Artificial Intelligence (AI): Exponential growth in applications operating in predictive maintenance, automotive systems and more.
  • Internet of Things (IoT): An expanding market which focuses on device connectivity and operational efficiency improvements.
  • Renewable energy: Significant opportunities driven by global sustainability goals and regulatory pressures on reducing carbon.
  • Investments in R&D for solar, wind and other clean technologies.
• India's future role:
  • A strengthening position in the global ER&D market over the next decade.
  • An anticipated increase in global ER&D spending provides India opportunities to attract international clients.
  • The ability to capitalise on cost advantages, a skilled workforce and supportive government policies.
  • A shift towards outsourcing ER&D to enhance innovation aligns with India's established reputation in IT services.
  • Emphasis on robust internal processes and fostering a culture of innovation to maintain leadership in the global ER&D landscape.

Conclusion

India has emerged as a pivotal player in the global ER&D market, which is projected to grow from US$ 1,811 billion in 2022 to US$ 2,672 billion by 2026. Leveraging its vast pool of over three million skilled engineers and cost-effective operations, India is well-equipped to meet the rising demand for innovation driven by digital engineering, AI, IoT, and renewable energy. Supported by government initiatives like "Make in India" and "Digital India," the country is positioned to capture a significant share of the global ER&D sourcing market, potentially contributing 22% by FY30. As industries worldwide increasingly prioritise outsourcing to enhance innovation, stakeholders are encouraged to engage with India to harness its strengths and drive collaborative advancements in ER&D.