Why E-R&D is outpacing IT sector

Amid geopolitical tensions, global economic challenges, government protectionism, and ongoing supply chain disruptions, the global Engineering Research & Development (ER&D) sector has demonstrated resilience and growth despite headwinds. It's evident from the substantial increase in ER&D expenditure, with India's share in global business ER&D sourcing expected to rise from $44-45 billion in FY23 to $130-170 billion by FY30. 

This starkly contrasts with the relatively flat performance of the IT sector in recent years, which will grow at 3-4% this year, estimates Amit Chadha, CEO & MD of LTTS, while ER&D will grow around 7%. 

It brings up the question: what is propelling the growth of ER&D vis a vis the IT sector?

The pace of technological change has accelerated considerably, says Chadha. “Earlier the cycle used to be between 5-6 years, today the technology change is happening on a 3-year cycle,” he explains. 

Innovations in artificial intelligence (AI) and cyber-cloud technologies are at the forefront of this rapid evolution, “creating immense pent-up demand and driving several changes across industries”. LTTS, till December 2023, had filed around 57 patents for AI. 

Secondly, in the wake of the pandemic, supply chains have undergone profound disruptions. “After Covid, people wanted to build smaller plants, [and] today a lot of people are building regional plants while supporting and sourcing from the region as well," says Chadha. This shift towards regional manufacturing aligns with the "China plus one" strategy, where businesses diversify their production bases beyond China to enhance sustainability. However, Chadha says, this surge in demand has also brought up a shortage of plant engineers, further driving the need for advanced ER&D services.

The global push towards sustainability and electrification is another critical driver of the ER&D sector's growth. "There’s a whole drive towards sustainability and electrification," Chadha says. Innovations in electrification, particularly in developing next-generation electric vehicle (EV) technologies, are transforming the automotive industry. “We are working on the next-gen EV technology that will help us in terms of faster battery charging and give consumers more mileage. There is a lot of innovation happening in this area,” he adds.

As per a Nasscom report, India's ER&D sector is expected to contribute 22% to the global ER&D sourcing market by FY30 as against 17% in FY23.

Despite being smaller than the traditional IT sector, the ER&D sector's growth trajectory is significantly steeper. Nasscom notes that ER&D is showing a CAGR of around 13%, in contrast to the IT services sector in India which has been growing at a slower pace, with a CAGR of around 8-10% over the past few years.

Additionally, India has moved away from a place of work to a marketplace for the world, becoming a global technology and innovation hub of the world. “The number of projects India Inc. along with the GCCs across all industries are executing is enormous. The kind of analytical, strategic, and cognitive skills India has as a nation, and coming out with every year, is mind-boggling,” says Chadha.

He ascribes this progress to human capital, education and the development of infrastructure. “The kind of digital infrastructure India has got today is second to none,” he adds.

From a market standpoint, 10% of LTTS’ business stems from India while the biggest chunk is 60% from North America, followed by 25% revenue from European clients and 5% from Japan.