The engineering, research and development (ER&D) sector will take at least two years before it returns to double-digit growth on average, according to Nasscom’s ER&D chair Kishor Patil. Within the sector, verticals such as semiconductor, industrial, automotive and medtech will be the first to rebound, he said.
The growth of companies operating in the ER&D space was outpacing that of information technology companies by a wide margin previously but a macroeconomic slowdown hit both segments. However, the dropoff in growth of ER&D companies was steeper than expected and more rapid than that of IT companies, experts say.
“So overall, as a sector now our growth is at 9-10 percent. When we go into double digit? I don't want to predict specifically, but for sure, less than two years as sector,” said Patil, who is also the chief executive officer and managing director of KPIT Technologies.
In the quarter ended June 30, ER&D companies were hit due to the automotive sector's poor financial results, high costs of transitioning to electric vehicles, and economic downturns. The completion and non-renewal of long-term projects, which typically span 4-5 years, across companies suggests the net quarterly revenue decline is here to stay, analysts say.
“I would not say it is a trend across. It may be at most blip. You have to give time for everyone to come back,” Patil added when asked about the non-renewal of long-term projects in the sector. Patil further said that the year-on-year rather than sequential growth of ER&D companies should be looked at for a clearer picture.
Also read: Auto sector slump hits ER&D companies in Q1, recovery expected only next fiscal
Earlier, analysts expected the sector to recover by the first quarter of FY26, as and when the macroeconomic situation were to improve.
Automotive impact
Patil believes that electric vehicles (EVs) are a “sacrosanct” and “irreversible” trend and that people will eventually move towards electrification, hybridisation, fuel cell, and other greener sources of energy.
Many companies have highlighted an abrupt and sharp weakening in demand in the automotive industry, especially in Europe, due to slower-than-anticipated adoption of EVs and rising cost pressures from increasing competition.
Patil also said that original equipment manufacturers (OEMs) have to reduce the cost of vehicles.
“Actually, in the last year, battery prices have come down by 30-40 percent, so it has become anyway, more affordable,” Patil highlighted, “and a little bit more cost efficiency will make it very, very palatable for consumers.”
He pointed towards China where most of the taxis run on renewable energy, because the cost has been reduced to an extent where operating a petrol-run vehicle costs about the same as a green energy car.
“As long as EVs/Hybrids grow even 10 percent higher than the conventional vehicles, without any subsidies, I think that that should make this segment grow significantly globally,” Patil said.
Also read: KPIT: No speed breaker for this auto ERD company
AI/GenAI benefits
As far as the productivity benefits from artificial intelligence (AI) and generative AI are concerned, Patil said the impact in areas such as embedded software, which is a key part of ER&D companies, is very minimal.
Embedded software is a specialised type of software that's designed to control and manage hardware devices in an electronic product.
In these areas, he said, "Gen AI/AI require large-scale data to drive productivity. In the embedded domain, lot of data is currently owned by individual companies and not available in the public domain. While Gen AI and AI have potential, it will take time to drive benefits in this domain as compared to normal IT/Digital for developing data sets to train these models."
Benefits from GenAI arise for players operating in the software development space, he said.
“It may take maybe one more year when people will start seeing it (benefits from AI/Gen AI) a little more,” Patil added.
Also read: Indian IT cos struggle with Gen AI rollout delays amid rising compute, cloud cost
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