In the face of economic slowdowns and geopolitical uncertainties, the Engineering Research & Development (ER&D) spend remains resilient, even witnessing substantial growth. At the heart of this growth is the rise of Digital Engineering, reshaping the landscape and providing a robust impetus for future spending across diverse verticals. ER&D spenders are clearly focusing on product development velocity, product ownership experience, alternate revenue streams, process and quality control, and business model and technology convergence.
The driving force behind the surge in ER&D spending is undeniably Digital Engineering, which will constitute 53% of the ER&D spend by 2025. In 2019, the Digital Engineering spend stands at USD 403 Bn, which is estimated to grow at a 19% CAGR to touch USD 1,153 Bn by 2025. As industries strive to embrace the wave of digital transformation, the demand for innovative engineering solutions has become more pronounced. From reimagining product design to optimizing processes, Digital Engineering is emerging as the cornerstone of future technological advancements.
Within the diverse tapestry of industry verticals, engineering has cemented its status as a core function, particularly in services-led sectors. Organizations are recognizing that engineering excellence is not just a necessity for product-centric industries but a strategic imperative for those delivering services. This shift underscores the pivotal role engineering plays in staying competitive and meeting the dynamic demands of modern consumers.
Notably, Z1000 enterprises in North America and Western Europe continue to remain as the dominant spenders at 45% and 28%, respectively. North American hegemony in ER&D spending can be attributable to the formidable presence of the Tech Mafia. The influential tech companies shaping the industry landscape contribute significantly to the region’s stronghold. Their innovative prowess and strategic investments make North America a powerhouse in driving ER&D growth. The study also highlights that Software & Internet vertical is the largest contributor to ER&D spend, with USD 196 Bn, and also contributes ~40% to the overall Digital Engineering spend, driven by investments in the Digital Engineering Stack and new-age technologies such as AI/ML, AR/VR, Big Data Analytics, and Blockchain.
Looking ahead, the Asia-Pacific (APAC) region is poised to overtake Western Europe in ER&D spending by 2025, propelled by substantial investments from China. This shift not only reflects the growing economic influence of the APAC region but also emphasizes China’s commitment to technological advancement. Companies operating in APAC are well-positioned to leverage this surge in spending for pioneering engineering initiatives.
As the ER&D landscape evolves, Service Providers are adopting strategic shifts to enhance their capabilities. The trend of increasing consolidation among IT and ER&D Service Providers signifies a move towards comprehensive service offerings. End-to-end Product Development Lifecycle (PDLC) requirements of legacy products is a key focus for ER&D SPs. Additionally, through strategic product and center carve-out deals, product companies are able to focus more on core initiatives. ‘Bolt-on’ acquisitions, where SPs acquire specialized capabilities, exemplify a strategy geared towards staying at the forefront of technological advancements.
In parallel, the increasing focus by Private Equity (PE) firms in the Engineering Services space signals a broader recognition of the sector’s potential. As investors direct their attention towards ER&D, we can anticipate a surge in innovation, expansion, and the development of cutting-edge solutions.
The ER&D sector is not merely weathering storms but emerging stronger and more dynamic. The winning combination of Digital Engineering, the strategic role of North America, the rising prominence of APAC, and the evolving strategies of Service Providers and investors collectively paint a picture of an industry on the brink of unprecedented transformation. As we navigate this dynamic landscape, the key to success lies in embracing innovation, fostering collaboration, and being at the forefront of the engineering revolution that is shaping our future.
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