Burgeoning ER&D landscape in India

Indian entrepreneurs are seeing many opportunities in large-end industries, particularly in sectors like automotive, aerospace, defense, and semiconductors. The two key forces that are driving this surge are technological platform shifts and a dedicated effort towards indigenization.

Indian startups are now winning large deals across the globe and in India where contract sizes are upwards of $100K with healthy profit margins and barriers to entry like onboarding. There are several business models which are prevalent and upcoming ranging from defense testing systems to semiconductor IP to IC journeys.

And that is why we at Pravega Ventures are excited about the Indian ER&D and embedded systems space.

Sizing Up The Market

• Top 25 auto OEMs globally (eg, Toyota Showcase, @Stellantis, Mercedes-Benz) spend approximately $200 million each on their R&D budget.
• According to NASSCOM, approximately $175 billion was spent in 2021 to outsource ER&D work globally. India accounts for a $40 billion slice of this, and is projected to grow at 12–13% CAGR, reaching $60 billion+ by 2025.

Why we are in on ER&D?

There are few reasons this space has piqued our interest recently. Here’s why…

1. Accelerated upgrade/development cycle: Traditional OEMs (Volkswagen, Porsche AG, GM) are compelled to upgrade and/or develop new products to keep up with newer and technologically aggressive OEMs like Tesla Motors or BYD Auto India.
2. Software is core to erstwhile mechanical systems: Software has evolved from being “just a feature” to becoming the “core” of the architecture for erstwhile mechanical platforms like cars. It is forcing a change in the existing workflows like design, development, validation, lifecycle management processes, and revenue models.
3. Multiple platform shifts are occurring simultaneously:
   >> Commercial Mobility: Mainstreaming of Electrification, Automation (ADAS and AV), and constant Connectivity.
   >> Defense: Accelerating use of UAV platforms, AI/ML, automation, AR/VR for training
   >> Space: Large LEO constellations, in-space edge processing, cloud-based ground station networks, and increasingly powerful payloads.
4. New use cases/workflows demand new products as the existing products are not sufficient (e.g. battery development). This creates new opportunities to gain market share.
5. Supply chain transformation: The idea of preferring traditional tier 1/2/3 over an OEM supply chain is transforming as new vendors surface and smaller vendors graduate to Tier 1 status. An example of that would be NVIDIA AI transitioning from a chip supplier to an automotive platform for AVs (NVIDIA Drive).
6. Geopolitical and macro issues are also creating new opportunities…- >> Impact on Israel & Ukraine’s tech industries
   >> Shift from a China-dependent supply chain (Foxconn sets up a plant near Hyderabad, Micron sets up a semiconductor plant in Sanand)
   >> India’s focus on indigenization (Tata Group)
   >> Concerns about climate change

In conclusion…

India is uniquely placed right now:

• Vendor ecosystem exists in bits & pieces
• Analogous ecosystems along with manufacturing success stories are thriving
• Trained/quasi-trained workforce is available
• Macro factors are supportive

While embedded systems design projects have consistently found its way to India, both macro indicators and on-ground conversations suggest a noticeable increase in both the volume and variety of work going forward.

Startups and mid-sized players in certain domains, especially in the automotive and defense space, have experienced significant revenue growth over the past five years and this momentum will only multiply in years ahead owing to technology platform shifts & continued efforts towards indigenization.

This article was co-authored by Dhruvin Mehta.