Why Digital Engineering is Here to Stay

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Why Digital Engineering is Here to Stay

November 2, 2023 203 0 Zinnov Engineering Research & Design

The global economy has faced various challenges in recent years, including geopolitical tensions and supply chain disruptions. Despite this, spending on Digital Engineering (DE), driven by digital transformation initiatives and technology investments, reached USD 810 Bn in 2022. This growth is expected to continue, with Zinnov estimates suggesting DE spending will reach USD 1.6 Tn by 2026. Digital Engineering spending is primarily led by the Manufacturing-led, Hi-tech-led, and Services-led verticals, with Hi-tech-led verticals like Software & Internet, Telecom, and Consumer Electronics growing the fastest. The four technology pillars driving DE investments include Generative AI, Metaverse, Digital Thread, and Hyperscalers. Service Providers are playing a crucial role in meeting the demand for DE expertise across enterprises, with a strategic focus on enhancing their digital capabilities and driving innovation in this evolving landscape.

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The last few years have been turbulent for the global economy. Geopolitical tensions, fears of recession, protectionism, and supply chain disruptions have impacted countries and industries around the world. Yet despite these challenges, spending on Digital Engineering (DE) – a subset of overall Engineering R&D – grew to touch USD 810 Bn in 2022. This growth is fueled by ongoing digital transformation initiatives and investments in technologies such as Cloud, AI, Metaverse, 5G, and Digital Thread.

The Unabated Rise of Digital Engineering

These cutting-edge technologies continue to unlock new use cases and business models. As a result, DE spend will expand rapidly to reach USD 1.6 Tn by 2026 per Zinnov estimates. Business leaders remain committed to funding innovation, offsetting volatility through cost optimization and productivity improvements. The relentless push towards digital transformation and growing reliance on Cloud, chips, and data will also drive DE spending. With enterprises prioritizing capabilities in Data Engineering, Analytics, Cybersecurity, and IOT, Service Providers (SPs) have a prime opportunity to capitalize. They have already seen strong expansion in the last year, especially in the US and Europe.

Manufacturing, Hi-tech, and Services verticals make up most of the Digital Engineering spend. Hi-tech-led verticals, including Software & Internet, Telecom, and Consumer Electronics – are the largest contributors to the DE spend, growing 20% faster than other verticals. While Services-led verticals are experiencing softened DE spend due to macro factors, they are still projected to grow over 18% annually, accounting for 27% of the total DE spend by 2026.

In the Asia Pacific region, heightened focus on DE by Hi-tech-led verticals has enabled it to slightly overtake Western Europe in Engineering R&D spending. However, North American companies remain the top contributors to DE spending, given the heavy concentration of Hi-tech firms.

Technology Pillars of Digital Engineering

Four key themes are propelling global DE spend: Generative AI, Metaverse, Digital Thread, and Hyperscalers.

While still evolving, Generative AI’s potential to transform industries is clear. VC investments have soared, totaling USD 13-14 Bn between 2018 and 2022 across 885 deals. As the technology matures, Service Providers can commercialize Generative AI offerings for diverse use cases in text, images, audio, and video – targeting Sales, Marketing, and Customer Service functions.
Industrial Metaverse is also attracting major investments, with the overall Metaverse market projected to hit USD 4-5 Tn by 2030. Service Providers are actively building capabilities through co-innovation labs and Centers of Excellence to deliver cutting-edge Metaverse solutions. They are also developing reusable IP like products and frameworks to create differentiation. And with the digital skills gap persisting, their focus on upskilling and hiring for Metaverse-related skills will be critical.
Integrating Digital Thread into supply chains enables greater adaptability and resilience. Connected Supply Chains (CSC) with embedded Digital Thread facilitate seamless flow of information of physical goods and services. More than one-third of the investments made in CSC services are being outsourced, and US enterprises account for ~44% of the overall outsourcing market. Top Service Providers are building extensive portfolios of IP and accelerators to drive innovation.
Finally, with digital transformation in full swing, demand for Cloud is soaring – especially in services sectors. This is projected to reach USD 1.3 Tn annually by 2030, driven by the lasting impact of the pandemic on digital adoption. To capitalize on the opportunity, enterprises are strategically investing in Cloud-based use cases across industries. AWS, Azure, and GCP have established dominance, collectively holding 58% market share.

The Role of Service Providers

To keep pace with the accelerated demand for Digital Engineering skillsets, Service Providers are boosting digital capabilities through strategic collaborations, investments, and acquisitions. The total addressable DE market reached USD 35-45 Bn in 2022. It remains fragmented, with specialists spread across geographies and industries. The top 10 SPs capture only 27% share of the overall DE market, leaving room for consolidation. Leading players are also acquiring companies to expand their digital expertise and deliver innovative solutions. As the DE landscape evolves, Service Providers will remain central to enterprise digital transformation.

Access Zinnov’s marquee report on Digital Engineering spends and the Engineering R&D landscape here.

Digital Engineering Digital engineering services Engineering R&D Engineering Research & Development

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Zinnov

Founded in 2002, Zinnov is a leading global management consulting and strategy advisory firm, with a presence in 10 global locations. Over the last 22 years, Zinnov has partnered with Global Enterprises and Fortune 2000 companies across their value creation journeys to develop actionable insights – across revenue, talent, innovation, scale, and optimization. Zinnov enables companies to develop and optimize a global engineering footprint through center setups, technology and functional Centers of Excellence (COEs), portfolio optimization, partnerships, and real-time data/ insights – through its unique GCC Accelerator Platform (GAP) offering. This multi-lever approach helps Zinnov’s clients achieve higher R&D efficiencies, innovation, and productivity via an immersive and highly networked model. Zinnov’s expertise also includes advising global PE firms in asset shortlisting, target evaluation, due diligence, and value creation for their portfolio companies through a globalization lens.