In the tempest of AI rocking the technology world, a niche segment may be emerging as an island of calm.
Technology companies that build hardware and the software to go with it will suffer less from disruption, multiple company executives and technology analysts said, since much of their work goes into researching and building physical products for sectors ranging from aerospace to automobiles. The complexity of integrating mechanical engineering with software creates a layer of complexity that AI models cannot yet replicate.
“Engineering, research and development (ER&D) firms are least likely to be impacted as these firms have lower coding-led revenue in their mix versus pure-play IT services,” said ICICI Securities analysts Ruchi Mukhija, Seema Nayak and Aditi Patil, in a note dated 20 February. According to the analysts, these firms are harder to automate for four main reasons: they perform fewer repetitive tasks, their projects require deep mechanical expertise, every client's needs are unique, and the high-stakes nature of the work makes human oversight essential.
Large players
Some of India's leading ER&D firms include L&T Technology Services (LTTS), Cyient and KPIT Technologies. The three companies ended last year with $1.26 billion, $870 million, and $691 million, up 8.16%, 0.81%, and 17.72%, respectively. The three companies design and build technologies and products for electronics companies, carmakers, airplane manufacturers and defence companies.
At the AI Impact Summit in New Delhi last month, LTTS chief executive Amit Chadha said AI tools cannot replace engineering done by humans. LTTS is one of India's leading ER&D companies, besides others such as Cyient and Tata Technologies.
“At a very high level, AI will not replace two things. It will not replace EI, which is emotional intelligence, and it will not replace EI again, which is engineering intelligence,” Chadha told CNBC TV18 at the summit. He added that AI was net positive for the company and would increase the productivity of its nearly 24,000 workforce.
Chadha’s views aligned with those of KPIT chief executive Kishor Patil, who last month said AI would not affect the entire lifecycle of a car but only software processes.
Full supply chain
“In the case of the engineering part, there is a full supply chain. Software is just a part of that supply chain. Because we are working on a product, we are not working on the process part of it; so, I think that is the main difference (of AI impact on IT services and ER&D firms),” Patil told NDTV Profit on 20 February.
He added that AI would not be able to handle the entire delivery of car and truck systems, but would be critical to reducing the time taken and ensuring better quality of the IT work done in those vehicles.
Automation tools alone cannot function in an engineering process, Sukamal Banerjee, chief executive of Cyient said.
“The industry is beginning to recognize that an AI-first approach on its own, is not sustainable or scalable. Human knowledge, domain expertise and ethics come first,” Banerjee told analysts on 22 January.
Anthropic launch
Concerns about the impact of AI on IT services companies swelled after 30 January, when Anthropic launched 11 AI tools to automate work across domains such as legal, finance, marketing, and sales. The launch triggered panic in stock markets, with Indian IT companies' shares falling over 20% in the last month.
Save KPIT, whose shares fell 31% between 30 January and 6 March, mid-sized ER&D firms fell 10-22%. Meanwhile, shares of the country’s five largest IT services companies including Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd, and Tech Mahindra Ltd fell 17-24%.
A second brokerage agreed that the impact of AI on ER&D firms will be limited.
“AI adoption would be limited to documentation and validation tasks, and we do not expect material deflation from AI adoption for ERD pure-plays,” said Kotak Institutional Equities analysts Kawaljeet Saluja, Sathishkumar S., and Vamshi Krishna, in a 4 March note.
Bigger concerns
Still, while automation might not pose as big a threat to ER&D companies, bigger concerns exist.
Pure-play engineering firms focussed on making products for car companies are expected to face a second straight year of slow demand as the world's largest carmakers face challenges from Chinese rivals and battle tariffs on imported components.
“R&D spending by clients is likely to be better in CY2026 across most verticals. However, automotive OEMs (original equipment manufacturers) remain under pressure from weak demand and no material change in customer preferences, further delaying large platform development programs for up to a couple of years,” the Kotak analysts said. OEMs refer to companies that make components used to build vehicles and include some carmakers that manufacture their own auto parts.
For now, Nasscom expects the country's ER&D sector to grow 6.8% to $63 billion in FY26. This is expected to be faster than the overall IT sector's growth of 6.1% to $315 billion.