Given its skyrocketing wages, tightening labor market, and worsening infrastructure bottlenecks, one might think India is starting to lose steam as an offshore research and development haven.
Not a chance. According to a study by Zinnov, a consulting firm that helps multinationals craft global product-development strategies, India's R&D scene is not only still gaining momentum, it's also becoming more strategically important. This is happening even though the average cost per employee rose 16.2% annually in the past three years.
Offshore R&D has mushroomed into a $9.35 billion annual industry, Zinnov reports, and is growing at a 23% annual clip. By 2012, the firm predicts, this business will reach $21.4 billion. The findings are based on interviews with senior managers of 120 India-based R&D centers of foreign companies.
The key drivers are multinationals. Roughly two-thirds of the work is done at R&D centers owned by tech giants such as Cisco (CSCO), Motorola (MOT), General Electric (GE), and Hewlett-Packard (HPQ), as well as a growing number of small- and midsize U.S. companies. The number of such foreign-owned centers has surged from 180 in 2000 to 594 this year.
What's more, the India R&D bases of multinationals increasingly are becoming the leading sites for developing particular products sold globally, whether they be new chips, software packages, or telecom devices. That means they often are responsible for all of the engineering, strategic direction, and even the profits and losses of a product line. Currently, 10% of offshore centers have "full ownership" of product lines, Zinnov estimates. By 2012, that will reach 30%.
Affordable Quality and Experience
Why is such Indian offshoring continuing to rise despite higher costs? One reason, of course, is that despite all the wage inflation, India remains a lot cheaper than the U.S. The total cost of employing a full-time Indian engineer—including wages and benefits, facilities, telecom, travel, and administrative support—ranges from $35,000 to $55,000. The U.S. average is at least three times that, Zinnov says. A lead engineer in India still averages just $30,000 a year in salary, while a raw recruit classified as an "associate engineer" draws a mere $4,440 a year. The growth of Indian engineering wages, meanwhile, is starting to slow, meaning the gap with the U.S. won't close anytime soon.
But a bigger reason, asserts Zinnov Managing Principal Vamsee Tirukkala, is that the growing quality and experience of India's huge technical workforce is offsetting escalating wages. Some of the estimated 250,000 Indian engineers working on global R&D, especially those who have been employed by big Indian software-services providers including Infosys (INFY), Tata Consulting Services, and Wipro (WIT), now have 10 years of experience working for international corporations, Tirukkala says. Countless others have received heavy training by their Indian employers. "The reason to go to India no longer is just about cost," he says. "It's about the quality of talent."
That's a big reason Bangalore—even with its horrible traffic congestion and soaring costs—remains by far the most important R&D base. Of the city's 80,500 engineers working in foreign-owned R&D centers, according to Zinnov's statistics, about two-thirds have four to seven years of experience. One-third have seven to 15 years, enough to qualify as a lead architect for many products. No other city in India comes close, Tirukkala says.
An influx of returnees from the U.S., Britain, and Australia, many boasting years of managerial and R&D experience at Western corporations, is supplementing India's technical workforce. Expatriate Indians now account for 10% to 15% of the staff in offshore R&D centers, Zinnov estimates. The software industry alone has benefited from the return of 30,000 expatriate professionals, according to Nasscom, India's information technology trade association. "The immigrants have brought the high-end talent that India needs," says Tirukkala.
Up the Innovation Ladder
This greater experience is enabling India to move up the innovation ladder, Tirukkala argues. More companies are making India the main R&D base for certain products because they are finding it harder than expected to control offshore engineers out of the U.S. "Chief technology officers are finding that globally distributed innovation is not working," he says. Some companies have decided to move engineering back to the U.S. But others have shifted top managers to India to run development work entirely from there. The India country head of software giant Adobe Systems (ADBE), for example, is also senior vice-president for its global printing and publishing system product business.
Not all analysts are convinced Indian R&D operations are ready to assume the lead in innovation, however. Martin Kenney, a University of California at Davis economist who has studied offshore R&D in India and China, agrees the trend is still growing in India and that its workforce is becoming more experienced and innovative. Since 2000, he notes, U.S. patents awarded to inventors filing from India rose more than fivefold, to around 550 a year.
But the number of India patents remains very small in the scheme of things: Last year the U.S. issued nearly 94,000 patents. And Kenney suspects the vast bulk of India's engineering hordes still is far too green to do complex design and innovation work. "Bangalore is not like Silicon Valley, where in a couple of weeks you can round up 10 people who have already designed chips at three different startups," he says. "We don't really yet know much about the true quality of the work done there. There are company anecdotes going both ways. Some of it may not be what it is cracked up to be."
Kenney believes low cost is still the primary reason U.S. companies are shifting work to India. "My guess is that if the Indian engineer cost the same as our engineer, nobody would go to India," he says.
Kenney does agree, however, that India's R&D workforce is steadily gaining the experience to produce innovation. The debate is whether that time is another five years away—or has already arrived.