Thursday, August 21, 2008

Offshoring R&D to India rises

India is the top choice for companies looking to outsource R and D with an offshoring business there expected to grow 23 percent to USD21 billion by 2012 and a talent pool in its largest hub, Bangalore second only to Silicon Valley, according to a study by a management consulting firm. The number of outsourced R and D centers in India has leapt from 180 in 2000 to 594 this year, according to the first report on Indias R and D centers from Zinnov . The huge talent pool in India has been fueling that growth, Zinnov said in its report.

About 140,000 engineers currently work in Indias R andD centers and another 110,000 are working for companies that serve them, a larger group than previously believed, the company reported. The engineering talent pool in Bangalore, Zinnov reported, is second only to that of Silicon Valley.

The India Semiconductor Association released a report in April projecting the design sector there will grow by more than 21 percent during the next three years to USD10.96 billion. It estimated about India employs about 130,000 engineers, the vast majority of them in software.

India is attracting and retaining more of its native technical workforce, according to the Zinnov report. About 30,000 of Indias engineers have returned in recent years from jobs in the U.S. The number of graduates from IIT and other top Indian universities relocating to the U.S. is on the decline, it said.

The maturing talent pool is driving an increase in the sophistication of jobs handled in the India R andD centers. About ten percent of the projects in the centers now involve full souptonuts development of a new product, a slice that is expected to increase to 30 percent by 2012, according to Zinnov.

The report estimates the cost per employee in India grew at 16.2 percent between 2005 and 2007. However, Zinnov expects the cost growth to slow as pay raises and real estate prices moderate in the future.

At the Design Automation Conference earlier this year, the president of one of Indias R andD firms estimated engineers salaries in India could rise to the levels of counterparts in the U.S. within a decade.

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 fulltime Indian engineer including wages and benefits, facilities, telecom, travel, and administrative support ranges from USD 35,000 to USD 55,000. The U.S. average is at least three times that. A lead engineer in India still averages just USD 30,000 a year in salary, while a raw recruit classified as an associate engineer draws a mere USD 4,440 a year. The growth of Indian engineering wages, meanwhile, is starting to slow, meaning the gap with the U.S. wont close anytime soon.

But a bigger reason, is that the growing quality and experience of Indias huge technical workforce is offsetting escalating wages. Some of the estimated 250,000 Indian engineers working on global R andD, especially those who have been employed by big Indian softwareservices providers including Infosys INFY, Tata Consulting Services, and Wipro WIT, now have 10 years of experience working for international corporations. Countless others have received heavy training by their Indian employers. The reason to go to India no longer is just about cost, . Its about the quality of talent.

Thats a big reason Bangalore remains by far the most important R andD base. Of the citys 80,500 engineers working in foreignowned R andD centers, according to Zinnovs statistics, about twothirds have four to seven years of experience. Onethird have seven to 15 years, enough to qualify as a lead architect for many products. No other city in India comes close.

An influx of returnees from the U.S., Britain, and Australia, many boasting years of managerial and R andD experience at Western corporations, is supplementing Indias technical workforce.