Offshoring R&D to India on the upswing

Offshoring R&D (research and development) to India is currently a US$9.35 billion industry, with R&D centers owned by multinational companies accounting for about $5.83 billion of this market, according to management consultancy Zinnov.

These centers work on software products, embedded systems and engineering services.

Zinnov forecast on Monday that R&D work sent by multinational companies to their own centers or to service providers in India is expected to grow to be a $21.4 billion industry by 2012, growing at a compound annual growth rate of 23 percent over that period.

A number of companies are also using their Indian operations to develop products for emerging markets, said Vamsee Tirukkala, co-founder and managing principal of Zinnov in an interview.

About 10 years ago when multinational companies started setting up centers in the country, Indian engineers were primarily working on ancillary services like testing and porting, because they were not seen to be ready to do product development. Over the last eight years, staff have matured, built domain expertise, had extensive interactions with customers, and can now design new products, Tirukkala said.

Although the cost of engineers has gone up five-fold in India over the last 15 years, it is still about one-third to half of the cost in the U.S. or Europe, according to Tirukkala.

Multinational corporations still find value in establishing offshore R&D centers in India, according to a Zinnov study. The number of such centers has gone up from 180 in 2000 to nearly 600 this year.

This trend of offshoring R&D to India is primarily driven by an increase in the available talent pool in the country over the last five years, as well as the cost savings, Zinnov said.

The strongest competition to India as an offshore R&D location will come from China, according to Tirukkala. But unlike India, which is experienced in global services delivery, most R&D companies in China are still addressing the domestic market, he said.

Although some multinational companies have R&D centers in India and China, the size of the Chinese operation is usually much smaller, Tirukkala said. In China, there are still concerns about the protection of intellectual property, the talent pool available is smaller than in India and there are far fewer people who can speak English than in India, he added.

India is also benefiting from about 30,000 Indians who have returned to the country after working in the U.S., according to Zinnov. Highly qualified Indians are also less likely to seek jobs abroad because of new opportunities in the country, Zinnov added.

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