India: R&D Stronghold

With giants like Cisco and GE driving demand and staffed more by skilled expats, India's offshore R&D centers are booming, despite spiraling wages

by Pete Engardio

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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.