August 12, 2008

Company-owned offshore centres growing fast in India

Some intellectual property concerns remain in China, report says

By John Ribeiro

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Offshore research and development work is currently a $9.35 billion (£4.92 billion) industry in India, but over half of this is accounted for by firms that own their own offshore centres, according to a new report.

R&D centres owned by multinational companies account for about $5.83 billion (£3.07 billion) in annual workload, according to management consultancy Zinnov. These centres work on software products, embedded systems and engineering services.

Zinnov forecast that this ‘captive offshore’ work will more than triple to become a $21.4 billion (£11.3 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 centres in the country, Indian engineers were primarily working on ancillary services like testing and porting. But 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 under half of the cost in the US or Europe, according to Tirukkala.

Multinational corporations still find value in establishing offshore R&D centres in India, according to a Zinnov study. The number of such centres 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 centres 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 US, 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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