For companies such as Caterpillar Inc., Boeing Co. and Volvo AG looking to get high-end software development and design projects rendered in low-cost countries, Eastern European countries of Romania, Poland and Hungary along with Russia are emerging key outsourcing destinations. They are catching up with first-mover India that faces new challenges of rising salary costs and attrition rates.
Salaries for Indian software professionals rose by around 15-20% in 2006, even as leading Indian tech vendors such as Wipro Ltd, Infosys Technologies Ltd and Tata Consultancy Services Ltd struggle to keep attrition rates—measured by the number of workers leaving jobs in a year as a percentage of total staff—below 20%. The staff churn is much higher for smaller firms.
While Romania, Poland, and Hungary are almost as costly as India in terms of billing ra-tes (including labour, office and other costs), Russia offers lower cost—at least 30% cheaper than India—apart from geographic proximity and local language skills to clients based in Europe. “What is wor-king for these Eastern European countries is the ‘nearshore’ advantage, as some of the large European outsourcers are more comfortable sending projects to nearby destinations in the region,” said S. Janakiraman, president of Bangalore-based Mindtree Consulting Ltd’s R&D services and chairman of trade body India Semiconductor Association.
Further, Romania and other countries offer a more stable workforce and relatively cheaper costs to clients. “Secondary cities in countries like Romania can undertake these projects at rates 25% lower than India,” Ramesh Emani president of Wipro’s product engineering services group said. Attrition among Indian semiconductor design firms are 15-20%, according to iSuppli Research, a California, US tech tracking firm.
What is working for Eastern Europe and Russia in particular is lower salaries and and much lower attrition rates.
Average labour costs in Eastern Europe are rising more slowly than in India. Consultant Frost & Sullivan predicts the average monthly cost for a high-end chip design engineer, already high at $4,400 (over Rs1.8 lakh) a month in India, is expected to rise to $5,500 by 2015, in part held down by an expanding supply of engineers into the hiring market. Wages in Eastern Europe will lag such levels, said Y. Shashidhar, vice-president of the firm’s tech and communication practice.
Designing a leading edge chip of, say, 65 nanometres can cost around $30-$40 million, and it is this cost that many companies want to crimp by outsourcing work to India and Eastern Europe. “In India, there are short-term costs of attrition and medium-term costs accruing out of wage pressures, which makes Eastern Europe look better as a destination,” said Jordan Selburn, an iSuppli analyst.
California-based Cadence Design Systems Inc., which has had key chunks of its software used to design microchips written in India, is looking at Russia when it comes to employing workers for executing complex projects of physical and electrical verification, as “the company can now hire more mathematics PhDs there than in India,” said Jaswinder Ahuja, its India managing director.
Around 30% of Cadence’s 130 professionals at its Moscow offices hold doctorates and all of them are technical postgraduates. “We have to spend almost two years training the B.Tech recruits in India, which has become like a ‘B.Tech factory’,” said Ahuja. Further, says Richard Peynot, a Forrester Research Inc. analyst based in Paris, European countries offer better skills in electronics, mathematics, simulation and 3D design.
Germany-based Infineon Technologies, which employs over 600 engineers in Bangalore, is now looking at Romania for outsourcing work related to engineering design for power controllers that sit on a chip. “We have been looking at Eastern Europe and established a design centre in Bucharest around a year ago. We have over 100 engineers there, focused primarily on designing power controllers and related work,” said Albert Stritter, managing director of Infineon Technologies India, who moved to the country earlier this year. Most of Infineon’s automobile clients are based in Western Europe, and it is easier to serve them from centres in Europe.
While Eastern European countries and Russia are not yet capable of competing with India when it comes to application development and maintenance work, it’s some of the high-end projects in the areas of semiconductor design that may move to other locations.
According to industry insiders, the total value of R&D work shipped to India by Alcatel-Lucent, Nokia-Siemens, Nortel, Motorola, Ericsson and other customers is in the range of $4 billion, half of which is application development and system design projects.
Another area of concern for Indian offshore vendors is the possibility of Eastern European countries joining the European Union (EU).
Once these countries are part of the EU, European R&D outsourcers would be more comfortable doing business with EU nations by leveraging regional trade agreements. Outsourcers such as Philips, Snecma and Schneider, who are currently offshoring to India, may also want to leverage the ‘near-shore’ advantage in Eastern Europe.
In a bid to dull the threat from East Europe-based tech firms, Bangalore-based Wipro Technologies acquired Austrian semiconductor design services firm, Newlogic in an all-cash deal of $56 million late in 2005, but such instances are rare.