Fewer captive R&D projects coming to India4 min read . Updated: 10 Mar 2008, 11:56 PM IST
Fewer captive R&D projects coming to India
Fewer captive R&D projects coming to India
Bangalore: In offshore software product development, India has been on the radar of tech firms aiming to trim costs and gain efficiency of operations for nearly a decade.
But, that interest seems to be waning in the last two years among what are called captive centres or fully owned units of foreign organizations even as demand for services by independent, third-party service providers expands at a rapid pace, latest research suggests.
In a first of its kind study focused on such captive centres, consulting firm Zinnov Management Consulting Pvt. Ltd has found that just 15 overseas tech firms opened India development units in 2007 compared with 76, 70 and 48 in each of the years from 2004 to 2006. The research covered 594 foreign firms that have set up captive or offshore development centres or ODCs in India. These include 390 software product development firms, 120 engaged in engineering services and 84 embedded service companies.
The study estimates the total research and development (R&D) offshoring market (comprising of both vendor and captive) to be $5.83 billion (Rs23,728 crore) and with a compounded annual growth rate (CAGR) of 23% by 2012.
However, the potential growth of captives is slower at 20% than vendors that are growing at 28%.
Zinnov chief executive Pari Natarajan cites the increase in the cost of operation as the primary reason for the slowdown in expansion of captive units, besides other factors such as insufficient hardware talent pool and infrastructure and inability of firms to engage engineers in work on high-end products.
“Operating cost escalation has become a serious constraint to the growth of R&D centres in India. We estimate the cost per employee to grow at CAGR of 14.3% over the period of next five years," says Natarajan. Cost escalation in the last three years was at a CAGR of 12% and the rise has been primarily due to rising wages and an appreciation in the value of the rupee against the US dollar.
Dell India Pvt. Ltd which recently moved its hardware R&D unit from Bangalore to Texas and Taiwan, diverting its focus on software development and testing, is one of the seven firms named by Zinnov that shut its R&D centres (hardware in this case) in India. Others include Accelrys Software Solutions Pvt. Ltd, Apple Services India Pvt. Ltd, Bose Corp. India Pvt. Ltd, Kana Software India Pvt. Ltd, Pervasive Software Technologies India Pvt. Ltd, and Riya Inc. with most of them closing their R&D operations in 2007.
Riya CEO Munjal Shah says an early-stage start-up firm such as his could ill-afford the overhead of communication issues with a remote office (such as in Bangalore) unless cost benefits outweighed losses in efficiencies coming from working in a single location.
“The huge run up in the wages (in Bangalore) has destroyed the return on investment," he wrote on his blog after closing Riya’s Bangalore operations. Still, investments are pouring into India from the likes of Cisco Systems Inc., whose chief John Chambers in October announced increasing its venture investment initiative in India by $100 million, in addition to the initial $100 million earmarked in 2005 to drive growth with high-potential Indian companies. In June 2006, Samuel Palmisano, chairman and chief executive of International Business Machines Corp., announced plans of tripling investment in India to $6 billion over three years. Despite cost escalations, insists Vivek Mansingh, country manager of Dell India R&D Centre, India’s advantage hasn’t faded in offshore development. “Besides cost advantages, there are other important factors such as strong local talent and core competencies that are important considerations to set up R&D operations in India," he says. Dell India plans to hire 100 engineers and product development professionals by the end of this year, expanding its 400-strong team by a fourth.
Ameet Nivsarkar, vice-president of the National Association of Software and Service Companies, a lobby for software and back office services firms in India, says while smaller companies may be looking at cost efficiency, most large companies are rooting for India for its “enviable talent pool".
“Smaller companies are here for cost advantage and are thinking of whether to set up captive centre or go along with an existing product development partner in India," he says. According to Zinnov’s research, about 184 units or 31% of the total captive ODCs in India have revenues of more than $500 million each and 90 of these firms have set up large teams of more than 200 employees in the country. Geneva-based electronics and semiconductor manufacturer ST Microelectronics, which set up chip design operations in India in 1990, is one such firm with more than 1,850 engineers employed here.
“India offers advantage of scaling up, a large market reach and enviable design capability, over other Asian countries which will continue to attract companies here," says Vivek Sharma, vice-president of emerging markets and director of the firm's India design centre, adding the level of investments in the past years cannot be expected at a time when semiconductor firms are growing in single digits.