Why India is more lucrative R&D destination than China? Date:   Wednesday , November 02, 2011 The existence of multinational R&D centers in India has been a constructive influence on the ecosystem of India. While the R&D factory in India is still growing as compared to other Asian countries like Japan, China, South Korea, and Israel, particularly because their local R&D ecosystem was always very favorable for MNC companies to penetrate and perform business, India has saved a cumulative $44 billion for their parent organizations in the last three years. Additionally, operating cost in India at present is 25 percent lesser as compared to China. A study conducted by Zinnov Management Consulting, a globalization advisory firm, “Operations Cost Benchmarking 2011” (OCB’11), revealed that though China is rapidly evolving in its R&D globalization journey, India is comparatively a more lucrative R&D destination. The last three years has seen a significant change in the operating cost prototype with the MNC R&D fraternity in India. With business being as usual in 2007-08 and costs increasing by 19 Percent, while during the Economic Downturn in 2008-08 there was a cost decline by 6 percent and 2009-10 saw Cost Optimization being focused on and costs declining by a further 4 percent in USD terms. Operating costs at R&D centers usually comprises of key components like Payroll & Payroll Related Benefits, Infrastructure and communications, Travel Professional services and Government and Regulatory. The Fiscal Year 2011 was marked by a variety of changes in the operating cost dynamics with key trends like Increase in Operating Cost, Investments for Growth, Demand for engineering/ embedded R&D work increasing in India, increased focus on IT Cost Optimization, less concerns for STPI Waiver, firms looking forward to expansion in Tier 2 Locations and centers expecting costs to increase further owing to salary increases and attrition. The operating costs of MNC R&D centers in India have increased considerably in FY 2011 owing to pay raise of 10-15 percent at an average and attrition management being one of the key challenges that was to be addressed. The operations costs have increased from 17.6 INR lakhs in 2009 to 19.1 INR lakhs in FY 2011. Centers even focused on increasing the experience pool for innovation and value creation. With all going on, India is now looked at with prospective of innovation, leadership and increasing productivity, high talent and strategic instead of treating it as a low cost destination for business. MNC R&D landscape in India has rapidly grown in the last decade and can now boast of a current base of 718 MNCs with their R&D centers here. India also has an installed R&D talent pool base of over 195,000 engineers that has been growing at an average of nine percent a year for the last five years. The talent pool supply includes migrations from industries, software professional returnees and the fresh engineering graduates. As the global economies started to recover from the downturn, employees of R&D centers in India have witnessed salary increments of ten to fifteen percent. And to compensate for no or minimal salary revisions the previous year, some of the R&D centers clubbed salary increments with one time bonuses. When asked what can be done to optimize costs without comprising on the quality of productivity, Praveen Bhadada, Directorr, Zinnov Management Consulting says, “They need to strike a balance, if you want people to add more value to work as well as feed in more freshers as they come at a low cost, low salary while the senior resources come in with a lot of experience. The other thing companies do is attrition and rehiring.” He also adds, “The market size of R&Ds in India stands at about $7.5 billion and we can expect a 10 to 15 percent growth in the next couple of years and growth mostly in engineering and embedded systems. And the new companies that are being established were initially into sustenance and are now focusing more on innovation and leadership which is completely different from what they actually do.” Many R&D centers have also started gambling big on the county’s promising aptitude pool; R&D centers witnessed the trend of recruiting experience pool for innovation and value creation. This clearly shows India is still rated as one of the most preferred R&D hotspot globally. The country is enjoying the label of being one of the cheapest R&D locations worldwide with highly talented engineers. Another area of R&D that is maturing rapidly in India is the Embedded Systems focused R&D ecosystem. Embedded systems MNC R&D centers in India are growing from cost-leveraged testing centers to value-adding devise focus. Telecom, consumer electronics, Automation, and Automotive are the top verticals with MNC R&D existence in India. The need to infiltrate high growth rising markets and to manage local competition in these markets is driving global OEMs to invest in product innovation in emerging market. The STPI tax holiday does not seem to seem to impact the operations of MNC R&D centers either as the STPI waiver is not extendable beyond 10 years; and companies with a longer presence will face very negligible impact. On the current scenario of STPI and SEZ, the heads of several large enterprises have shared their views. While many believe that it is good idea to expand 2nd or 3rd center in SEZ, other feel that moving to a SEZ will not help MNC companies mitigate the impact of the expiry of the STPI scheme to major extent. Also in case of older and larger companies, they have all used the scheme and are all in a position to pay tax or move operations to high-cost SEZs, it’s a steeper curve for mid-sized firms, is the common thought among the companies. Zinnov’s comparative study of the MNC R&D centers in India and China showed that India has 718 MNCs while China has 1046 out of which 300 companies in India and 342 in China are on the list of Top 1,000 Global R&D spenders. India is way ahead of China when it comes down to the talent pool as India has over 196,000 employees compared to China’s talent pool of 152,000. India has a fresh R&D suitable of 45,000 whereas China has around 56,000. The average cost per year per person in India is $41,480 which is comparatively lucrative when compared to the cost of per person per year of China which currently stands at $50,400. As a result, India has been able to deliver better cost savings to the headquarters. MNCs in India have started setting up their secondary R&D centers for non-core work in tier II locations in India such as Madurai, Chandigarh, Baroda, Coimbatore and Bhubaneswar as they are 40 to 50 percent more cost effective compared to Tier I locations such as Bangalore, Pune or Chennai. These companies are using functions like HR, Finance and others in a shared service model between Tier 1 and tier II centers in order to optimize costs. Companies like Bosch, Honeywell, Quark and Radiance have already started their Tier II centers in Coimbatore, Madurai and Ahmadabad respectively. A further increase in the operating costs are expected though as companies invest in growth, balance experience pyramid and try to manage attrition. R&D Centers in India will redefine their strategy to sustain and grow. The factors they will consider changing include Compensation revision, focused hiring, technical career path, attrition, and focused hiring, focus on sustained career growth and multi-city strategy. * Attrition: The industry might continue to witness attrition due to increased market opportunities and individual aspirations for sustained growth. Best in class companies will continue to manage attrition better * Focus on Sustained Career Growth: Amplified stress on India management teams to increase leadership of products at the India center. This will effect in increase in global roles from India and employing for technical & business skills in the business. * Multi-city Strategy: Companies will spotlight on building their organization across numerous cities to increase catchment area for talent, decrease dealing risks and optimize on costs. *Compensation Revisions: To counter the effects of inflation, market demand and attrition management, compensation revisions would continue to happen. * Focused Hiring: Companies will continue to balance the organizational pyramid – Focus on hiring senior engineers and fresher is expected. * Technical Career Path: There will probably be an increase in demand for Technical skills and importance will be given t develop a strong technical path in the company.