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 im****tant factors such as strong local
talent and core competencies that are im****tant 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.
http://www.livemint.com/2008/03/10235600/Fewer-captive-RampD-projects.html
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