For years, labor market analysts have argued that transactional work will increasingly move overseas, while complex research and design work remains in the United States where the world’s largest supply of knowledge workers resides.
They’re wrong. U.S. companies are moving research work at all levels to locations in Asia and Central and Eastern Europe, where the talent pool is larger, costs are lower and new markets are more accessible.
Companies spend huge sums for R&D because it powers innovation and growth. Microsoft pumps more than $8 billion a year into R&D; Siemens spends $6 billion. Labor costs account for 56 percent to 86 percent of R&D spending, according to KPMG studies.
Annual labor costs for a senior engineer range from $150,000 to $200,000 in the United States, compared with $30,000 to $40,000 for equivalent talent in India, or one-fifth of the U.S. cost, according to Ayan Mukherjee, Wipro Ltd.’s North American vice president for R&D services.
Wipro, a Bangalore-based global heavyweight in IT services, employs 40,000 workers, including 10,000 Indian R&D engineers who perform both simple and complex research for the company’s global clients. "The talent in India for research and design work goes up to the highest levels and is no different than in the U.S.," Mukherjee says.
Although the IT industry was the first to offshore significant amounts of R&D, other industries are rapidly embracing the practice. Of the top 10 auto R&D projects from 2002 to2004, four were based in the developed countries and six were based in China, India, Thailand and Brazil, according to OCO Consulting.
In addition to the hard cash savings in labor costs, sending R&D work abroad can reduce time to market by 30 percent to 40 percent, Mukherjee notes. "The value to the companies becomes immense when you can shorten time to market," he says. The capacity for completing multiple projects can increase by 50 percent to 200 percent.
Mukherjee says that the infrastructure--not just the labor--is available for companies to outsource entire R&D projects that involve complex work.
Companies are also offshoring R&D to meet market needs. As developing countries consume more, products must be designed to serve these markets as well as markets in the developed nations. "If you want a global product, it must reflect global innovation talent and R&D work done in the countries where you want to sell," Mukherjee says.
"Gold mine of talent"
Moving R&D work abroad is not limited to the large multinationals. When the Cobalt Group, a Seattle-based automotive online services company with 800 employees, needed to expand its R&D workforce three years ago, it looked to Bangalore. It now utilizes 50 engineers in a dedicated facility run by India’s Ness Technologies.
Rajan Krishnamurty, Cobalt executive vice president and CTO, led the move to send the work to India. The driving force behind his decision was the ability to obtain equivalent talent at a lower price. For small firms such as Cobalt, labor costs for R&D engineers in India are about one-third of the U.S. costs, he says.
Cobalt’s Bangalore R&D staff has accumulated the necessary domain knowledge and now assumes full responsibility for entire projects, including the most complex work. "The more typical approach is to send low-risk work to India, but that is a recipe for failure," Krishnamurty says.
"The talent there is as good or better than in the U.S.," he says. "The large U.S.-based companies now investing in R&D centers in India--Oracle, Intel and Microsoft, for example--do not view them as adjunct facilities but as labs for original work."
Although Cobalt’s Indian R&D engineers are for legal purposes employees of Ness Technologies, "they are treated as Cobalt employees and they have a higher identification with Cobalt than with Ness," Krishnamurty says. Cobalt selects the employees and includes them in company communications and meetings.
The choice of outsourcing partners is important. "The executive relationships are critical," Krishnamurty notes. "It’s not just about contracts."
Global R&D is also expanding rapidly in Central and Eastern Europe. Russia is emerging as a global center for electronic design, with 1 million scientists working in 4,500 R&D centers, including labs built by Motorola, Cisco and Hewlett-Packard. Intel already employs 1,500 Russian researchers working in labs in Moscow, St. Petersburg and Novosibirsk, Siberia.
Gen3 Partners, a Boston-based product innovation firm, runs an R&D lab in St. Petersburg with 90 scientists and engineers, all with master’s or doctoral degrees. "We located the lab in Russia because of its long tradition of scientific excellence and because the costs are much lower than in the United States," says Sam Kogan, president and COO.
Gen3 scientists make $9,600 to $36,000 a year at the St. Petersburg lab, a fraction of what comparable talent would cost in the United States. "In addition, the Russian government has finally recognized that it is sitting on a gold mine of talent and is now building technology parks to leverage it," Kogan says. Russia will complete six parks by 2010 with favorable tax and customs incentives.
Push and pull
Like many global labor market trends, the shift in R&D work is the product of a series of broad push/pull factors. The relative supply of knowledge workers in the advanced nations is diminishing and growing more expensive, while the supply in the developing world is rising and becoming more cost-effective.
Every year, India graduates 2 million proficient English speakers with strong technical and quantitative skills, according to A.T. Kearney. India’s top engineering schools pump out high-quality knowledge workers who are no longer simply coding software but moving up the value chain to high-level analytics and consulting.
China graduated 325,000 engineers last year, five times as many as the U.S. The number of researchers in China soared from 531,000 in 1999 to 811,000 in 2002, more than Japan’s 676,000 and quickly approaching the European Union’s 1 million and the United States’ 1.3 million, according to the Organization for Economic Cooperation and Development.
In addition, while government support for R&D work is expanding in Russia, China and India, U.S. support is waning. China now spends 1.5 percent of its GDP on R&D, a higher percentage than the U.S. or Japan.
The U.S. government increased R&D spending this year by 6 percent, to $98 billion, but the portion earmarked for military use increasingly dominates the federal R&D budget, with shortfalls in spending for basic research. U.S. corporate R&D spending, which accounts for two-thirds of the national total, has been basically flat for four years.
Given the distinct cost advantages of moving jobs to the developing nations and the growing pool of researchers there who are able to assume the most sophisticated levels of work, it will be increasingly difficult for U.S. workforce executives to justify leaving R&D work at home.
|Average Annual Salaries for Engineers|
|Source: Institute of Electrical and Electronics Engineers, 2003 data|