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R&D Sent to China

Offshore outsourcing growth slowed briefly during the recession but came roaring back in the second quarter of 2009, with every indicator pointing to heady growth rates ahead.

December 30, 2009
Related Topics: Global Business Issues, Workforce Planning, Recruitment
Companies such as IBM, Microsoft and Nokia outsource chunks of their research and development and product development work to Symbio, a global product development firm with seven R&D centers in Finland and Sweden and five offshore development centers in mainland China, Taiwan and Bangladesh.

One thousand of Symbio’s 1,400 employees work at three development centers in China, the new world powerhouse for R&D spending and talent.

With its software development engineers in China handling the bulk of the work, Symbio cuts time-to-market for its clients by as much as 25 percent and product engineering costs by as much as 75 percent. “For our clients, costs are a priority, but agility and time-to-market are also key,” says Jacob Hsu, Symbio’s CEO, now based in Beijing. Hsu was educated at the University of Pennsylvania’s Wharton School of Business.

To ensure a steady flow of top talent with company-specific skills, Symbio partners with a major university at each of its three development centers in China.

“Every year, we select 100 top juniors at each university, work with the university to design a curriculum and then move those students into paid internships at Symbio in their senior year,” Hsu explains.

Hsu is unconcerned about reports of wage inflation in China topping 6 percent.

“Whether you are in China or any location, controlling wage inflation comes down to managing your talent pipeline,” he says. “To control costs, we must manage our employees to increase the value of their skills.”

In addition to its training programs for students, the company maintains an internal program that offers 108 different courses for existing employees.

The world spends more than $1.1 trillion a year on R&D, with corporations accounting for 62 percent of the total, according to Booz & Co. Among the top 1,000 global corporate R&D spenders, nine out of 10 conduct R&D activities in multiple locations offshore, with the majority spending more than half of their R&D budget outside their home country. Booz’s 2009 study found that companies spending more of their R&D budget in low-cost locations perform substantially better in sales and market capitalization growth. China is now the single largest net recipient of R&D offshore spending.

Companies commonly lower their R&D labor costs by 40 to 60 percent by offshoring to the developing economies, according to the Boston Consulting Group. Salaries for associate engineers in India average $4,400 per year, compared with $53,400 per year for newly minted engineers in North America or Europe, Boston Consulting Group notes.

Hsu is actively exploring locations for new centers in China but has little appetite for moving into other emerging markets.

“There is still so much room for growth in China, with an incredible upside for workforce expansion and plenty of scale, especially in Tier II cities,” he notes. “We have to stay cost-effective, but we have to tap into the best engineers and experts and they are only in certain locations,” Hsu says.

Increasingly, those locations are in China and India—the preferred sites for offshore R&D. The emerging markets already account for two-thirds of the global engineering talent pool, and that share is rapidly growing, Boston Consulting Group says.

Workforce Management, December 14, 2009, p. 27 -- Subscribe Now!

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