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India used to be seen as the perfect offshore research and
development hub for global firms seeking to tap its low-cost and
supposedly vast engineering talent pool to devise products for world
markets.
Companies including Microsoft, IBM, Intel, AMD,
Google, Motorola, Yahoo!, Cisco and Siemens have opened R and D
centres in India, drawn by payroll costs that were once a quarter of
those in the US and Europe.
But the cost advantage is fading and engineers
trained in basic research are harder to find, reducing India's
appeal, says Zinnov, a consultancy that advises overseas firms on R
and D issues.
"Some companies witnessed a 20 percent rise
last year in the cost of running their R and D operations in
India," Zinnov chief executive Pari Natarajan said in an
interview.
"If this trend continues, the cost
advantage of doing R and D in India compared to the US will go
away," he said, predicting a shakeout in the R and D offshoring
market.
India is home to 594 R and D facilities set up
by overseas firms that invested a combined 5.83 billion dollars,
according to Zinnov.
Rising costs and a shortage of skilled workers
have also hurt other industries -- from software to retailing -- in
an economy that has expanded at an annual average of 8.6 percent
over the past four years. But the R and D offshoring market has
received scant attention.
"Costs are going up all over, and we are
also facing a shortage of shop floor workers," said Anjun Roy,
economist at the Federation of Indian Chambers of Commerce and
Industry.
"There is a need to improve skill sets in a
lot of areas."
Like software makers, R and D centres whose
expenses are incurred mainly in rupees were hurt by a more than 12
percent rise last year in the value of the Indian unit against the
dollar.
Wages jumped about 15 percent as companies
fought to hire and retain hard-to-find engineers skilled in
research.
India turns out more than half a million
engineers every year, but institutions do not train them in basic
research, limiting the available talent pool to no more than 100,000
people, said Natarajan.
The shortage may set back the ambitious
expansion plans announced by companies such as networking giant
Cisco, which said in October that it plans to triple its headcount
in India to 10,000 in three years.
"It's going to be very difficult for
companies which have very aggressive hiring targets," Natarajan
said. "It's almost impossible to hire unless you compromise on
the quality of talent."
Cisco, which plans to use India to develop
products for customers in emerging markets, has opened 170 academies
across the country and is training 8,600 students to overcome the
talent crunch, human resources executive Leo Scrivener said.
"We are aware that a large pool of
technical specialists and business solutions experts can't be
readily hired from the market," Scrivener told AFP.
Cisco has benefited from its R and D facility in
India that has generated 110 US patents, with another 400 pending
with the US Patents and Trademark Office.
Hundreds of patents have been filed by other
research facilities based in the country. Half the work on an Intel
wonder chip, a fingernail-sized device unveiled last year that
offers supercomputer performance, was done by its India research
centre.
Despite the problems facing R and D, Zinnov
predicts that investment in existing facilities by large global
companies capable of riding out rising costs, and with the
infrastructure to train fresh graduates, will drive India as an
offshore R and D destination.
That will pump up the R and D market by an
annual average of 23 percent until 2012, even as per-employee cost
in India increases by a yearly 13.3 percent.
Smaller facilities may have to shut shop or sell
out while investment in new R and D centres will likely dry up as
part of a looming consolidation, said Natarajan.
-- AFP
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