Recession Hurts India's R&D Offshore Outsourcing

by Manu Sharma    Mar 18, 2009

At the time of recession, lower billing rates in China offer a lucrative proposition for US based companies to outsource their offshore R&D related work to third party service providers in China. This is impacting the Indian outsourcing market adversely. 

While the Indian R&D offshore outsourcing market is projected to grow at 14-16% in 2009, the Chinese market is expected to outshine India with a 30-35% during the recession period.

Even though China is only about 1/3rd of the total Indian R&D offshore outsourcing market in size, it has a relatively faster growth ratio than India. This is primarily attributed to the nascent stage of the China market and a small base as compared to India. Indian offshore outsourcing market has now reached a relatively mature stage. In fact, India’s R&D offshore outsourcing market, which is estimated at $3.5 billion, experienced a 21% growth in 2008 while the China market, estimated at $1.3 billion, grew at a phenomenal 46% during the same period. Currency fluctuations have impacted the overall size of the market over the last six months.

Talking to CXOtoday, Praveen Bhadada, engagement manager at Zinnov Management Consultancy, said, "The upswing in the number of US-based companies trying to de-risk their R&D related work to third party service providers in China, among other factors, has resulted in this trend."

The billing rates of the service providers in China are relatively lower compared to India. While top tier Indian IT firms charge between $23-28 per hour for new product development, Chinese firms charge between $19-25 per hour for the same work. The billing rates for Indian IT firms are higher owing to factors such as better quality, IP protection and timely delivery. "But in the present economic recession scenario, both vendors and customers are looking to optimize on the billing rates," said Bhadada.

In 2005, outsourced work to China amounted to $408 million, of which US had a 52% share. In 2008, China offshore outsourcing R&D related work amounted to $1,287 million and US share amounted to 64%.  Similarly, Europe and Japan have also contributed to the major share of outsourcing work to China.

Indian service providers having operations in China do not offer a broad array of R&D services as opposed to their Chinese competitors and their focus is primarily on IT services.

Comparing India and China, the total Indian service providers R&D headcount numbers to 110,000 with about 130 pure Indian players while the number in China is estimated at 39,000 to 45,000 with about 250-plus local service provider companies.

As per a Zinnov report, Indian service providers in China have not been able to scale up their R&D operations in spite of having ambitious ramp-up plans since inception. Also, all the major Indian IT players like TCS, Infosys, Satyam and Wipro have failed to reach the headcount targets and also failed to make any inroads in China. Indian firms were to grow their headcount significantly faster but none have managed to do so