VideoIt's these offshore gains that come at the expense of U.S. engineers, Hira points out. "To say that Intel or somebody else moving R&D offshore is not going to have some kind of adverse impact in the U.S. is wishful thinking," he says. "If they're going to spend $100 million over there, they're not going to spend $100 million over here."
That may be. But as far as CFOs are concerned, it's all for the good of their P&Ls. Sophie says UTStarcom's engineering costs offshore are about 25 percent of what the company would have spent in the States. This brings his R&D costs down to just 10 percent of sales. "If we were to assume that all those engineers were domiciled in the U.S., our R&D would be well over 15 percent of revenues," he says.
Similarly, E.piphany's Yeaman has no qualms about outsourcing R&D jobs overseas. "I can't tell you what might take the place of the development jobs that are going to be transferred offshore," he says, "but I can tell you that we need to do what's best for shareholders, and that is to have the most efficient development organization while maintaining the quality it takes to be an innovator in the industry."
Outsourcing Vs. Offshoring
The inevitable difficulties involved with the management of outsourcing relationships have led some companies to choose the "offshoring" model of outsourcing R&D, in which companies establish their own subsidiaries rather than farm out the work to third parties. UTStarcom took this path last year when it hired 25 engineers for its initial R&D investment in India. This year it acquired an Indian facility that was controlled by CommWorks, a division inside 3Com that is focused on telecommunications.
Larger companies also prefer full ownership to ease the risk of infringement on intellectual property rights (IPR). In China, companies formerly did much R&D in joint ventures with Chinese firms or universities, says the Stimson Center's Walsh. Now they are abandoning the joint-venture model in favor of wholly foreign-owned enterprises, to make sure anything they develop in the R&D centers is their own property.
In outsourcing arrangements, U.S. companies ultimately have little power over IPR protection, although Yeaman says that generally, outsourcing pro-viders like Innova have "tight" protection procedures.
Meanwhile, E.piphany is exploring the possibility of full ownership. The company is now analyzing whether to continue the fully outsourced setup, establish its own presence in India or China, or pursue a combination of both, "which may entail working with an outsourcer to build an operation where the intent would be for us to take it over down the line," says Yeaman.
The CFO is studying the cost and operational implications of each option. All options are feasible in India, where the IT market is mature and there are more established outsourcers. In China, where IT outsourcing is less mature, it's more difficult to find an outsourcing provider. However, China has a time-zone advantage: the 15-hour difference between California and China, versus 12 hours between California and India, would give U.S. and offshore engineers more time to collaborate. Whatever E.piphany finally decides, Yeaman is confident the cost advantage will be substantial. Year-to-date, the company's R&D costs have accounted for 38 percent of revenues, versus 41 percent last year. "Ultimately we expect to spend somewhere in the neighborhood of 15 percent on R&D," he says.
Given such promise, it's easy to predict that offshoring of R&D could only grow. Gartner's Iyengar says the next wave of outsourcing in India could be for big pharmaceuticals companies in the United States and Europe to choose India as an offshore location for downstream drug-discovery efforts. In June, the British firm AstraZeneca announced it was increasing its $10 million investment in India by another $30 million, for the development of new treatments for tuberculosis. "This is a very expensive process for these companies, and heavily dependent on high-quality PhDs, which are in abundance in India," says Iyengar.
To Yeaman, it all makes economic sense. "If you're going to have the most cost-efficient structure," he says, "you need today to have an offshore presence."
Abe De Ramos is executive editor of CFO Asia.
China Wants Our IT Jobs, Too
As if manufacturing jobs weren't enough, China is grabbing U.S. IT jobs, too. In the next three to five years, China and India may receive almost the same amount of revenue—about $27 billion to $30 billion—from IT outsourcing, according to research firm Gartner.
The lure for U.S. companies to outsource IT jobs to China is obvious: cheap labor costs. "China is about 40 percent less than India right now, and I think that gap will widen over time," says Gordon Brooks, president and CEO of Waltham, Massachusetts-based E5 Systems, which runs IT outsourcing facilities in Beijing and Bangalore.
A testament to China's growing role in the industry is the influx of Indian IT-services firms. Well-known providers such as Tata, Wipro, and Infosys have quietly set up shops in the mainland in the past year. "Most of the Indian firms are outsourcing to China; they're just not telling their customers they're doing it," says Brooks. "I don't think Indian firms want people to understand that China is ready, for the benefit of [preserving their] margins."
Reader Comments» Post a comment