CFO Magazine

The China Syndrome

U.S. companies are beginning to outsource technology research and development to India and China. Will a meltdown in tech jobs follow?

Abe De Ramos
CFO Magazine

October 1, 2003

Mike Sophie has good reason to smile these days. In a year that's been rough for almost every business sector, the CFO and vice president of finance at Alameda, California-based UTStarcom is expecting an 86 percent jump in revenue, from $982 million in 2002 to a record $1.8 billion. And he hopes that's just the beginning. The company, which provides mobile telephony suited to emerging markets, is soon to deploy the technology in South Asia, Africa, and Latin America. To that end, UTStarcom earmarked $25 million in July to expand its research-and-development center and hire about 100 engineers. If that sounds like a lot of bang for the buck, it is—because the R&D center is based in India.

CFOs still wondering whether or not to send back-office functions offshore are far behind the outsourcing vanguard. Increasingly, technology R&D is migrating overseas. Intel, for example, is developing Banias, its next-generation mobile processor, in Israel; Nortel Networks is developing its wireless Internet infrastructure in India.

Cost advantage and a vast talent pool are driving the trend. India is the overall outsourcing leader, followed by Ireland and the Philippines. But China is rapidly gaining ground (see "China Wants Our IT Jobs, Too," at the end of this article). In general, the movement of high-end jobs offshore can only accelerate, says Partha Iyengar, a research vice president at Stamford, Connecticut-based consulting firm Gartner.

To be sure, there is also a strategic reason why UTStarcom is locating R&D activity outside the United States: it sells almost all of its products and services overseas. Currently the company has more than 1,400 engineers in China, which accounted for 80 percent of 2002 revenues. It also has 150 engineers in India, which should overtake Japan as its second-largest market next year.

Meanwhile, foreign companies are getting in on the outsourcing act. In August, French telecom giant Alcatel raised its R&D investment in China to $100 million. "Our goal is to develop China as an R&D center not just for China, but for the rest of our global business," says Christian Gregoire, chief technology officer of Alcatel Asia Pacific. The $18.5 billion-a-year firm is betting big on third-generation mobile infrastructure and applications, and chose Shanghai as the first site outside Europe for this development task.

The Shanghai facility has access to Alcatel's global technology pool, and all projects in China are planned and performed under the same system, and with the same objectives, as other R&D centers worldwide, says Gregoire. "China offers a very cost-competitive talent pool of R&D engineers, so there is ready availability," he adds.

The trend is not restricted to large companies. San Mateo, California-based E.piphany, an $84 million-a-year provider of customer relationship management software, outsources 15 percent of its R&D workforce to Innova, based in Bangalore, India. It expects to increase this to 30 to 40 percent by the end of 2004, although it may switch the outsourcing to China. "What led us there initially was our desire to have the most cost-efficient, quality R&D organization we can have," says CFO Kevin Yeaman.

Replacing or Supplementing?
That's not music to the ears of Ron Hira, chair of the R&D policy committee at the Institute of Electrical and Electronics Engineers USA, a professional society. Hira, who testified before a House of Representatives inquiry in June on the economic impact of outsourcing, blames the global "decentralization" of R&D for the rise of the unemployment rate in the profession to unprecedented levels (7 percent in first-quarter 2003). That rate eased in the second quarter, "but the raw unemployment numbers mask the shift that people are out of work for many more weeks, months, even years before they can get jobs," says Hira.

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