Nearshore Americas

Offshore R and D Spikes Despite Recession


Engineering research and development spending increased overall during the recession, but more of this spending is now moving offshore, according to a new study.

The study by Booz & Co., a management consulting firm with the National Association of Software and Services Companies (NASSCOM), India’s largest industry group, looks at engineering research spending by various industrial sectors globally. It also offers a snapshot of engineering salaries.

The study data shows a gradual shift, over three decades, in where that money is being spent.

In 1990, there was approximately $407 billion in global engineering research and development (ER&D) spending worldwide, with 42% of it in the United States, 16% in Japan, and 1% in Asia. Most of the remainder of the spending was in Europe.

In 2009, global ER&D hit $1.1 trillion, with 38% of it in the U.S., 14% in Japan and 7% in Asia. (This was an increase in spending of 12% from 2008.) By 2020, the study predicts worldwide spending will reach $1.4 trillion, with 35% in the United States, 13% in Japan and 11% in Asia.

India’s share of this global market was $8.3 billion in 2009, an increase of about 40% over the last three years. It is expected to reach $45 billion by 2020, the study forecast.

The growth of offshore work in India began with low-end engineering, such as basic CAD and CAM. But, increasingly, offshore firms are doing high-end work on behalf of clients, such as on hybrid technology for the automotive industry and avionics R&D, said Vikas Seghal, a partner at Booz.

True innovation work is still about 20% or less of the offshore spending in India, but it is increasing at a rapid rate because India is a big market on its own and overseas firms are more comfortable with working there, said Seghal.

“The high-end work will be retained in the U.S., so don’t expect India to do an iPhone ,” said Seghal. A reason for this is that products such as the iPhone require a seamless interface between manufacturing engineering and product engineering and software design; India at this point is mainly software design and product engineering, he said.

While China is seeing similar growth , much of the ER&D is being done by local divisions of global companies. The engineering work being done in China “is predominantly for Chinese products,” said Seghal.

In contrast, India’s offshore firms are working for a broad range of global companies and that may put it in a strong position to develop its own industries, said Seghal. India “is going up the learning curve faster because it is forced to meet Western standards as it tries to build products,” he said.

Of the total low-cost ER&D offshore market in 2009 of about $38 billion, India’s share was 21% — the largest — and China had between 18% and 20%, according to the study.

Seghal believes that India will have a deflationary impact on global engineering services that will keep costs from escalating.

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The average hourly engineering wage in the U.S. is $41, with the average salary in India at $4 an hour; the report points out in a footnote that the range is from $2 to $11 an hour, depending on experience.

By contrast, the average engineering wage in Russia is $10 an hour, and in China $6 an hour.

According to the Institute of Electrical and Electronics Engineers (IEEE-USA, the 2008 median income for its U.S. members working full time in design and development engineering was $110,330. But the group said the impact of offshoring on salaries is unknown.

The use of offshore for research and development by U.S companies is getting a detailed look at the National Science Foundation, which, in a preliminary report released in May, said U.S. companies spent $330 billion in R&D in 2008, with $234 of it spent in the U.S.

Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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