Global R&D moves towards integration across US, India, China

India's 'invention services' & China's 'transformation services' next wave of offshoring

That Indians make great software and Chinese manufacture everything on a grand scale is old hat.

Now, US firms are bringing their "customer-facing people" together with Indian software makers and Chinese manufacturers to create a new R&D and business model that will outdo all outsourcing that has happened so far, say experts with a ringside view of the trends.

China and India are fast becoming "export bases for innovative products": US firms are moving into a phase where co-location of R&D with either the consumer or the manufacturing facility is no longer necessary. Instead, they are "driving greater integration of R&D across the US, China and India," which is the beginning of the next big wave of offshoring, said Navi Radjou, a vice president of research with analyst firm Forrester.

In this model, which Forrester calls Innovation Networks, US firms will "source not simply low-cost talent, but 'invention services' (R&D services) in India and 'transformation services' (manufacturing services) in China, to build products for a global economy" Radjou said.

Indian IT firms like Wipro will play a key role with their product engineering services (PES), he said. Cambridge, Massachusettes-based Radjou wrote a paper on Wipro's PES capabilities and how that can help the firm exploit the opportunities of Innovation Networks.

PES is the fastest-growing practice within Wipro Technologies, the global IT services business of Wipro. PES generated 28 per cent of Wipro Technologies's $1.35 b revenues last year.

PES is opening the next chapter in IT outsourcing: R&D services, Radjou said. "Indeed, outsourcing in the global electronics industry is growing at 20 per cent annually. Indian IT providers should capitalise on this trend."

The Indian R&D services market is projected to grow from $2.3 b today to $11 b by 2008-2010, according to Nasscom, the Indian IT trade body. McKinsey, a consultancy, in its 2004 Global Survey of Business Executives found "more executives of large companies planned to invest in R&D facilities in India than in China."

But China boasts world-class electronics manufacturing capabilities embodied in its semiconductor firms like Semiconductor Manufacturing International Corporation (SMIC) and Grace Semiconductor - which are key in transforming Indian inventions into innovative products, Radjou's white paper said.

The result: India and China combined will become a major hub in the global electronics Innovation Networks - a fluid market structure that matches global innovation demand with worldwide supply of talent and capabilities. That Western IT services providers already recognise this combination's power is evident in their plans for ramping up their Indian supply base:

IBM already has an R&D lab in New Delhi and intends to recruit 14,000 software engineers in India, whom Forrester calls "software inventors".

Today, most of this Indian talent pool develops IBM-branded hardware and software. But as services eclipse products in IBM's revenue base, "expect IBM's Indian scientists and engineers to join IBM's On Demand Innovation Services (ODIS) and Engineering & Technology Services (E&TS) practices "" IBM units that offer client tailored innovation services "" to design custom chips and supply chain software algorithms for IBM clients," Radjou said.

Relatedly, Deloitte's Intellectual Asset Management (IAM) practice, will add "Indian inventors" to its virtual expert network, and outsource its IP valuation services to Indian specialists like Evalueserve.

By sourcing invention services from a low-cost supply base like India, Western providers like IBM and Deloitte can dedicate their highly paid consultants to transforming inventions into client-valued services, he said.

This means "Indian IT tigers," to compete in the market, will have to "cozy up to Chinese manufacturing dragons."

As Western IT providers beef up their Indian R&D presence, local providers will need to differentiate their invention capabilities and will be forced to move up the electronics Innovation Network value chain. They can do this by providing "soup-to-nuts" (end-to-end) solutions that combine design and manufacturing services.

For instance, while India gets more recognition as a base for semiconductor chip design, chip manufacturing isn't its forte. But China "is fertile with semiconductor foundries" such as Grace Semiconductor, SMIC, Taiwan Semiconductor Manufacturing Company (TSMC), and United Microelectronics Corporation (UMC) that boast sophisticated chip manufacturing capabilities.

Wipro's PES has already partnered SMIC, TSMC and UMC. Expect other Indian IT providers like TCS and Infosys to be doing the same thing "" offer clients the power of combining India's design services with China's manufacturing capabilities.