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Offshore R&D spending grows, recession or not

Patrick Thibodeau | July 19, 2010
India won't be making iPhone anytime soon, but it may pressure U.S. engineering salaries

FRAMINGHAM, 19 JULY 2010 - 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 US$407 billion in global engineering research and development (ER&D) spending worldwide, with 42 per cent of it in the United States, 16 per cent in Japan, and 1 per cent in Asia. Most of the remainder of the spending was in Europe.

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

India's share of this global market was $8.3 billion in 2009, an increase of about 40 per cent 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 per cent 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.


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