Insight
The reality of business is that companies must do more with less to stay competitive and continually search out new ways to improve products and time-to-market to lead their markets. Top companies have long found it makes good business sense to outsource a business function — from making parts to delivering payroll — to wherever it can be done the best. With the Telecommunications Act of 1996 came the wave of fiber-optic cable and a new capability that truly enabled the IT departments of U.S. companies to plug into offshore outsourcing firms and take advantage of lower wages and cost efficiencies.
Many of these same companies have R&D departments developing embedded software and hardware and now the CTOs want to leverage offshore vendors to not only reap the same benefits of lower wages and expanded productivity, but bring better products to market sooner. Although the potential benefits are there, companies must consider two things before offshoring embedded R&D technology. First, the requirements of an R&D department that does embedded technology development for the marketplace and those of an IT department that serves employees are not the same. Second, a country’s human capital may be good quality for IT projects, but may not be the best choice to meet the higher skill levels required for R&D embedded technology.
Basically, the technology offshoring choices boils down to two: China or India. China is known as “the world’s factory” and produces $60 billion worth of consumer electronic goods a year. India, known as “the offshore call center,” is the acknowledged leader in IT and business process outsourcing (BPO).1
Whether a CTO is searching for an offshore outsourcing vendor for a single project or a long-term partnership, the vendor’s country should be a significant part of the due diligence.
Engineering Talent Pool
The highly respected National Academies notes in an October, 2005 report that a company could potentially employ five chemists in China or 11 engineers in India for the cost of one chemist or engineer in the United States. Wages are lower offshore, there’s no question about that. Long Circle, however, suggests that companies must look further and examine additional important criteria when searching for the best country to outsource embedded product research and development technology.
Pay attention to attrition and wages
The number one reason most companies send work offshore is because wages are less. Experts recommend that engineering wages stay within the range of 20 to 50 percent lower than wages in the U.S. to make offshoring worthwhile. However an important factor to keep in mind is that the rules of supply and demand apply in offshoring and inevitably result in rising wages.
According to a report released in June, 2005 by management consulting company McKinsey and Company, India faces a shortage of middle managers due to the growth of India’s IT industry by approximately 20 percent annually over the last 10 years. Wages for IT project managers have increased by 23 percent annually over the last four years. 2
Attrition rates in India have been estimated at anywhere from 20 percent to 50 percent. Turnover is a problem and many firms are looking for ways to retain their workers in addition to increased wages. According to a Businessweek article in February, 2005, India: Good Help Is Hard To Find, a prominent vendor is using creative ways to hire middle managers and to reduce attrition — from finding homes for new hires to helping their children with school admissions.
Industry analysts acknowledge that India is the seasoned player in offshore IT technology and wages are rising, while China is newer to the offshoring industry and wages in China are lower.
Is the R&D pool deep enough, with enough new graduates and experienced engineers?
Although both China and India have excellent universities and engineering programs, a very real concern for a company looking to offshore embedded systems R&D development is: Does this country have a large enough pool of R&D engineers, both new graduates and young engineers with seven years or less of experience? If not, supply and demand may eventually drive the costs up and possibly impact deadlines.
New graduates. The exact number of four-year engineering graduates each country produces yearly is open to debate.
The statistics cited in the first row of the chart below have been widely quoted in the media, from Fortune Magazine to a speech by Senator Ted Kennedy. However according to the Wall Street Journal online, these figures are misleading and no one can track down a concrete and reliable source for where the numbers originated.
Engineering Graduates China India United States
Source: Unknown 600,000 350,000 70,000
Source: Duke University 352,000 112,000 137,000
The statistics in the second row of the chart are from a study released in December, 2005 by Duke University (and also widely quoted in the media, including The Christian Science Monitor) that cites different numbers for the engineering graduates in each country.
Regardless of the actual number, statistics show that China produces the most engineering graduates each year.
Experienced engineers. The offshore country’s workforce must have depth of experience as well. In a press release issued in February to review the industry’s performance during 2005, NASSCOM said that in India, IT service workers clearly dominate engineering R&D workers. According to NASSCOM, in 2005 there were 316,000 workers in the ITES-BPO segment and only 93,000 workers in the engineering services and R&D and software products segment. This trend is expected to continue during 2006.
By comparison, a McKinsey and Company report says that four percent of the total university-educated workforce in India has an engineering degree, compared to 33 percent in China.2
When selecting an offshore vendor for embedded technology, the vendor must not only have sufficient human capital (both new graduates and experienced engineers) to complete the development project, but the experience of the workforce must be product research and development, instead of merely IT experience.
University educated workforce
with engineering degree:
India: 4%
China: 33 %
Potential culture and language barriers
Although engineers do not necessarily require a good command of English to perform their job, communication could be an obstacle unless there are English-speaking employees at points-of-contact with the customer.
In India, English (although not American English) is the second language and companies can expect offshore employees to communicate well.
While English is not as common for the average Chinese citizen, the situation is different for college graduates in China. To be admitted to college in China, high school graduates take five exams, and three of those exams — Chinese literature, math, and English — are required. To attend the top universities, students must obtain near perfect scores on their exams — including English. The result is that top university graduates in China do have good English language skills.
Infrastructure: How are the roads and the utilities?
On August 8, 2008, the world will focus on China when the 2008 Summer Olympic Games begin in Beijing. China is taking great pride in hosting the Olympic Games and is focusing on improving infrastructure for the expected visitors from around the world.
According to news reports:
• Beijing will spend an estimated $38 billion for new urban infrastructure, including building and renovating roads and railroads, building subway and light rail lines and building sites for Olympic venues.
• Natural gas will replace many coal-burning heating plants.
• A third airport terminal in Beijing will double the airport’s capacity.
India’s infrastructure, on the other hand, is generally viewed as lacking. For example, the International Diamond Exchange (IDEX) noted in a recent online report that although India potentially could become the leading market for diamonds in the future, India currently faces major obstacles such as India’s heavy dependence on imported energy and poor infrastructure. IDEX laments, “India’s infrastructure is dismal. For example, roads are poor and land-based communications don’t work.”
However, according to an article on indiadaily.com, “… improving India's potholed highways, congested ports and erratic telecommunications and blackout-plagued power service is vital to drawing foreign investment and bolstering the economy further, economists say.” The Indian government has forecasted growth of 6.9 percent during the year ending March 31, 2005, which means India has the second-fasted growing economy after China. 4
When evaluating outsourcing vendors, companies should keep in mind that U.S. personnel will undoubtedly visit the vendor’s offshore facilities from time to time.
Intellectual Property Protection
Both India and China have reputations that are less than stellar when it comes to protecting intellectual property. China especially is notorious for copyright infringement. However media sources reported recently that an intellectual property milestone was reached when a U.S. business was sued for patent infringement in Texas federal court by a mainland Chinese plaintiff. Experts predict that when Chinese companies begin to police their own IP infringement, the Chinese government will become more vigilant in protecting the intellectual property of foreign countries within China.
China’s membership in the World Trade Organization (WTO) is also viewed as driving reform.
Companies should scrutinize a potential vendor’s security protocols to ensure that a potential vendor adheres to the best-of-class security protocols found in U.S. companies.
Conclusion
When early outsourcing projects involved IT and Business Processing Outsourcing (BPO) the majority of companies turned to India. However, outsourcing IT development and BPO is not the same as outsourcing embedded product research and development; that’s comparing apples to oranges. The requirements and skill levels are not the same. Companies must evaluate not only the outsourcing vendor’s qualifications, but the vendor’s offshore location as well to ensure companies realize the value they want to achieve. Long Circle recommends for a company’s R&D department to realize the greatest return on their outsourcing investment, there is no better place in the world than China.
About the Author
Hayden Hong, the founder and CEO of Long Circle, has over a decade of outsourcing and consulting experience. Prior to founding Long Circle, Hong was the president and founder of MacaoDude, a consulting firm that counts among its clients Motorola, Nortel, and various high technology companies in the Boston 128 area. In 2005, Hong merged the two companies to provide U.S. companies with low-risk, convenient access to China’s engineering talent, manufacturing industry, and emerging markets. His background includes managing U.S.–China offshore R&D projects for GE, as well as management positions at Broad Reach Communications, a GE partner. Hong received a MSEE degree from Purdue University and a BSEE degree from Northeastern University, graduated magna cum laude.
About Long Circle
Long Circle provides outsourced engineering services to companies whose products and services rely on embedded software and hardware technology. Long Circle and the Long Circle China Center of Excellence enables U.S. companies to reduce costs, increase engineering bandwidth, and broaden market reach by providing low-risk, strategic access to China’s engineering talent, manufacturing industry, and emerging markets. To learn more about Long Circle, visit http://www.longcircle.com. |
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