India becomes R&D hot spot as technology companies cut costs: Although India seems a natural location for offshore R&D, certain problems such as shortage of home-grown researchers need to be tackled...

Rina Chandran

Bangalore: At Microsoft Corp.’s research centre in a leafy lane in India’s technology capital, a new generation of researchers is being groomed half a world away from the software giant’s sprawling headquarters in Seattle.

Complete with bean bags and coffee served in steel tumblers, the centre is helping change the perception that India is no place for top-end research and development (R&D).

Staffed with around 60 full-time researchers, many of them Indians with PhDs from top universities in the US, the centre is at the cutting edge of Microsoft’s R&D. It covers seven areas of research, including mobility and cryptography.

Its success, including developing a popular tool for Microsoft’s new search engine Bing, underscores the potential of R&D in India at a time when cost-conscious firms are keen to offshore to save money by using talented researchers abroad. Showing off the Bing tool, which enables searches for locations with incomplete or even incorrect addresses, B. Ashok, a director of a research unit at the centre, said the innovation would never have taken root if the R&D had been done in the US. “It was completely inspired by the Indian environment, but is applicable worldwide,” he said.

‘The Indian units are more tuned to the needs of customers in emerging markets.’

While India might seem like a natural location to expand offshoring into R&D, it is hampered by some serious structural problems that range from not enough home-grown researchers to a lack of government support. India produces around 300,000 computer science graduates a year. Yet, it produces only around 100 computer science PhDs, a small fraction of the 1,500-2,000 that get awarded in the US, or China, every year.

“Students here are not exposed to research from an early age, faculties are not exposed to research and there’s no career path for innovation because there’s a lot of pressure to get a ‘real’ job,” said Vidya Natampally, head of strategy at the Microsoft India Research Centre.

The small numbers of PhDs and the lack of government incentives for India’s fledgling R&D sector are blunting the country’s edge, analysts warn.

Rival China has already pulled ahead with at least 1,100 R&D centres compared with less than 800 in India, despite lingering concerns about rule of law and intellectual property rights. Aside from providing funding to encourage students to complete their PhDs, China also offers fiscal incentives such as tax breaks for R&D centres and special economic zones provide infrastructure for hi-tech and R&D industries. India is also losing out in the patent stakes. In 2006-2007, just 7,000 patents were granted in this country of 1.1 billion people, compared with nearly 160,000 in the US.

“We’re nowhere near the US or even Israel when it comes to innovations,” said Praveen Bhadada at consultancy Zinnov, which estimates the R&D sector in India is worth around $9.2 billion (Rs.44,436 crore).

India is cheaper than China for R&D, those in the industry in Bangalore said. But salaries in India have been rising by around 15% every year and may soon reach parity with China. R&D centre costs in Shanghai are currently just 10-15% higher than in India.

Cisco Systems Inc., International Business Machines Corp., Intel Corp., Nokia Corp., Telefon AB LM Ericsson and Suzuki Motor Corp. have all gone beyond low-end coding and tweaking products for the local market, with hefty investments and recruitment. Their success shows India’s potential if the government starts supporting such ventures and building high-tech parks and incubators.

“If Paris asks for some work, it’s not because they think it’s cheaper but because they want inputs from India,” said Jean Philippe, chief designer of Renault India Studio, which competes with the French car makers Renault SA’s five other global studios.

Texas Instruments Inc. and San Jose-based Cadence Design Systems Inc. were among the first to set up R&D in India in the mid-1980s, drawn by the legions of English-speaking software engineers who could be hired at around 20% of the cost of engineers in the US.

The opening of the economy in the early 1990s and the establishment of the software services industry drew more foreign firms looking to cut costs and tap emerging markets. “From when a few companies offshored non-critical design work, we have seen India emerge as a preferred destination for design and development of chip, board and embedded software,” said Jaswinder Ahuja, managing director of Cadence India.

Firms first focused on the D in R&D, but research has grown in importance in recent years, and many of the facilities in India are now the largest outside their home base.

Half of Cisco’s core R&D work, including innovations in WiMAX and optical networks, and around 40% of business software firm SAP AG’s ideas for processes and product development come from India.

WiMAX, short for worldwide interoperability for microwave access, is a telecommunications technology that provides wireless data transmission.

“The Indian units are more tuned to the needs of customers in emerging markets. Besides, Bangalore is only a five-hour flight away from three strategic regions: south-east Asia, east Asia and the Middle East,” said Aravind Sitaraman, vice-president at Cisco.

IBM’s India Research Labs does a “fair share of patenting”, helping swell the parent’s record numbers every year, said director Guruduth Banavar in Bangalore. Its new $100 million mobile communications research, Mobile Web, is the first time a big project has been driven from outside the US, he said.

“For a research lab it’s the best environment to be in: you can see the problems and the opportunities,” Banavar said.