The economic slowdown has resulted in increasing number of US-based companies now outsourcing their offshore R&D related work to third-party service providers in China, who charge lower billing rates. This has impacted the Indian outsourcing market adversely.

While the Indian R&D offshore outsourcing market is projected to grow at 14-16% in 2009, the Chinese market is expected to outshine India with a 30-35% during the recession period.

Even though China is only about 1/3rd of the total Indian R&D offshore outsourcing market in size, it has a relatively faster growth ratio than India. This is basically due to the capabilities of China in the manufacturing R&D and also lower billing rates.

In fact, India’s R&D offshore outsourcing market, which is estimated at $43.5 billion, experienced a 21% growth in 2008, while the China market, estimated at $9.5 billion, grew at a phenomenal 46% during the same period. It is primarily due the rupee fluctuations; the appreciation, followed by the depreciation, has largely impacted this market.

Talking to CXOtoday, Praveen Bhadada, engagement manager at Zinnov Management Consultancy, said, “The upswing in the number of US-based companies trying to offshore their R&D related work to third party service providers in China, among other factors, has resulted in this trend.”

The billing rates of the service providers in China are relatively lower compared to India. While Indian IT firms charge $24 per hour for new product development, Chinese firms charge $21 per hour for the same work. The billing rates for Indian IT firms are higher owing to factors such as better quality, IP protection and timely delivery. “But in the present economic recession scenario, both vendors and customers are looking to optimize on the billing rates,” said Bhadada.

In 2005, outsourced work to China amounted to $408 million, of which US had a 52% share. In 2008, China outsourcing R&D related work amounted to $1,287 million and US share amounted to 64%.  Similarly, Europe and Japan have also contributed to the major share of outsourcing work to China.
Another reason is Indian service providers do not offer a broad array of R&D services as opposed to their Chinese competitors and their focus is primarily on IT services. In fact, the total Indian service providers R&D headcount numbers to 110,000 with about 130 pure Indian players while the number in China is estimated at 39,000 to 45,000 with about 250-plus local service provider companies.

As per a Zinnov report, Indian service providers in China have not been able to scale up their R&D operations in spite of having ambitious ramp-up plans since inception. Also, all the major Indian IT players like TCS, Infosys, Satyam and Wipro have failed to reach the targets and also failed to make any inroads in China. Indian firms were to grow their headcount by 25% annually, but none have managed to do so.

The corporate sector expects the period of downturn in the Indian economy to continue till May 2010 before bouncing back in response to the fiscal and monetary policy stimulus and abatement of recession in the international economy.

This was revealed by Assocham Business Barometer (ABB) Survey of CEOs.

In the ABB Survey, 84 percent of the CEOs polled across various business segments were unanimous about the view that poor business confidence in India may extend till the middle of the next year.

Around 77 percent of the industry heads believed that the growth rebound would be faster and sooner in India than the developed economies of US and Europe, said Assocham President Sajjan Jindal.
The key driving factors for end of slowdown in India, cited by the ABB respondents, included reduction of repo rate and reverse repo rates infusing liquidity in the markets, government in terms of improved fiscal spending and fall in inflation providing cushion to the industry in terms of reduced cost.

The industry expects the economic activity to pick momentum after the elections as the stalled projects would resume and fresh budgetary allocations would further boost the economy. The combined impact of these factors would be felt after the end of the fiscal 2009-10.

About 60 percent of the Indian GDP is domestic consumption and the percentage contribution of exports is 23 percent. Hence, even as it would be difficult for the export sector to revive by the end of this year, the Indian economy may regain its lost momentum in response to government investments and domestic consumption.

The investment scenario in the Indian economy has taken the hit as both domestic as well as foreign investment dipped due to credit crunch and declining demand. As many as 73 percent of the CEOs expect the investments to recoup by the end of the year 2009 as domestic consumption potential would pull the investors to the economy.

The ABB Survey, Economic Outlook for India, was based on the responses from 237 CEOs and managing directors across 15 sectors at small, medium- and large-scale level companies. The survey was done during the month of February.

It may be recalled that Samir Barua, director, Indian Institute of Management-Ahmedabad (IIM-A) had however, said last month that the Indian economy could witness an upsurge, and be back on growth trajectory by end of third quarter this year as compared to the  expected upturn in developed economies of the world by second quarter of 2010.

“We might witness an upturn and restoration of normal GDP growth say of 8% against the projected sub six per cent presently, as early as in third or fourth quarter of 2009, but will be subjected to fulfillment of few pre-conditions,” Barua said while addressing a gathering on Central Excise Day in Ahmedabad.