globalizing r&d function for mid-size organizations – learnings from large organizations

Globalizing R&D Function for Mid-size Organizations – Learnings from Large Organizations

Written by David Watkins and Amit Goel

Dec 2011

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Globalizing Research & Development Function

Knowledgefaber, a global consulting firm with offices in India, US and UK helps global organizations to realize the potential of emerging economies in terms of market access (please refer to the article on Growth Consulting) as well as helps global R&D spenders in their outsourcing/offshoring initiatives. Knowledgefaber has brought together a R&D function globalization perspective for mid-size, and smaller companies based on learning from large Fortune 500 organizations. Establishing R&D centers globally and utilizing the distributed R&D network is helping large organizations. So why should mid-size companies and smaller companies be left behind?

Globalization of R&D function is not a discretionary move anymore but fast becoming a gold standard and a necessity. So while Fortune 500 companies have realized this in a big way, it’s the turn of the mid-size companies to look at emerging economies (best value countries) seriously for both “as R&D destination” and “as a market”.

Recently, Ron Kirk, the U.S. Trade Representative stated that “there is almost limitless potential for growth in trade between our two countries, and that can contribute to economic recovery and job creation in the United States and continued economic growth in India.”

Also, the US, in a bid to enhance its trade relationship with emerging economies such as India, promised to remove trade barriers with India and Brazil and focus on the implementation of stricter enforcement of IPR with China US Trade Representative Ron Kirk said.

India has emerged as a prime location to conduct offshore R&D. A recent study conducted under the aegis of “PRO INNO Europe”, an initiative of the European Union, discovered that India has bagged most of the R&D projects off shored from EU-countries. Additionally, a recent report on “Internationalization of R&D by European Union” had recommended Europe and its member states to deepen the knowledge-based interaction between EU Member States and India related to Science &Technology field

India is no longer thought of as a market of cheap labor but as the forefront of the rapidly evolving Business Process Off shoring (BPO) market, and the top destination for American companies for expanding their R&D centers to take advantage of India’s ever increasing talent of highly educated and highly technology minded professionals.

Overview – Globalization is no longer a concept discussed in boardrooms, or executive suites among senior management, it is now a clear necessity for virtually all firms big or small. Manpower Group’s sixth-annual Talent Shortage Survey revealed that 52% of U.S. employers are experiencing difficulty filling mission-critical positions within their organizations, up from 14 percent in 2010. The number of employers struggling to fill positions is at an all-time high despite an unemployment rate that has diminished only marginally during the last year. To make matters worse for both American and European companies, the baby boomers are preparing to retire which is the best educated in history and supplies most of the skilled workforce in the US and Europe. Already the global Diaspora in the US is accounting for nearly all the growth in the nation. The US will have to look abroad to solve its worker shortage and ageing population. Companies simply have to change the ways they do business in order to survive and compete in the global market.

Another major driver that the global competitiveness has enabled is that new products and services are available to customers worldwide; customers now have proliferation of choices. This new global demand and greater choices for consumer’s means companies also have to offer better choices for consumers, improve their service quality at lower costs, and decrease the product development cycles. These kinds of pressures have led to an increased emphasis on reengineering internal business processes while working

For enquiries please contact: [email protected]; +91-80-41231576



hand-in-hand with the customers and suppliers to better integrate all the planning, logistics, and operations throughout the company. A company’s competitive position simply depends on greater access to more goods and services, and the introduction of new products needs to occur at a faster pace. More and more companies in North America and UK are going for R&D centers in India, China, Philippines and other BVCs or emerging economies to leverage the cost advantages and surplus of skilled labor.

Looking towards India:

While many large enterprises still look to China to solve their work force shortages, especially in the manufacturing sector, it is India where the world is now looking towards to solve their intellectual requirements, R&D, and to expand their operations into while tapping the vast resources of its population of well educated human resources. While China still represents the largest share of US business expanding their manufacturing operations, India carries the day when looking for highly skilled engineers, especially skilled software engineers and programmers.

India is also the favored destination for the outsourcing of research and development work with over 900 R&D centers established in India since 1985. It was reported way back in 2007, that the top 80 U.S. corporate R&D spenders deployed an estimated of US$80.1 billion of their $146 billion R&D funds overseas with most of it divided between China and India. What is more impressive is that today in 2011 over 85 percent of the fortune 500 companies are conducting their innovation activities in India. Clearly, India is fast becoming the destination for American and European companies to expand their R&D operations.

Semiconductors29%

Telecommunication24%

Automotive & Aerospace

14%

Transportation, Power &

Construction13%

Electronics & Automation

14%

Others6%

Note: 350+ India R&D centers (non-software) across sectors. Apart from the above there are 600+

software R&D centers as well in India. Mid-size companies have started making in-roads




Just last year, the pharmaceutical industry spent almost 2 billion on numerous sorts of R&D activities in India and that figure is expected to grow towards the $25 billion mark before 2025. In India, R&D spending rose from 0.1 percent to 1.1 percent just on pharmaceutical research. More and more Pharma execs are seeing the advantage of expanding into India by developing products locally within their 100% control R&D centers.

What’s more important, India is very attractive country from a market standpoint as well. So while Fortune 500 companies have realized this, it’s the turn of the mid-size companies to look at Best Value Countries (emerging economies) seriously for both “as R&D destination” and “as a market”. A recent HSBC's International Business Survey found that the portion of U.S. executives planning to increase their overseas sales targets rose sharply to a survey high of 72%, up from 49% in 2008 and 56% in 2009, underscoring the rapid globalization of the core of America's economy. Fifty-six percent (56%) of the executives polled say their overseas sales are growing faster than domestic sales, a rebound from 52% last year though still below the 67% level seen in 2008. Even companies like Gamesa located in Spain is looking beyond Europe now towards India to offset the weak business in Europe and the United States. While we don’t know the exact details yet, on March 9th of this year Gamesa announced plans to invest $83 million through 2012 to open wind turbine production plants and also a research and technology center in India. In early 2012, they hope to have a new turbine blade factory up and running in Gujarat state in northwestern India. Another reason to expand into India is to simply expand your base of clients, customers, and potential customers. In November of this year LinkedIn also decided to open up a R&D center in India. While LinkedIn only spends a very small percentage of their revenue on R&D (usually under 5%), according to the company, “This R&D center will support and operate the websites basic technology infrastructure that is used to build the core products and features of LinkedIn.” One of the sources of LinkedIn said, “With Internet connectivity in India set to grow at an exponential pace, the company has plenty of room to expand its subscriber base in the country.”

The importance of Growing your R&D Center in a BEST VALUE COUNTRY (EMERGING ECONOMIES)

While offshoring has been around for a long time, in particular since US multinationals off- shored labor-intensive manufacturing to low-cost developing countries, companies such as General Electric, Motorola, and Texas Instruments have established R&D centers in India since the 1990’s. Even companies such as Citigroup and American Express have started setting up offshore facilities to carry out enterprise-wide activities to take advantage of the high level of technical education coupled with low labor costs in India. One study found that American companies save $0.58 on every dollar spent on jobs moved to India (Farrell, 2005). The main savings come from wages and from the bundling of activities in one location which results in large economies of scale. So while larger organizations have exercised this option in a big way, it’s the turn of the mid-size companies to look at emerging economies for their research and development work. Regions in India such as Bangalore continue to attract Western high technology companies to establish R&D centers thanks to the low labor cost and the high availability of qualified highly skilled technical labor.




Knowledgefaber tracks 19 BVCs (Best Value Countries) on an ongoing basis for R&D centers and vendors in engineering services field. The following is the list:

Asia Europe South & Central America

Africa

India Ireland Brazil South Africa

China Russia MexicoMalaysia Poland Argentina Philippines Czech RepublicVietnam Romania

Sri LankaBangladeshThailandIsraelSingapore

Note: For a detailed understanding of the R&D centers (captives) and vendor landscape in these countries please write to us at [email protected]

Clearly, India and China must be doing something right with over 900+ R&D centers each. But countries like Philippines and Malaysia also provide several advantages and option for expansion of R&D network.

City level R&D center analysis: Knowledgefaber has studied the geographical distribution of R&D Centers in India. What makes Bangalore attractive to high tech companies is the availability of highly qualified engineers. Every region offers its distinct characteristics.

Bangalore43%

Pune11%

NCR14%

Hyderabad12%

Chennai11%

Mumbai5%

Others4%

Distribution of R&D centers in Indian cities




Considerations for the Mid-Size companies:

For companies that have a foot print in BVC’s – they are currently looking for following areas of help:

Does your cost considerations and expansion plans warrant another center? So should you be looking at location attractiveness that would open up your product development horizon even more. Benchmarking and understanding if you are doing well enough with your existing center vis-à-vis your comparator set. Buy or build analysis – Perhaps acquiring another small R&D center or outsourcing to a vendor will get you everything you need without all the costs of opening up a new one.

For companies that don’t have a foot print in BVC’s, some of your first considerations should be:

What is the advantage of expanding your R&D operations to these countries:

In addition to the cost advantage, companies opening their R&D center in (say) India would have access to the highly qualified Engineering talent pool. By establishing a centre in India, firms would also get the opportunity to understand and address the huge Indian local market. Due to the time difference, engineering centre in India will also improve the time to market as there would continuous development of products (Product development cycles). For a detailed report with numerical analysis please write to us!

What products can actually be off shored to India?

Companies initially can look to off shore less complex work such as product testing, Software development, CAD/CAM work for lesser risk product portfolio and slowly grow the areas of work. For a detailed roadmap for offshoring please write to us!

What is location attractiveness?

Through “Location attractiveness studies” Knowledgefaber helps MNCs in deciding location for their R&D centers or location for their 2nd or 3rd center under expansion plans. Knowledgefaber evaluates various Tier – I and II cities in India for potential set up of a R&D/ IT services center, maps the performance of these Tier I, II cities on 16 well defined and exhaustive set of parameters and provides ranking to these cities indicating their attractiveness for setting up of a R&D center

Vendor Model versus Captive center (own subsidiary doing R&D work):

Knowledgefaber has observed that the number of new captive centers opening up is on a decline every year. So what exactly is happening? Is it a clear sign that captive model is going down and companies are preferring outsourcing to vendors? Or companies are opening captive centers in other economies?

Knowledgefaber believes there is more to it than meets the eye. It’s a fact that Fortune 500 companies are more or less already in India with their R&D center footprint. So what is the trend amongst mid-sized companies? With mixed success of the R&D centers of Fortune 500 companies in India (not all have grown at the pace they wanted to), with limited budgets of mid-size companies, with initial “hit-the-ground-running advantage” of vendor model and with talent supply related problems, a lot of mid-size companies




have opted to either not open their own center (and give it to vendors) or postpone it (nail it and then scale it outsourcing concept).

20

74

136

85

-

20

40

60

80

100

120

140

160

Before 1990 1990 - 2000 2000 - 2005 2005 Onwards

India R&D CentersNumber of Centers

Vendor space has also been very exciting space to watch out for in the recent past. Infact, some of the vendors from India have really taken a big lead. They are going after companies in the west to acquire them and get people with domain expertise and customer relationships. Knowledgefaber observed that the consolidation in the vendor space has started. Engineering services vendor space is following the same trend that IT services followed (say) 5-7 years back. But growing at a very fast pace.

There have been a lot of M&A’s in engineering services sector as an increasing number of organizations are increasing their size, services offered and scale both in terms of customers and geographic reach. Some organizations like Quest Global, Infotech, Neptune Services have made 2-3 acquisitions in the past 3 years. This has helped the players become larger in size and offer broader portfolios in end-to-end

global engineering services. Also M&As have helped provide companies with greater market presence. For a more detailed analysis of M&A in engineering services in last 5 years please write to us!

Hence major trends that can be observed are:

1. Horizontal Integration: Helped companies increase the kind of services they can provide Expand their know how to other promising and emerging sectors Leverage complementary skills of the 2 companies to tap into new sectors Can offer more integrated solutions due to capabilities in multiple sectors Some examples are Infotech acquired Daxcon, L&T and EADS JV, ESI group acquired

Mindware Technologies

2. Vertical Integration: Company becomes specialized in a specific sector where its capabilities already exist Strengthens already existing capabilities due to acquired company’s resources Offer comprehensive end-to-end solutions to more complex problems Achieving leadership position in a sector on a regional or global scale




Some examples are Quest global acquired ASE technologies, Tooltech acquires Misslbeck Engg

3. Customer base: Helps tap newer customer base whatever their size, location or sector Helps mitigate risks and optimize costs for clients Some examples are Invenio acquired DPM Interactive, Neptune acquired Subsea

Engineering Services Limited, etc4. Global scale: All these M&As focus on making the combined entity such that it can operate on a

global scale and provide global engineering services footprint by making use of large geographical reach

How Knowledgefaber can help you:

Knowledgefaber, a facts base consulting and research firm that tracks over 900 R&D firms in India and around the world. We work with global and Indian organizations and help them in defining growth, mitigating risks and solving business challenges. Our major focus is on emerging markets and emerging economies. Knowledgefaber has also created an end to end Product Development Globalizing Consulting service that is based on Four Pillars:

1. Project Experience that includes:a. R&D Center Benchmarking report subscriptions for fortune 500 firmsb. Roadmap for offshoring for large US companies in 14 Best Value Countries (emerging

economies)c. Team Members actively involved in doing demand/supply side assessments in both the

Nasscom ES reportsd. Competitor Benchmarking in the R&D & Vendor landscapee. Vendor Account plan targeting R&D spends, sectors and specific clients

2. ES experts/Teama. Team members have worked on more than two dozen ES projects in last 5 yearsb. More than 40 man years of experience in ES & R&D outsourcingc. Strategy to implementation expertise

3. Database & Knowledge Repositoriesa. We track over 900 R&D Centers in India aloneb. We track over 150 Engineering Services Providers globallyc. We provide Internal Reports on Engineering services across multiple verticalsd. Database is monitored and updated on a weekly basis by a dedicated team of analysts

and sent out monthly on a subscription basis.4. Network/Contacts

a. Over 800 contacts globally in Captives, R&D centers, ODC’s and ESP’s

b. Worldwide network of contacts ranging from Mid to Senor level across multiple verticals

