Research and development starts to move offshore

As corporate America becomes increasingly comfortable with offshore development, it’s sending substantially more sophisticated IT work overseas. Companies such as Google Inc. are turning to foreign workers not for their willingness to work for lower wages but for their technological prowess.

Google is advertising for highly skilled IT help at its recently opened research and development facility in Bangalore, India. These employees will be involved in all aspects of Google’s computer engineering work: conception, research, implementation and deployment.

“Bangalore is the so-called Silicon Valley of India, and there is a large pool of talented software engineers there,” said Krishna Bharat, Google’s principal scientist.

R&D is core to most companies. They guard it carefully, and their brightest people work on it. But as offshoring becomes increasingly commonplace, companies are moving up the value chain, using foreign workers in ways that make them a more integral part of the corporate identity.

Silicon Valley venture capital firms are encouraging start-ups to send their product development work overseas, said Marc Hebert, a vice-president at Sierra Atlantic Inc., a Fremont, Calif.-based outsourcing firm that specializes in R&D. While Google was explicit about talent rather than cost being the driver of its offshore move, most companies are equally keen to tap the lower wages, which enable them to hire more people to bring products to market faster.

Hebert said that although idea generation and funding are still coming from the U.S., more and more of the R&D work needed to actually bring a product to market is being done offshore. “That’s the really interesting trend,” he said.

What that means for the future of Silicon Valley and IT development in the U.S. is unclear. But while overseas firms are hiring, the IEEE-USA said this week that the 2003 U.S. jobless rate for computer scientists and systems analysts has reached an all-time high of 5.2 per cent.

The Asia connection

Although the number of R&D jobs that have moved to Asia doesn’t yet approach the number of low-end IT jobs that have moved, such as those in programming, the gap is bound to narrow, said Bob Hayward, an Australia-based senior vice-president at Gartner Inc.

“There’s a certain amount of inevitability about it,” Hayward said, noting that the highly skilled Asian workforce and the leading role taken by those countries in developing cutting-edge services and technologies, such as broadband Internet access and flat-panel technology, have attracted the attention of U.S. IT vendors.

Just in the past three to four years, U.S.-backed investments in Asian R&D operations have increased dramatically, Hayward said. He noted that those investments have soared while IT vendors, faced with a global slowdown in demand for their products, have held back investments in other areas. Several of the largest U.S. IT vendors started building R&D centres in China in 1998. Intel Corp. and Microsoft Corp. have opened facilities in Beijing. Intel has 40 researchers; Microsoft has 200 Ph.D. candidate interns and 170 researchers.

Some governments provide economic incentives to attract U.S. companies to invest in R&D operations in their countries. In Taiwan, for example, foreign firms can deduct 35 per cent of their R&D investments from the income tax owed by their profit-making operations.

Still, some IT development work can be done only in the U.S., said Richard Brown, associate vice-president of marketing at Via Technologies Inc. in Taipei, Taiwan. For example, the design and development of Via’s PC chip-set products is done in Taiwan, but the company’s CPU and graphics-chips products are designed by teams in the U.S., reflecting the dominance of the U.S. in those product areas, he said.

‘Big picture’ question

But the trend is clear. About half of the IT R&D done by Stratex Networks Inc. takes place overseas, some at its New Zealand subsidiary, and some in India. That has included development of a network configuration tool, said B. Lee Jones, vice-president of IT and CIO at the San Jose-based company. Jones has eight data centres to run on five continents and offices across 22 time zones. Like many U.S. IT executives, he wonders about the big picture: the long-term impact on the U.S. as more work is shifted offshore. But Jones said he believes the U.S. will remain dominant in IT.

Though he has some hesitancy about moving high-level work offshore, along with a desire to keep core development in the U.S., Jones said that “as the comfort level goes up and we are able to take advantage of having comparable quality for smaller prices, people will naturally migrate there.”

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