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A decade ago, Whitefield, a remote suburb of Bangalore, made headlines on those rare occasions when gangs of armed bandits burst into homes at night. Today that former stretch of farmland and scattered houses is disturbed only by giant cranes, cement mixers and trucks piled up with white sand. Buildings of glass and steel are rising all over, as Bangalore's fast-expanding outsourcing industry radiates far beyond the city. Perhaps the most impressive spot in Whitefield is the campus of SAP Labs. The main building, with its comfortable sofas and a sunny atrium, is a sumptuous workplace by Indian standards.
But what is most remarkable about that site, built by the German software giant SAP, is what's going on inside. SAP Labs' 1,400 employees in Bangalore form the company's largest research-and-development unit outside Germany. Instead of dumping its call-center work and low-end programming in Whitefield, SAP relies on the area's computer scientists and engineers to carry out its most critical activity. More than 10% of the patents filed by SAP originate in Bangalore, and the influx of Indian engineers is accelerating the adoption of English at SAP and loosening up its traditionally rigid attitude toward software engineering, says Martin Prinz, the joint managing director of SAP Labs India. "The Bangalore center is starting to change SAP."
That transformation is just one example of a realignment by U.S. and European companies that is turning India from a distant satellite of Silicon Valley into one of the inner hubs of global technology. Since 2003, Yahoo's software-development center has been nestling up to the pizza joints and blue-jean shops on Bangalore's swank Mahatma Gandhi Road. Google co-founders Larry Page and Sergey Brin visited their company's R&D center in Bangalore last October and said they plan to create a mirror image of Google's U.S. research team in India. Microsoft CEO Steve Ballmer visited India a month later, unveiling a new campus and plans to hire hundreds of software engineers. "We want access to the phenomenal engineering talent graduating out of Indian universities," Ballmer told reporters. Intel hired 800 people in India last year, and CEO Craig Barrett last fall inaugurated construction of a new building.
To be sure, research and development is still just a sliver of India's tech boom. The bulk of the more than $16 billion earned by India's tech outsourcers in 2004 came from call-center work and low-end programming. Worldwide, only 0.3% of the $180 billion spent each year on developing software products goes to India. But, as with the earlier wave of tech outsourcing, R&D in India may prove to be too good a bargain to ignore: the cost of developing a basic software product in India is about $2 million, or just 40% of the cost in the U.S., according to India's IT industry group Nasscom. "We're likely to see an explosion in R&D outsourcing in 2005 and 2006," says Partha Iyengar, an analyst at the research firm Gartner who is based in Pune. If that happens, India's tech sector could enter a new, more mature phase of growth. U.S. and European firms would have a fresh way to nurture innovation. But they will also face the risks of laying the building blocks of their technological future far from home. "I really worry about R&D," says Ralph Wyndrum, a former research executive at AT&T and president-elect of IEEE, a professional group for engineering. If outsourcing erodes opportunities for engineers in the U.S., he says, "then you're not going to have the innovation that gives you a competitive edge."
Giants like Intel and Microsoft are bellwethers for other technology firms, but the seeds of globalized R&D were planted decades earlier. "The old model of research was Bell Labs'," says Ronil Hira, a professor of public policy at the Rochester Institute of Technology. Working on everything from basic science to prototypes of new products, centralized labs produced landmarks like the transistor, and every major corporation had such incubators. That changed over the past 20 years, as businesses started to shift their R&D money away from basic science in centralized labs (they would rely on universities for that) and toward design-and-development work done elsewhere—closer to production sites, by private research companies and eventually overseas.
More recently, the digital revolution narrowed the focus of R&D to software. From cars to cell phones to toasters, "a large part of the value of a project becomes embedded in the software," Hira says. So countries like India, with strong capabilities in software development, have gained leverage in attracting the work. Joining the tech companies congregating in Bangalore is a diverse group of manufacturers developing software for their products. Philips, the Dutch consumer-electronics giant, develops and tests software for DVD players and flat-screen TVs. General Motors opened a research lab, its first outside the U.S. Others without wholly owned R&D labs are parceling out discrete pieces of research to Indian firms such as Wipro Technologies, which increased its R&D business 55% last year. "[Clients] are not doing their core-competency product engineering with us, but there's a lot of work around it," says Wipro Technologies' CEO, Vivek Paul. For example, Wipro might handle the documentation and testing of new software or create the foreign-language versions.
But outsourcing R&D can bring significant risks. The usual drawbacks in any kind of outsourcing are magnified in the multilayered process of research. Concerns about the security of sensitive research is the biggest potential obstacle, according to Gartner analyst Iyengar. "Indians tend to be less security sensitive than the clients," he says. "It's quite common for Indians to share salary information with each other. In the U.S., this is absolute heresy." At wholly owned research centers, like those run by Intel and Microsoft, security is less of a concern, says Stefan Spohr, a vice president at consulting firm A.T. Kearney. "You build firewalls. You educate your employees. It's really no different than in the U.S."
As R&D goes global, other countries are also attracting attention, most notably China. Of the more than 200 foreign companies with research facilities in China, a handful are doing substantive research. About a month before Microsoft made a splash with plans to expand its 170-person Beijing research center by 20%, France Telecom announced last June that it would open an R&D facility in Beijing. Cisco CEO John Chambers announced plans to hire 100 people for a new research center by early 2006. The push into China is driven by more than human resources. Like India, China has a large pool of skilled computer scientists and basic-science researchers. China offers something else too: an entry point to 1 billion Chinese consumers. Motorola's researchers in China, for example, adapted the Chinese-language version of its A760 mobile phone. Other companies are doing only basic research, biding their time until they figure out how to break into the consumer market.
As more U.S. companies shift more resources to India and China—even legendary Bell Labs has a research center in Bangalore—some observers are worried about what it means for the U.S. economy. With companies able to tap into the best talent all over the world, "that's a plus because it adds to innovation," Hira says. But when growth abroad is substituted for growth here, the U.S. loses the happy spillover of investing in research—all those new firms in Silicon Valley, around Austin, Texas, and along Boston's Route 128. If Bangalore and Beijing become the new cradles of innovation, is that where the next Google will be born? "If it turns out you're pushing some of the R&D away, it builds up the world's economy, but not your own," Hira says.
The one advantage the U.S. still maintains is its culture of innovation. "Most Indians in the IT industry are programmers," says B.R. Sheaker, a recruiter for outsourcing companies in Bangalore. "They are taught to follow the rules. They lack the analytical ability to think independently, to be bold." That creative thinking led the U.S. to its dominance in software, and India and China are looking for ways to re-create that spirit. It's a complicated puzzle, and one that probably will not be solved in a lab.
- Aravind Adiga and Jyoti Thottam
- As more firms send research to India and China, could the U.S. fall behind?