BANGALORE: India used to be seen as the perfect offshore research and development hub for global firms seeking to tap its low-cost and supposedly vast engineering talent pool to devise products for world markets.

Companies including Microsoft, IBM, Intel, AMD, Google, Motorola, Yahoo!, Cisco and Siemens have opened R and D centres in India, drawn by payroll costs that were once a quarter of those in the US and Europe.

But the cost advantage is fading and engineers trained in basic research are harder to find, reducing India’s appeal, says Zinnov, a consultancy that advises overseas firms on research and development issues.

“Some companies witnessed a 20 per cent rise last year in the cost of running their R and D operations in India,” Zinnov chief executive Pari Natarajan said in an interview.

“If this trend continues, the cost advantage of doing R and D in India compared to the US will go away,” he said, predicting a shakeout in the research and development offshoring market.

India is home to 594 research and development facilities set up by overseas firms that invested a combined $5.83 billion, according to Zinnov.

Rising costs and a shortage of skilled workers have also hurt other industries — from software to retailing — in an economy that has expanded at an annual average of 8.6 per cent over the past four years. But the research and development offshoring market has received scant attention.

Software makers, research and development centres whose expenses are incurred mainly in rupees were hurt by a more than 12 per cent rise last year in the value of the Indian unit against the dollar.

Wages jumped about 15 per cent as companies fought to hire and retain hard-to-find engineers skilled in research.

India turns out more than half a million engineers every year, but institutions do not train them in basic research, limiting the available talent pool to no more than 100,000 people, said Natarajan.

The shortage may set back the ambitious expansion plans announced by companies such as networking giant Cisco, which said in October that it plans to triple its headcount in India to 10,000 in three years.

“It’s going to be very difficult for companies which have very aggressive hiring targets,” Natarajan said. “It’s almost impossible to hire unless you compromise on the quality of talent.”

Hundreds of patents have been filed by other research facilities based in the country. Half the work on an Intel wonder chip, a fingernail-sized device unveiled last year that offers supercomputer performance, was done by its India research centre.

Despite the problems facing research and development, Zinnov predicts that investment in existing facilities by large global companies capable of riding out rising costs, and with the infrastructure to train fresh graduates, will drive India as an offshore research and development destination.

That will pump up the research and development market by an annual average of 23 per cent until 2012, even as per-employee cost in India increases by a yearly 13.3 per cent.

Smaller facilities may have to shut shop or sell out while investment in new research and development centres will likely dry up as part of a looming consolidation, said Natarajan.—AFP