Rationale for Offshoring US Corporate R&D
INTRODUCTION: Corporate R&D refers to research and development activities carried out by corporations to enhance and build new products as well as create intellectual property which helps companies remain competitive. The primary goal is to therefore enhance profitability and any scientific breakthrough is a by product or happenstance. The goal of research in universities and government labs is to enhance and build scientific knowledge and therefore any scientific breakthrough in a university is the result of several years of dedicated pursuit.
Offshoring refers to performing a business function or part of a business function in another country. Lower development costs in countries like India and China has been a major reason for offshoring but other strategic reasons are becoming increasingly important.
In my previous articles I have stated some common mistakes when offshoring embedded software development and argued that socialist systems like universities are much better at innovating. Here I would like to explore why corporate R&D specially from the US needs to move to lower cost countries and how this would be a win-win-win situation for companies-shareholders and employees in technology.
CAREER PATHS AND DREAM JOBS FOR ENGINEERS AND SCIENTISTS:
As there may be several paths that Engineers and Scientists can follow let us see typical career paths for Electrical Engineers and Computer Scientists. According to IEEE USA[1], Electrical Engineers usually have a Bachelors or Masters in Electrical Engineering and spend the first few years of their career learning about a company’s product. After this period he/she needs to choose a technical specialty with job responsibilities including design specification and research of new products. An electrical engineer may also choose to pursue a career in managing technology. Computer scientists usually follow a path similar to Electrical Engineers but with greater focus on computers or might choose a research stream, where they apply mathematical and scientific concepts to solving technical problems.
In both cases we can see that the career path heads towards a management position with decreasing technical knowledge or a research position with increasing technical knowledge. It would therefore be logical to conclude that a creating a large number of research and management positions would be great for Electrical Engineers and Computer Scientists.
In my previous paper “Innovation Occurs When Market Forces are absent”[2], I have shown why socialist systems are best suited to innovate and why capitalist systems are great at creating wealth and tinkering with products. Corporate R&D is definitely a capitalist system. No CEO can admit with a straight face that he/she does not expect any returns from his R&D department or that he/she is ready to wait for decades before a breakthrough in technology.
Yet socialist systems are exactly where most breakthrough innovations occur and this is the setup where Electrical Engineers and Computer Scientists seeking a technical job, would choose to work provided they are compensated adequately. The other career path heading towards technical management is currently open to few people due to hierarchy in every organization. Therefore for every 15-20 engineers you can have only one technical manager leaving the other 19 frustrated. Companies in the US are hardly growing at the rate needed to fulfill managerial aspirations of their technical employees.
Offshoring R&D creates a surprisingly large number of technical management positions as companies seek to handle offshore suppliers. The savings obtained from cheaper labor costs can be used to fund universities to create more research positions fulfilling the aspirations of those seeking to pursue a technical line. No doubt the US government can help by taxing corporate profits from offshoring and using this to fund research labs and universities. The net result will be society with a large number of technical management and research positions. The only worry is if the number of new positions created is equal to those off shored. The answer is most likely yes as the rapid growth of China and India will create not just places to offshore but markets to expand, which can be exploited by well positioned US companies. In no way is this scenario even remotely similar to that painted by offshoring opponents. According to them offshoring will simply result in a loss of jobs from the US, with no benefit or benefiting only management.
As the major concern of employees regarding offshoring of R&D has been addressed we can now look at other reasons why it makes sense to move R&D to lower cost countries.
HUGE INCREASE IN ROI:
R&D is basically a high risk operation. For every molecule that becomes a drug like Lipitor there are 99 that fail to make it. Even for molecules that do make it to the market there is no guarantee the drug will be a ‘blockbuster’ (i.e. hugely profitable), new research keeps throwing up simple remedies which can be as effective as a ‘blockbuster’ drug.
Lowering risk and pursuing development activities may not really lead to any strategic advantage. Automotive companies Ford, GM and Chrysler routinely spend over $13 Billion on R&D[3]. Michigan is second only to California when it comes to R&D spending, but the state is merely playing catch up with stronger Japanese competitors and is therefore spending most of this money on pure development activities. Hence it does not come as a surprise that few associate Michigan with innovation.
These higher costs come at a time when few executives are happy about their company’s innovations. A good way to avoid higher costs would be use cheaper offshore resources. This would reduce risk to companies as savings on R&D offshoring are significant. Even if the R&D activity is not fruitful, amount wasted is tiny. A unique feature of R&D offshoring is that risk mitigation can be achieved along with cost savings. R&D is a low leverage operation, in the sense that higher costs do not translate into more or better innovation[4].If the R&D activity is successful it would lead to greater ROI.
STRATEGIC ADVANTAGE: A low cost R&D base which cannot be copied by competitors is a definite strategic advantage. US companies, with English as their language of communication can establish R&D bases in low cost countries with a large number of English Speaking graduates like India and the Philippines. European and Japanese companies cannot do the same as their language of communication is not spoken in many low cost countries. Besides cultural differences between Europe and some low cost countries, most technical documents are in European languages (other than English) or in badly translated English, which makes communication with low cost countries very difficult. We have thus encountered an efficient way of doing research which cannot be easily copied by competitors. Clearly this is the definition of Strategic Advantage.
OFFSHORE R&D CENTER IS A BEACHHEAD IN RAPIDLY GROWING COUNTRIES:
Most companies in the US try to sell existing products or modifications of existing products in rapidly growing countries like India and China. One of the impediments to greater local customization of products is the home country location of most R&D facilities. Products are primarily designed for the US market and customized for another market. This is done mainly to avoid the cost associated with creating new products for each market. However when cost of doing R&D decreases, it is possible to create new products for several markets. An R&D center in a low cost country can be tasked to create products designed for the local market. Considering the fact that India and China are growing at almost double digit rates, products designed for these markets have the potential to be very profitable. Thus an offshore R&D center provides a good point of entry into potentially large markets.
[1] http://www.ieeeusa.org/careers/yourcareer.html
[2] Embeddedoutsourcer.wordpress.com
[3] http://findarticles.com/p/articles/mi_m0UDO/is_5_16/ai_94892352
[4] http://www.finfacts.com/irelandbusinessnews/publish/article_10008033.shtml
