R&D Globalization: Service Provider

Transcription

1 R&D Globalization: Service Provider Landscape in China March, 2009 A Syndicated Report This report is solely for the use of Zinnov client and Zinnov personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from Zinnov

2 Agenda 1 Market Overview 2 India China Comparison 3 Growth Drivers & Restraints 4 Way Forward

3 The R&D offshore outsourcing market accounts for about 17% of the total R&D offshoring market in China Overall Offshoring Market 1, 2008 R&D Offshore Outsourcing Market 2, % USD Billion 6 ` % MNC Subsidiaries R&D Service Providers 0 IT Services ITeS R&D Total Note: 1 Includes both MNC subsidiaries as well as service providers; 2 Estimated at current price Source: NASSCOM; Primary interviews with key stakeholders in China; Company Annual Reports Zinnov Analysis

4 R&D offshore outsourcing market in China has witnessed a fast growth over the last 3 years to reach~ USD 1.3 billion in ,500 China R&D Offshore Outsourcing 1 Market, ,200 Discussion USD Million ,287 The China R&D offshore outsourcing market is dominated by Chinese service providers with relatively small presence of India and US based service providers R&D services related revenues for top 3 players are growing at much faster rate than the industry average of 46.6% The offshore outsourcing market in China is still in its nascent stage and is poised to sustain the growth in the foreseeable future Note: 1 Outsourcing to third party service providers Source: NASSCOM Report -NASSCOMTracing_China's_IT_Software_and_Services_Industry_Evolution; Primary interviews with key stakeholders with leading service providers in China; Zinnov Analysis

5 The R&D offshore outsourcing market in China is highly fragmented; top 10 service providers account for about 28% of the total market 1,000 R&D Revenues of Top Service Providers in China, 2008 USD Million There are more than 10,000 large to small sized outsourcing service providers in China providing IT services/ ITeS / R&D services For more information, please contact info@zinnov.com Top 5 Top 6-10 Top Top Rest Top Service Providers 1 Achievo Augmentum Beyondsoft ChinaSoft Dextrys hisoft Insigma Neusoft Symbio Vanceinfo Note: 1 In alphabetical order; Information based on RFIs and responses to primary interviews Source: Company websites; Interviews with key R&D service providers in China; Zinnov Analysis

6 US based companies are increasingly outsourcing R&D related work to third party service providers in China Split of R&D Offshore Outsourcing Revenue by Geography, % 80% USD 408 Mn USD 612 Mn USD 887 Mn USD 1,287 Mn 17% 19% 18% 16% 13% For more information, contact 15% 5% 15% 16% Per Cent 60% 40% 13% 13% 14% 20% 52% 52% 58% 64% 0% USA Europe Japan ROW* Note: *Rest of World Source: NASSCOM Report -NASSCOM-Tracing_China's_IT_Software_and_Services_Industry_Evolution; Primary interviews with key stakeholders with leading service providers in China; Zinnov Analysis

7 About 75% of the total installed talent pool with service providers is junior level talent with less than 4 years of experience Service Provider R&D Talent by Experience Level, ,000 4,500 45,000 R&D Installed Talent Pool with Service Providers 40,000 30,000 20,000 10,000 6,750 3,900 5,850 15,750 For more information, contact ` info@zinnov.com 13,650 18,000 39,000 15,600 Range Yrs 2-5 Yrs 5-8 Yrs 8+ Yrs Total Experience Level Source: Company press articles; Primary interviews with key stakeholders with leading service providers in China; Zinnov Analysis

8 Chinese service providers follow a unique organizational structure to overcome the language barrier and keep costs in check Organizational Structure Illustrative 100% 100% 10% 5% 13% 5% 15% 3% With more than 75% of the resources being junior in terms of experience, the overall cost is reduced significantly 75% 12% 35% 3% Per Cent 50% 87% Expats/ foreign returns help overcome English language barrier and becomes a bridge for communication between the teams and the clients 32% 40% 2% 25% 38% 0% Total 8+ Years 5-8 Yrs 2-5 Yrs 0-2 Yrs Chinese Expatriates/ Foreign Returns Source: Primary interviews with key stakeholders with leading service providers in China; Zinnov Analysis

10 The R&D offshore outsourcing market of China is about 1/3 rd of the total market in India 50 Overall Offshoring Market 1, 2008 R&D Offshore Outsourcing Market 2, 2008: India vs. China 43.3 China USD Billion India For more information, please USD contact Billion India China India China Service Providers USD 3.5 Bn MNC Subsidiaries USD 5.8 Bn Service Providers USD 1.3 Bn MNC Subsidiaries USD 6.4 Bn IT Services ITeS R&D Note: 1 Includes both MNC subsidiaries as well as service providers; 2 Estimated at current price Source: NASSCOM; Primary interviews with key stakeholders in India and China; Zinnov Analysis

11 Quality Assurance (QA) and testing accounts for the majority of work being outsourced to service providers in China R&D Split by Work Profile, 2008 Discussion For more information, please contact Interviews with the customers of China based service providers suggests that they are uncertain about the capabilities of these service providers owing to the nascent stage of the market Outsourcing low end work minimizes the risk and acts as a test field for the service providers Localization of products is gaining increased attention due to the presence of large domestic market in both India and China Source: NASSCOM; Primary interviews with key stakeholders in India and China; Zinnov Analysis

12 Billing rates of the service providers in China are relatively lower as compared to India 30 Service Provider Blended Billing Rates by Horizontals in India, Service Provider Blended Billing Rates by Horizontals in China, 2008 USD/ Hour USD/ Hour For more information, please contact info@zinnov.com New Product Development Quality Assurance/ Testing Localization/ Globalization Sustenance 0 New Product Development Quality Assurance/ Testing Localization/ Globalization Sustenance Billing rates are relatively higher in India across functions owing to factors such as better quality, IP protection and timely delivery In the current economic crisis, both vendors and their customers are looking to optimize on the billing rates Blended billing rates for top 5 service providers are relatively higher owing largely to their experience, capabilities and quality of talent Localization billing rates can be significantly higher for niche skills and language capabilities (such as Finesse language) Source: Primary interviews with key stakeholders in India and China; Zinnov Analysis

13 Indian service providers have not been able to scale up their operations in China, in spite of having ambitious ramp up plans since inception 3,000 2,000 1,000 0 Total Headcount for Top 4 Indian Service Providers in China , , R&D Headcount for Top 4 Indian Service Providers in China, ,900 Cumulative 300 revenues for top 4 Indian service providers is about USD 65 million of which R&D services constitutes only about USD million For more information, please contact 80 info@zinnov.com TCS Infosys Satyam Wipro TCS Infosys Satyam Wipro Discussion Top Indian service providers aimed at relatively larger projects from China market, in alignment to their global strategy. However, due to the nascent stage of the market it was tough to achieve this target MNCs looking to diversify R&D globalization risks chose Chinese service providers for risk mitigation specially in the China market Due to cultural and language differences, recruitment and retention of key employees became a key challenge for the Indian service providers Most of the top Indian service providers in China do not offer a broad array of R&D services as opposed to their Chinese competitors and the focus is primarily on IT services Source: Annual reports; Press releases, Primary interviews with key stakeholders with leading service providers in China; Zinnov Analysis

15 A variety of challenges and growth drivers have contributed towards the current state of the China offshore outsourcing market Key Challenges Growth Drivers Government Support Language Proficiency Cultural Differences Fragmented Service Providers Lack of Suitable Workforce Currency Appreciation High Attrition Global Business Practices Strategic Geographic Location Low Costs Risk Mitigation Huge Talent Pool Huge Domestic Market Quality Infrastructure Culture and Language Rules and Regulations Source: Zinnov Analysis,Secondary and interviews with key stakeholders

16 Communication issues along with lack of scalability are primary reasons that are restraining the growth of R&D service providers Key Challenges Low percentage of English language penetration even in the professional arena has been a major bottleneck Language Proficiency Cultural Differences Stark cultural differences have hugely affected the smooth functioning of operations As the market is highly fragmented there is lack of big service providers offering complete range of services Fragmented Service Providers Lack of Suitable Workforce Lack of talent at middle and top management position has hindered the growth Chinese Yuan has appreciated by % in last three years hence affecting the total cost Currency Appreciation High Attrition Very high attrition rates have been observed as wage hikes are in single digits at junior levels Lack of adherence to globally accepted business practices is a challenge Global Business Practices Rules and Regulations Hukou system coupled with IP security laws has come out as a bottleneck Source: Zinnov Analysis,Secondary and interviews with key stakeholders

17 Low cost of operations along with the proximity to certain key markets in APAC region are some of the key drivers of growth Growth Drivers Strong government support is one of the primary factors favoring strong growth forecasts Government Support Strategic Geographic Location Near shoring opportunities from Japanese market and entry location for APAC region Average Chinese salaries are significantly lower than that of developed countries and providing cost arbitrage opportunities Low Costs Risk Mitigation Companies are looking at China as alternative offshoring location as a risk mitigation strategy China has huge workforce available at low costs compared to developed countries Huge Talent Pool Huge Domestic Market Huge domestic market has also supported the high growth rate of service providers China has invested heavily in creating quality physical infrastructure in last few years Quality Infrastructure Culture and Language Similar cultural heritage has helped Chinese service providers prosper with their APAC operations and clients Source: Zinnov Analysis,Secondary and interviews with key stakeholders

19 Service providers have till now acted as back-end support centers in the R&D value chain; thus capability & capacity improvement is imminent Employee Management Service providers need to harness the talent pool they employ in order to build higher technological and managerial know-how; this will improve productivity and efficiency of the over all team Brand Visibility Vendors must consciously build and position their brands as problem solvers to key challenges that R&D centers are facing. Indian vendors have done real well in this regard. Way Forward Work Off-shored Expanding set of offerings to strategic R&D consulting capabilities & capitalizing on early entrant opportunities in key R&D segments viz. engineering services, where only a few service providers exist Cross Country Centers Indian vendors have taken a lead and setup their R&D centers in China to capitalize the lower operational costs; Chinese vendor too can look into this regard and make some changes required Source: Zinnov Analysis

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