R&D hubs of multinationals save $70 bn over 5 years

Even as salary costs and real estate prices rose in India, research & development (R&D) centres of multinational companies continued to save costs for parent companies. Also, withdrawal of the ‘Software Technology Parks of India’ policy and increasing real estate prices and average salaries led to these firms foraying into Tier-II cities.

In the last five years, multinational companies’ R&D centres in India led to net savings of about $70 billion for these companies, according to a study by advisory firm Zinnov.

The study stated the average operating cost for such R&D centres declined six per cent in dollar terms for FY12. However, in rupee terms, these rose three per cent. The cost per employee stood at $40,604 in FY12, compared with $43,174 in FY11. However, the average salary increment of 13 per cent in the fourth quarter of FY12 resulted in a rise in the overall operating costs in India, in rupee terms.

INDIA SHINING

• While average operating costs declined in $ terms, there was a three per cent increase in rupee terms 
• Average salary increments of 13% in Q4 for FY12 resulted in increase in operating costs 
• Real estate increments seeing a rise of 5-13%
• Over 80% of organisations being affected by STPI withdrawal
• Tier-II cities attractive, as average employee operating costs are 30% lower compared to Tier-I cities

“The Indian R&D ecosystem started 25 years ago, based on the huge cost arbitrage it offered to headquarters. The fact that R&D centres of multinational companies are now increasingly focused on innovation, leadership and better value addition and are still able to deliver cost savings of over $70 billion in the last five years is a significant advantage,” said Praveen Bhadada, director (market expansion), Zinnov.

The study, ‘Operational Costs Benchmarking Study 2012’, surveyed 55 R&D centres with over 37,000 employees across India. It stated the weakening of the rupee vis-à-vis the dollar and the euro led to an advantage, while the focus on talent pyramid optimisation led to cost savings. Additionally, expansion into Tier-II cities reduced the overall operating costs of these centres.

“For this year, we noticed the Indian currency depreciation proved favourable to MNC R&D centres here and they were able to significantly optimise costs, despite a net salary increment of 13 per cent in the last quarter of FY12. Also, we are confident India would continue to maintain its competitive advantage over other emerging markets for a long time,” he added.

Despite the increase in cost, the R&D landscape in India continued to grow. The study states the current base of MNC R&D centres in India is about 870. India today accounts for an installed R&D talent pool base of more than 2,10,000 engineers, growing at an average of nine per cent a year for the last five years. Tier-II cities are turning into attractive options, with approximately 30 per cent lower costs compared to cities like Bangalore, which not only house a large number of MNCs, but are also expensive, as employees gain experience and more opportunities. Also, commercial real estate prices are about 15-20 per cent lower in Tier-II cities. In addition, attrition is much lower in Tier-II cities, owing to lack of competition and hesitation to migrate, the study showed.