India’s ‘sticky’ outsourcing firms eye R&D budgets: CNBC
MUMBAI, INDIA—India has long been a destination for outsourcing labor-intensive tasks, but a new wave of technology firms is now targeting research and development (R&D) budgets traditionally held by Western markets.
According to CNBC’s “Inside India” newsletter, this shift will redefine India’s position in global outsourcing.
Growth in the services sector
The services sector in India has seen significant growth, now making up 45% of the country’s total exports, rising from 30% a decade ago. Business process outsourcing (BPO), which includes activities like customer support and mass marketing campaigns, accounts for over three-quarters of these services exports by value.
This expansion is driven by India’s low labor costs and high IT literacy. Services exports have grown nearly 20% annually over the past two years, far exceeding the 5% growth in goods exports.
High-tech aspirations and sticky client relationships
Despite its success in BPO, India has faced challenges due to a lack of high-tech firms and jobs, which has led to a significant “brain drain.”
Companies like Cyient are addressing this by tapping into Western clients’ R&D budgets. Cyient conducts R&D for major companies such as Microsoft and Siemens across sectors like aerospace and communications and is expanding into the semiconductor industry.
These firms are creating “sticky” relationships with their clients. Once R&D costs are outsourced to companies like Cyient, they become deeply embedded in their clients’ operations, making it challenging to switch providers.
“Once you’re embedded with a company like Cyient, it’s very difficult for you to strip yourself out,” said Kunal Desai of GIB Asset Management.
Challenges and opportunities
While the potential is vast, challenges remain. The growth of this sector depends on developed economies’ willingness to outsource parts of their R&D. Desai noted that while cutting-edge R&D may remain in-house, legacy R&D could benefit from cost advantages if scaled offshore.
As competition intensifies from countries like the Philippines, Mexico, Brazil, Poland, and Malaysia, India’s burgeoning high-tech outsourcing sector could address employment risks posed by artificial intelligence advancements in BPO.
Future prospects and strategic growth
India’s evolving outsourcing industry is about cost efficiency and cultivating deep-rooted partnerships that are difficult to sever.
As these “sticky” firms continue to rise, they promise to reshape India’s economic landscape by tapping into new markets and addressing long-standing challenges.
With the sector valued at $30 billion and expected to double in five years, India’s tech firms are poised for significant growth if they can successfully navigate these challenges.
