By Praveen Bhadada

In my last blog, “India & China: The offshoring Race”, I had mentioned about the vast R&D talent pool available in China as well as in India. In terms of the installed base, the current numbers are in favour of India. However, in terms of fresh talent pool availability, China is better off as compared to India. But, unlike IT services, R&D is not purely a number game. Domain expertise and relevant experience (functional skills) are much required in the case of R&D activities, and these determine the kind of work that is offshored to a particular location across the globe.

Unlike India, China’s organizational model does not follow a pyramid structure; it is more skewed at the top where there is talent deficit and at the bottom levels there is a surplus of talent. In China, 75 percent of the personnel engaged in R&D activities at the MNC subsidiary centers have less than 5 years of experience. According to Government sources in China, about 2.3 million science and engineering graduates pass out of colleges every year. This number for US and India is very low. Some argue that we are not comparing apples to apples and that the definition of science and engineering is significantly different in China. Nevertheless, the numbers for China are still higher even when compared on the most appropriate parameters.

Interestingly, even though there are abundant fresh graduates in the market place, many have inferior functional skills and lack of practical knowledge due to the varying quality of education in the West and the East. Language and cultural differences are some of the other key challenges often encountered. Based on our analysis, of the 2.3 million graduates, only 60,000 (even less) are capable of taking up R&D related jobs at the 1,100 odd MNC centers spread across the country. Even though the number of fresh science and engineering graduates is only about 650,000 in India, their MNC employability is close to 45,000.

Lack of English language proficiency and culture gap are obviously the biggest hurdles for China. But presence of a large domestic market is a bigger attraction for most of the companies. In order to leverage the opportunity, MNCs started relying on expatriates who acted as a bridge of communication between the local team and the team at the headquarters. Expats account for about 6 to 12 percent of the total headcount at some of these 1,100 centers. Most of the R&D directors at the China centers are expatriates who have significant experience and are obviously ‘language proficient’. Some of the senior architects and team leads/ managers are also expats who help teams communicate and execute effectively.

Over a period of time, MNCs have devised a new model to leverage China’s capabilities. To avoid communication hassles, most of the development work allocated to China is under full ownership structure for localization of products or QA/ testing related work. Some companies still run as per the staff augmentation model, but this ratio is expected to further decrease with the increase in value perception of the China centers globally.

Though, most of the companies are still treating China as the test field to explore the capabilities, some early entrants have already crossed that line. Some companies have started considering China as a ‘Value Center’, rather than just a ‘Cost Center’. China has witnessed a lot of innovation in the Hi-Tech space and the focus of innovation is both local as well as global. Nokia N series phones, Google weather map, IBM HotVideo, Microsoft outlook mobile service are some of the global innovations that have come out of China centers of these respective companies. Microsoft’s English assistant and Motorola’s A2100 Ming and A780 mobile handsets were built out of China centers for consumption in the local market. There are plenty of such examples.

How fast does China move up the value chain would be an interesting watch. Support and focus of the Chinese government is a positive sign, but there is a significant scope of improvement in talent capability and issues such as IP protection. The question remains the same: Will China overpower India? If Yes, when?

Praveen Bhadada is an Engagement Manager at Zinnov.