· Next Level Outsourcing - R&D China

 

Innovation empowers all businesses to improve their products, services, and processes to anticipate and respond to the rapidly-changing needs of customers. This means investing time and money into research and development (R&D) to establish customer needs and develop products and services accordingly. Thus, research and development forms an essential part not only of making the business more profitable and productive, but also of ensuring business survival in the future.

The extreme importance of R&D to a company necessitates it to be carefully planned and managed to succeed. However, various challenges in the R&D cycle, coupled with heightened competition in the world market have greatly impacted the way by which companies develop or revitalize their products and services, and ultimately bring them to market.

Rising R&D operational and labor costs, longer time to market, and shortage of available talent pool to accomplish R&D objectives are hampering companies nowadays. R&D initiatives also carry an element of risk because they involve trying out new, untested ideas, which may or may not be commercially successful.

Consequently, companies are turning to reliable and experienced outsourcing partners in lower-cost country destinations like India and China for their R&D programs. In the short term, outsourcing can give companies the opportunity to cut on cost and scale their resources accordingly, while in the long run, it gives them far more revenues from gaining access to and tapping worldwide skills and capabilities, which can tremendously improve existing products and services, and accelerate new R&D undertakings.

As markets mature, there is now an increased and higher value-creation opportunities for involved players in outsourced R&D. Because of this, there is an upsurge of R&D programs and facilities going offshore. Majority of industry analysts expect this trend to continue specially that a large number of outsourcing deals are currently under negotiation. At the same time, local services providers are in a rush to increase their capabilities and expand their service offerings.

 

Outsourcing of non-core R&D components to offshore providers with solid experience and expertise in product development, testing and sustenance, complemented with clear understanding of emerging markets and new geographies also enables most companies to focus on their core competencies in the R&D value chain – product strategy and product architecture and design.

By locating their R&D facility or project abroad, companies are able to tap the developing nations’ vast pool of college-educated workforce at a fraction of U.S. salaries. China’s labor cost advantage, for instance – which can translate into as much as 70% over U.S. salaries, is simply overwhelming.

Another pull factor to outsourced R&D initiatives is the market trend suggesting that the domestic talent pool is shrinking in the U.S. while growing exponentially in Asian countries. In fact, the 600,000 technical engineers in China far outnumber those 70,000 in the U.S. and 100,000 in all of Europe.

The outsourcing of R&D activities likewise guarantees 24 hours a day and seven days a week development process. This 24/7 development would definitely enable companies to shorten their R&D cycle, accelerate their time to market, and enhance their chances at winning in innovation.

Although improved time to market was achieved by most companies engaged in outsourcing, many of them claim this benefit is not automatically achieved. To facilitate higher odds of improving time to market, some companies now offer financial incentives to providers not only to compensate for the risks they have to take, but also for the significant investments in resources they have to put in just to meet the client’s demands. As a result of this arrangement, both parties share the savings achieved by the development cycle.

Outsourcing their R&D is a definite advantage to U.S. and European companies because it enables them to support co-located manufacturing activities, which can reduce cost; and improve product quality, performance and availability. Moreover, it enables them to influence foreign research initiatives.

On the other hand, local economies of countries housing R&D centers of multinational companies also leverage these R&D initiatives by positioning investments to maximize their benefits and in the process, stimulating their own economies.

Undoubtedly, outsourcing of R&D provides mutual benefits to outsourcing countries as well as country destinations. Despite the migration of R&D facilities to lower-cost countries, this does not necessarily derail the ability of developing countries to reinvigorate their domestic centers of excellence and maintain their capabilities for critical technologies. In fact, they have the unrivaled capacity to innovate technologies of critical importance to their countries, such as in defense, biotechnology, genomics or other areas.

In summary, outsourcing of R&D programs enables companies to reduce their operating and labor costs and scale their resources. It also gives them the chance to tap global resources and allows faster time to market in order to increase their profits and improve their competitiveness in the global market.
 
In a global scale, outsourcing of R&D initiatives is the perfect opportunity to enhance both domestic and foreign research and development capabilities. It can definitely open doors toward innovation partnerships between countries, foreign corporations, governments and academia. After all, outsourcing has one ultimate goal – to bring the world closer together, so that the gains of one country become the gains of others.