Allure of R&D draws tech giants to India

By S. John Tilak and Sayantani Ghosh - Analysis

BANGALORE (Reuters) - As the world prepared for the launch of Intel's server processor Xeon 7400 last September, engineers in Bangalore -- dubbed the Silicon Valley of India -- were putting the finishing touches on what would become the company's best-performing server chip yet. The chip was designed end-to-end by Intel Corp's (INTC.O) digital enterprise group in Bangalore.

Increasingly, the Indian arms of multinational tech giants are working on global brands such as Microsoft Corp's (MSFT.O) search engine Bing, its upcoming Windows 7 operating system and Google Inc's (GOOG.O) Map Maker.

The country, perceived as a necessary low-cost option only a few years ago, is fast becoming a destination for higher-end R&D work, with skilled engineering talent and India's own rising economic might adding to the appeal.

While India may not yet have shrugged off its "cheap labor" tag and is periodically the target of populist rhetoric from Western politicians, for technology firms the country has new connotations.

Faced with maturing home markets and aging workforces in the United States and Europe, companies are looking at India for a growing supplier base and young, agile workers.

"Today if you were to ask any of the product companies if they could do without their India-based hubs, I think the answer would be no," said Noshir Kaka, director at McKinsey & Co, a global consultancy firm.

"We're actually seeing the creation of new products and new services that may not have seen the light of day if we had only used a developed-market workforce for them," he said.

Hewlett-Packard, which set up its India R&D center in 1989, started out with cost efficiencies in mind, said Rick Steffens, who heads its systems technology and software division.

"As those teams started to get some experience and do more development, what we started noticing was that they were also capable of making changes to and enhancing the product."

Recent comments from U.S. President Barack Obama about ending tax incentives for U.S. companies that ship jobs abroad caused a flutter among tech firms. But they appear to be going ahead with their India investment plans.

German software company SAP's (SAPG.DE) plan to pump $1 billion into India between 2006 and 2010 is on track, said Kush Desai, managing director of SAP Labs India.

"Germany's confidence in India has constantly risen, along with the experience that people have gained in their work over the years," Desai said.

The attractive Asia-Pacific market is another draw.

In 2006, Cisco (CSCO.O) established its Globalization Center East in Bangalore for, among other reasons, "its proximity to 70 percent of the world's population within a five-hour flight," said Chief Globalization Officer Wim Elfrink.

"The focus is to tap the intellectual talent, growth opportunities and innovation," said Elfrink, who is based in Bangalore and reports to CEO John Chambers.