Rising Wages in India. Will it impact competitiveness?

The premise of outsourcing is primarily based on the availability of cheaper talent, materials and other supply chain ingredients in a different geography. While the manufacturing industry mostly has outsourced to China and other low cost locations in Asia, software outsourcing is mostly offshored to India. The experience during the Y2K era helped to build the channels to funnel this kind of work to India and the rise of Infosys, Wipro and the like can all be tied to the success they had during the peak Y2K years of late 1990s.

Wages in India relative to the Western world were often 75% lower than comparable wages in Boston, San Jose or London and even with fully loaded costs, the margins were greatly in favor of the outsourcer. ASIC engineering wages in India, for example in 2000-2001 still were low in comparison with more developed regions. They were closer to the US $ 20,000 per annum range for an engineer with 3-5 years of experience as compared with $65,000 in the US. However, time, outsourcing and higher demand and tight supply have taken their toll.

Anecdotal evidence suggests that wages were routinely adjusted upwards for hardware engineers twice every twelve to eighteen months, with double digit increases over the 2002- 2006 time frame. Outsourcing companies had to compete for the same small pool of talent with larger MNCs like IBM and Cisco which were all rushing to grow headcount in Bangalore, Pune, Hyderabad and other cities. At the same time, the pool of hardware engineers available and even software engineers who are trained in embedded software development techniques is growing much more slowly. A quasi government committee set up review the supply of hardware engineers with the right kind of skills found that India was graduating no more that 3000 to 4000 hardware engineers who could be recruited for more front end design and for IC design. PCB design engineers were a little easier to come by.

It is no surprise that wages are increasing steadily, in India, for engineers with the right kind of experience and especially for technical leads and mid level engineering managers. As the gap closes between wages paid in India as compared with those paid in the outsourcing countries, outsourcing purely for margins may not make that much financial sense anymore. The criteria for outsourcing will have to be based on other factors such as proximity to customers or government subsidies and tax free zones among other things. A rising tide lifts all boats and once wage parity is global there may be no cheaper zone to move to.