The ‘sticky’ outsourcing firms on the rise

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India has long been a destination for companies in developed markets to outsource labor-intensive tasks.

However, several of the country's new technology companies are aiming to gain access to a share of R&D budgets – funds previously protected for spending in Western markets.

Over the years, the services sector of the Indian economy has grown to 45% of total exports, up from 30% a decade ago. Business process outsourcing (BPO), which includes customer support, drafting contracts or conducting large-scale marketing campaigns, accounts for more than three-quarters of the value of exported services, according to consultancy Capital Economics.

Relatively low labor costs and high information technology literacy have enabled service exports to grow at an average annual rate of nearly 20% in the past two years, significantly faster than the 5% annual growth of goods.

At the same time, the Indian government has been eager to support manufacturing to create significant job opportunities, a key economic and political challenge that cannot be solved by the services sector alone.

However, India has also long lacked enough high-tech companies and jobs, resulting in one of the largest “brain drains.” One way for companies to solve this problem is to secure a portion of their R&D budgets that were previously unavailable to Western customers.

Take an engineering company as an example saint Conducts research and development for 300 companies, including Microsoft and Siemensacross multiple industries, primarily aerospace and communications. It is also beginning to expand into the semiconductor industry (perhaps the high-tech economy) to help companies improve their design capabilities.

Cyient is not alone. Peers such as KofojiLarson and Toubrow's LTI Thinking Tree The firm's subsidiaries and other companies are copying the idea, and the market is now worth $30 billion and is expected to grow over the next five years, according to Kunal Desai, manager of J.P. Morgan's emerging markets fund. Double. Gibb Asset Management.

These companies also have their own unique moats compared to the large BPO companies of the past three decades. Once R&D costs are outsourced, they are less likely to be frequently transferred to another company or country. In effect, these companies become an integral part of the outsourcer.

“Once you're embedded in a company like Cyient, it's very difficult to separate yourself,” Desai, whose fund holds a stake in the company's stock, told an audience of professional investors. Quality growth investor conference in London this week. “Companies’ ability to cultivate these sticky relationships can help enhance the company’s competitive advantage.”

However, there are risks here too. Desai said a key growth factor depends on whether companies in developed economies accept that some of their R&D work can be outsourced.

“Not necessarily R&D, because that's at the forefront of what companies are doing, but traditional R&D where they can benefit from the cost advantages of expanding overseas,” Desai told CNBC on the sidelines of the conference.

If the industry overcomes the challenges, it will gain popularity at a time of increasing competition from companies in countries such as the Philippines, Mexico, Brazil, Poland and Malaysia. Perhaps it can also address some of the risks posed by the jobs created by artificial intelligence in the BPO industry.

Behind the boom in Indian stock markets. The Nifty 50 index is up 17% so far this year and has hit multiple closing highs. have There are several reasons behind its rise: public infrastructure investment, domestic manufacturing diversification from Chinese companies, healthy economic growth and lower interest rates from the Federal Reserve. To profit from Indian equities, analysts and fund managers favor the banking and real estate sectors.

Indian stocks have now fallen for five consecutive days to a two-week low. Oil prices fell 2.12% as geopolitical risks in the Middle East led to higher oil prices nifty 50 today. The index is up 16.2% this year.