When outsourcing to India started with the Y2K bug fixes, companies suddenly discovered a location where engineering salaries were a fraction of those in the United States, technical education was taught in English and the supply of skilled engineers seemed limitless.

At the turn of the century, experienced ASIC engineers in India reportedly earned an annual salary of about $20,000 compared with the $65,000 in the U.S. While a new engineer in the early days of his career still earns merely $5,000 annually, the cost advantage for experienced engineers in sophisticated technology work is rapidly eroding. The multinationals that outsourced their work to design houses now find themselves competing for the same pool of highly qualified and experienced staff when opening design centers in the country.

A Frost & Sullivan study conducted last year pegged the average monthly engineering workforce cost at about $3,767 in 2005. Data from the India Semiconductor Association (ISA) reveals that the highest per engineer monthly cost was for IC design. The costs were about the same for board design and embedded software development engineers in 2005. However, embedded software development costs per engineering month are expected to be higher than those for board design during a forecast period of 2005 to 2015 due to high demand.

The average monthly engineering workforce cost is expected to reach $4,361 in 2010 and is predicted to grow at a CAGR of 2.1 percent from 2005 to 2015. Growth in salaries is largely expected to contribute to this increase in cost toward workforce. Salaries in India's manufacturing and service sectors reportedly rose by about 12 percent last year. This year, that rate is expected to be anywhere between 12 percent and 15 percent.

Some companies have been looking at alternative destinations. One example is the flip-flop by Apple Inc. when it closed a months-old subsidiary and junked plans to set up a technical support center. Another is that of Intel Corp. choosing to invest billions in manufacturing and R&D in Vietnam. Even two Indian companies, Wipro Ltd and Satyam Computer Services Ltd, recently cautioned that salary increases could depress Q3 profit margins.

Yet, Nasscom reports that India's technology and outsourced services industry revenues rose from $30.3 billion to $39.7 billion in the fiscal year that ended March. And companies continue to invest. For instance, Cisco is reportedly building a million-square-foot campus in Bengaluru to house 10,000 staff. Google Inc. and Adobe Systems Inc. are also expanding in India.

Technology companies are also changing strategies—even business models—to get higher margins. And in doing so, they are moving India beyond being a low-cost alternative to China. IT companies, for instance, are looking at offering more than just call-center outsourcing and tech maintenance, and are eyeing the embedded software development space. Wipro now provides its clients with consulting services and takes over entire IT systems.

Other Indian companies are eyeing overseas operations. Satyam is hiring 300 people in Cairo, Egypt. Wipro has a joint venture in Saudi Arabia, two centers in China and plans one in the Philippines. Tata Consultancy Services has opened a center in Mexico and will soon start operations in Morocco.

For others, the opportunity in offshore product development is becoming more apparent as they look at the success of design centers by multinationals companies that have churned out high-end products from India.

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