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back to index backASIAtalk February,  2006


India: Growth Plans

Aging infrastructure, low-cost competitors, and worker shortages could clip India's IT boom. Here's how the country's tech leaders are coping. Second of three parts in the Inside India series.

At the World Economic Forum in Davos, Switzerland, two weeks ago, India was indeed everywhere. From an "India Everywhere" marketing campaign that blanketed the snow-covered town to a packed cocktail party celebrating India's Jan. 26 Republic Day to tireless glad-handing by Infosys Technologies CEO Nandan Nilekani and other subcontinent big shots, the emergence of India and China was topic A at the annual gathering of influentials. To some, the party is just getting started.

"What's driving this whole thing is that companies have found a superefficient way to create a back office, and sometimes a front office," says Steve Pratt, CEO of Infosys Consulting, a subsidiary of Infosys Technologies, unwinding in his hotel room after a night that included dancing with tennis star Monica Seles. "That wave is not nearly played out yet."

But as our firsthand report in part one of the Inside India series indicated, a potential shortage of qualified tech workers; rising wages; battered roads, airports, and power grids that aren't keeping up with increased use; and competition from low-cost markets in Asia, Africa, and Europe threaten to hold back expansion (see "Inside India," Jan. 16, p. 38). In response, India's tech leaders are looking overseas for new talent, getting more involved in improving the country's infrastructure, cultivating expertise in emerging technologies to snare new outsourcing work, and using mergers and acquisitions to supplement organic growth.

To wit: India's technology and business-process outsourcing industry is forecast to grow from $22 billion for the fiscal year ending in March, to $60 billion by 2010, according to a report issued last month by Indian IT trade group the National Association of Software and Service Companies and consulting firm McKinsey. To fuel that 30%-plus annual growth, Nasscom-McKinsey predicts that the Indian cities of Bangalore, New Delhi, Hyderabad, Chennai, and Mumbai will employ a million more tech workers within five years. Other Indian towns will add 600,000 IT jobs. Those workers could take 1 million international flights in 2010, accounting for a fifth of Indians' international air travel, Nasscom-McKinsey says. But fly into Bangalore's misnamed international airport--a rundown concrete blockhouse with a few worn-out baggage belts and metal folding chairs in the lobby--and you get an idea of what those travelers will be up against.

On A Roll

Offshore outsourcing is by no means tapped out in India. Infosys, which is India's No. 2 outsourcer based on the most recent fiscal year, last month reported a 32% increase in revenue for its third quarter ended Dec. 31, to $559 million, putting it on track for more than $2 billion in sales for the year. Profits rose 28%, and the company added more than 3,200 employees and 36 clients, as it expanded into new sectors, including oil and gas, insurance, and pharmaceuticals.

Wipro, the No. 3 Indian outsourcing company, last month reported a 33% increase in revenue, to $617 million for the Dec. 31 quarter; net income rose 25% to $118 million. And No. 1 outsourcer Tata Consultancy Services saw profits in its December quarter rise by nearly 9% and revenue increase 10.6%, to $725 million.

Whether India's tech pacesetters can match investors' goals in the quarters ahead will depend on their ability to help address national problems. It also hinges on how they execute their growth strategies. Branching into new areas could be especially important as companies looking to outsource IT work split up large deals among several service providers. In order to keep growing, Infosys, TCS, and Wipro are beefing up their consulting practices, adding skills in new tech domains, branching into non-IT product design, and expanding internationally.

One new emphasis is installation of Oracle and SAP business applications. Packaged software, network and infrastructure management, radio-frequency identification, and mobile computing are other areas in which Infosys is investing, says chief operating officer S. Gopalakrishnan. The company, which is rapidly adding consultants, got about 35% of its revenue from computer systems maintenance, 30% from application development, and the remainder from testing, business-process work, and consulting. One recent deal: A contract with Institutional Shareholder Services has Infosys advising on IT buying and design of next-generation systems. But Infosys' consulting revenue is still "miniscule" compared with its app development and maintenance work, says Forrester Research analyst Stephanie Moore.

About 4% of Infosys' revenue comes from non-IT product design in the aerospace and automotive industries--for example, a deal with Airbus Industrie to design part of the wing for Airbus' new A380 superjumbo jet. Wipro also has a piece of that contract.

Wipro also has a deal with General Motors for $300 million of work over five years, a portion of which was awarded last week as part of the $7.5 billion in IT contracts GM handed out. One place Wipro is looking to for growth is in its ability to capture slices of research and development spending that multinationals today do in-house, either in their home countries or at their own operations in India. "Any fundamental R&D, they don't want to outsource," says Divakaran Mangalath, Wipro's CTO. Intel, for instance, will outsource development of new versions of existing products, such as engineering for its dual-core chips. But key to capturing R&D for next-generation products, work that Intel currently keeps in-house, will be building expertise in areas such as wireless technologies and communications chips.

TCS is seeing its share of growth, too. It signed 12 new customers in its industrial engineering unit, increased head count to 3,400 consultants, and expanded into areas such as plant management and integrating factory-floor software with business apps, according to the company's quarterly report. TCS also signed big IT deals with banks in India, China, and Russia during the quarter.

Acquisition Binge

All three of India's tech leaders are expanding beyond India. To get a leg up on new markets, they're focusing heavily on acquisitions. Wipro in December paid $28 million for mPower Software Service, a Princeton, N.J., vendor of software development for payments processing. That same month, it acquired NewLogic Technologies, an Austrian chip-design company whose customers include German chipmaker Infineon Technologies, for $56 million. The acquisition will add to Wipro's business developing wireless Internet and RFID systems.

At Infosys, "acquisitions are definitely on the table when it comes to growth," Pratt says. But "we're very picky," he adds. Infosys could use acquisitions to enter new vertical markets, particularly in Europe, where trade regulations, labor laws, and a multitude of languages make it difficult to do business. "It's a complicated place, and entering certain markets is probably best to do through acquisition," he says.

Infosys also is rapidly expanding its two campuses in China to serve a growing market on the mainland, plus Taiwan, Hong Kong, and eventually Japan and Korea. The company's Chinese subsidiary posted just $1.9 million in sales last year, says Infosys China CEO James Lin, but that could double this year. The company also plans to increase head count from 400 to as many as 1,400 by the end of the year.

Most U.S. companies aren't yet comfortable outsourcing work to China or Eastern Europe, says Infosys customer Christopher Osentowski, a director at Ingram Micro, a $25 billion-a-year computer-products distributor. But that could change. "Those things are coming, but they're still a few years down the line," he says. "The Indian companies that try to get in there early will have a distinct advantage because they have this learning from the last five or 10 years."

Back Home

Acquisitions and global expansion are ways India's IT companies can expand the pool of skilled workers--a pool that's growing far too slowly back home. The country is staring at a shortfall of 500,000 IT workers by 2010, the Nasscom-McKinsey report predicts. At that point, India's tech economy will employ 2.3 million workers.

Only a quarter of the 400,000 engineering and computer science graduates of Indian universities each year "are suitable on an as-is basis," Nasscom president Kiran Karnik says. The rest have subpar technical skills, a poor command of English, or are unwilling to relocate to India's tech centers. Even factoring in 15% growth of the 100,000 qualified grads produced each year, "if we stick at that number, it's going to be a constraint," he says.

Particularly in demand are workers with three to seven years of experience who can work independently or manage a small team, Infosys' Gopalakrishnan says. They keep clients' costs down by requiring less supervision. Yet expansion of consulting and other specialized areas means further wage inflation at a time when IT workers' salaries already are climbing 10% to 15% a year.

There's an upside to hiring experienced people, though. As Infosys moves into new consulting areas such as equity research, process engineering, order management, and human resources administration, it has leeway to raise prices by combining expensive consulting with cheap Indian IT labor, Infosys Consulting's Pratt says.

Legal Hurdles

As India's outsourcers add more sophisticated services to their portfolios, questions about the legal environment also could choke growth. Among them: foreign companies' concerns about protecting intellectual property and enforcing intellectual-property laws in India's often slow-moving courts. That issue is enough to cause some U.S. companies looking for lower labor costs to establish their own operations in India rather than hire an outsourcer, even though it may cost more, says Michael Mensik, a partner at law firm Baker & McKenzie, who advises companies about outsourcing.

Regulatory compliance also could become an issue, Mensik adds. "I don't need to know a whole lot of law to manage your network or fix your legacy system," he says. But for work like payroll management, benefits, or accounting for a public company, "then India is right smack dab in the middle of my Sarbanes-Oxley accountability."

Recent and pending changes could make this less of a threat. India's Parliament this month plans to amend a law on data protection to encompass computer networks and mobile devices, as well as data that lives on individual machines. And on Jan. 18, Nasscom launched a "national skills registry" database of IT pros in India that includes employees' professional and educational histories to reduce the cost of background checks.

Less under India's direct control is new tech competition from China, Russia, Eastern Europe, South Africa, Egypt, and others looking for a piece of the outsourcing action. Language skills give some of them an edge. India lacks large numbers of German, French, Spanish, and Japanese speakers, which makes Eastern Europe and China more attractive for certain customers.

When Ingram Micro outsourced customer service and order management functions to Infosys subsidiary Progeon last year, it moved back-office paperwork to Bangalore but phone support to an Infosys facility in the Philippines. Filipinos' better English skills were the deciding factor. "Indian outsourcers are trained with a global accent," which can sound "disjointed" to North American customers, Ingram Micro's Osentowski says. "It seems to be based more on the Queen's English."

Language parochialism is just one more reason for Indian IT companies to push for global growth. India's long-term success depends on its top tech players' willingness to move beyond what they already do well and take risks with new technologies and in other emerging countries, while building up shaky resources at home. If that approach succeeds, they could be partying at Davos for a long time to come.

Source: InformationWeek - GAI


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