Saturday, November 1, 2014

More information technology firms in Hyderabad

[In my continuing quest for IT firms, I made another trip to Hyderabad, and met B Ramalinga Raju of Satyam, who some years later went to jail for having cooked accounts and mismanaged the company. Tech Mahindra has tried for years to take over the shell of Satyam, but the income tax department's absurd demands have stalled it. I wish we got a finance minister who has the guts to bring the revenue departments under control.]

Information technology in Hyderabad

In January I wrote about Pramati Technologies, the Hyderabad firm that had designed router software and taken on big firms like BEA Weblogic, Oracle and IBM. I had a feeling that Hyderabad harboured other unusual firms, and I went looking for them with the help of Kapil Ramamurti of Spark Capital Partners and Sankaran Nandakumar of VNVision. Nandakumar has an interesting history; from TCS he went to Nagarjuna Fertilizers. Instead of just selling fertilizers to farmers, he visualized growing crops as a system, and asked himself how one could add value to it. For instance, it is stupid to apply all fertilizers together. Phosphatic fertilizers stimulate root growth, so they should be applied at the beginning. Nitrogenous fertilizers help leaf growth, so they should be applied once the plant begins to grow. Now he is applying this type of systems thinking to agribusinesses, high-tech firms and social service organizations – including Dalit groups and a women’s organization which has crossed 60.
The most impressive sight I saw was the Satyam campus. Located some 30 kilometers out of Hyderabad, this 120-acre campus breaks away from the arid western Andhra countryside. On entry it looks like a jungle. The half-a-dozen buildings get lost in the wilderness. The campus has a botanical garden, a nursery, a little zoo and an aviary. One building houses the restaurant, seminar rooms, and a gym with an outdoor swimming pool. Workers can carry their lunch out and sit around rustic round tables. Insiders like visitors to admire the solid timber of the tables and the gate; actually, they are made of cement. The workers can take their laptops and work outdoors, for the campus is equipped with bluetooth technology; even in the open air, a computer has wireless connection with nets, internal and worldwide.
B Rama Raju, one of the two brothers who started Satyam, is a remarkably relaxed man in these turbulent times. They started the company in 1989; at that time they were body-shopping for John Deere – they had set up a team to work within the John Deere plant. Once VSAT links arrived, it would have been far more economical if the team had been located in India; labour turnover would also have been lower. To persuade John Deere, Satyam moved the team to a location across the road from the plant; no one was allowed to cross the road. Convinced by the experiment, John Deere allowed the first offshore development to move to India.
According to Raju, the turning point for the Indian IT industry came with Y2K. The flawless transition to the next millennium created confidence in Indian firms, and built up relationships which kept the latter afloat in the hard times that followed. Indians have greater confidence in their own ability than clients do; Indians cannot say no, and take on tasks beyond their capacity because it would be impolite to refuse. That is where Y2K made a difference – it narrowed the gap between what Indians thought of themselves and what others did. Now clients are calling Indian firms, and asking them to take on end-to-end responsibility. Although newest and smallest of the Big Five, Satyam has built up relationships which assure it of a smooth path ahead.
I visited two specialist firms which are still feeling their way forward. Both have been set up by engineers who did well in the Silicon Valley, and who were lured back to Hyderabad. MosChip Semiconductor was set up in 1999 by four friends; three are in Hyderabad, while the fourth, an American, handles marketing in the US. It designs chips that control the connexion between PCs and other devices. Now that PCs are being used to play music and films, to make telephone calls and keep watch with digital cameras, there is a demand for new chips to manage the interface. MosChip designs the chips, gets them manufactured by a fabricator in Taiwan and sells them under its own name to equipment manufacturers. Most of the customers are in East Asia, where consumer electronics are a booming industry.
Its founder, Ram Reddy, graduated from IIT Madras in 1970, and then went to Wisconsin for an MSEE. He returned and worked on defence contracts at the IIT. That was the world of IBM 1600s and 360s, of data on thousands of punched cards, and of semiconductor chips with four gates (today they can have over 2 million). The first minicomputer, PDP micro, was made by DEC in 1970. The shift from mainframes to personal computers was just beginning; semiconductors were just about to break out of computers and enter consumer durables.
Reddy then went back to the States to do a Ph D. That was the time when semiconductors were beginning to be used in devices – calculators, watches etc. In 1977 he got an offer from AMI to make the world’s first DSP chip and took it. He worked on custom-designed chips for six years. He patented an algorithm for rounding off. Years passed like a blur. Early in the morning, his wife drove him to work; late in the evening she brought him back. Two hours for dinner and a chat, and it was time for bed.
No one gets rich by doing a job; everyone who was any good was setting up his own company in the 1980s. A customer from Florida was watching him; he told Reddy, “Tell me when you are going to leave,” and backed him when he did finally leave. He got contracts from Franklin, Western Digital, Microsoft amongst others. He set up three companies.
Finally Reddy decided to try out India, and returned in 1997. That was the time when all multinationals were recruiting in India; it was very difficult to attract or retain software engineers, especially if they had any experience of semiconductor design. Things have got easier after 2001. But even then, it is difficult to get talent of the right kind; Reddy is thinking of starting a school of chip design, and expects to have a pool of chip designers in five years’ time.
Srini Raju, chairman of ilabs, is a serial entrepreneur. A graduate from Regional Engineering College, Kurukshetra and MS from Utah, he worked with a consultancy in Palo Alto, California, before Ramalinga Raju lured him to come back and join Satyam, which was just taking off then; Srini helped run it till 1996. He also set up DBSS, which has now grown into Cognizant, the highly successful IT solutions provider. From 1997, Srini built up businesses centred on telecom, ERP and transactions processing, which were later merged into Satyam.

In 2000 he left Satyam and started ilabs, an incubator to create businesses based on intellectual property in life sciences, telecommunications and internet-based business services. He has already spun off six companies specializing in telecom clearing and settlement, WiFi, prepaid, and mobile business transactions. Srini is trying to prove that technologies – and not just solutions – for world markets can be produced in India. I think he will.

The mysterious entrepreneur

[This column from Business Standard of 6 May 2003 pinpoints a peculiarity of the Indian economy - that much enterprise is unincorporated. Little is known about it because the Central Statistical Office has not investigated who the entrepreneurs are.]


The advent of grass-roots capitalism


I was browsing the Economic Survey when my eye fell on a footnote in the Tables on savings and investment: adjusted for errors and omissions. That was strange, I thought; why did one have to adjust for errors and omissions? All one has to do is to give the actual errors in an additional row. Reserve Bank of India does this all the time in the balance of payments figures, which it does not reconcile even after 50 years; why did the finance ministry have to do it differently? So I began investigating, and a number of skeletons stumbled out of its cupboard.


             AS PROPORTION OF GDP (%), YEARS ENDING 31 MARCH OF












1997
1998
1999
2000
2001
2002
2003









Savings

23.2
23.1
21.5
24.2
23.4
24.0

  Government
1.7
1.3
-1.0
-1.0
-2.3
-2.5

  Private

21.5
21.8
22.5
25.2
25.7
26.5

    Corporate
4.5
4.2
3.7
4.4
4.1
4.0

    Non-corporate
17.0
17.6
18.8
20.8
21.6
22.5

      Financial
10.4
9.6
10.5
10.7
10.4
11.2

      Physical
6.7
8.0
8.4
9.6
11.2
11.3

Investment
24.5
24.6
22.6
25.2
24.0
23.7

  Mistakes

3.1
-0.1
-0.6
-2.7
-1.3
-1.1

  Changes in stocks
-1.0
0.9
-0.1
1.9
0.7
0.8

  Government
6.8
6.5
6.6
7.0
6.4
6.2

  Private

15.6
17.3
16.7
19.0
18.2
17.8

    Corporate
8.7
9.0
7.6
7.7
5.8
5.5

    Non-corporate
6.9
8.3
9.1
11.3
12.4
12.3

Investment-savings
1.3
1.5
1.1
1.0
0.6
-0.3

  Mistakes

3.1
-0.1
-0.6
-2.7
-1.3
-1.1

  Government
5.1
5.2
7.6
8.0
8.7
8.7

  Private

-5.9
-4.5
-5.8
-6.2
-7.5
-8.7

    Corporate
4.2
4.8
3.9
3.3
1.7
1.5

    Non-corporate
-10.1
-9.3
-9.7
-9.5
-9.2
-10.2

Central taxes
9.4
9.1
8.3
8.9
9.0
8.1
9.6
  Personal income tax
1.3
1.1
1.2
1.3
1.5
1.4
1.7
  Corporation tax
1.4
1.3
1.4
1.6
1.7
1.6
2.6
  Excise

3.3
3.2
3.1
3.2
3.3
3.2
3.7
  Customs

3.1
2.6
2.3
2.5
2.3
1.8
1.8
Central debt

51.1
51.2
52.7
55.5
58.1
61.4
Interest


4.3
4.5
4.7
4.7
4.6
4.8
Av rate of interest

8.4
8.8
8.9
8.5
7.9
7.8


Look first at the last column, giving the ratio of tax revenue to GDP. It fell from 9 per cent in 2000-01 to 8.1 per cent in 2001-02; the Survey expects it to jump to 9.6 per cent in 2002-03. This is of a piece with the ministry’s eternal optimism. In Yashwant Sinha’s time, revenue was routinely overestimated. He always planned to bring down the fiscal deficit. But the plans were all in the air; revenue was always lower than budgeted, the deficit was always higher, and the debt went up. How much up? Sinha was cautious in the first three years; the ratio of central debt to GDP went up from 51.1 per cent in 1997-98 to 52.7 per cent in 1999-2000. (I suspect he kept it down by passing on the burden of small savings to the states.) Then he became reckless: the ratio went up to 61.4 per cent by 2002-03. The East India Company introduced a single-entry system of book-keeping in the 18th century which records only current cash flows and ignores assets and liabilities. Our government conveniently sticks to it in the 21st century. So the debt does not enter the budget; only interest on it does. And the government kept the ratio of interest to GDP from rising by reducing interest rates. It could do so because the rising foreign exchange reserves removed its fear of a payments crisis, and it could bring down the average interest rate on the debt by 13 per cent.
The debt-GDP ratio rose faster because the government stopped doing any net savings. When Sinha took over, government savings were 1.7 per cent of GDP; in 2001-02 they were minus 2.5 per cent. In other words, it was taking away 2.5 per cent of private savings and blowing them up on consumption.
Private savings, in the meanwhile, showed an enormous increase from 21.5 per cent of GDP in 1996-97 to 26.5 per cent in 2001-02. Corporate savings changed little; but non-corporate savings went up from 17 to 22.5 per cent of GDP. Non-corporates’ financial savings rose little – from 10.4 to 11.2 per cent of GDP. These financial savings continued to finance government investment, and less and less, corporate investment. But non-corporates’ physical savings went up from 6.7 to 11.3 per cent of GDP.
Physical savings mean savings directly used to buy houses, plant, machinery etc. An increase in them must be reflected in investment. It is: non-corporate investment went up from 6.9 to 12.3 per cent. Corporate investment fell sharply from 8.7 per cent of GDP in 1996-97 to 5.5 per cent in 2001-02; government investment changed little. The big change over the six years was that the share of non-corporates in total investment went up from 28 to 52 per cent. Till the 1980s the government pre-empted most of the savings and was the dominant investor. For a short while in the early 1990s, corporates’ share in investment went up. In the late 1990s we have an unprecedented phenomenon – non-corporates have raised their share of domestic investment to over a half.
Which means that the share of non-corporates’ financial savings in their total savings fell – from 61 per cent in 1996-97 to 50 per cent in 2001-02. Non-corporates – which means individuals and partnerships – have always been passionate investors in bank deposits and government securities, mostly indirectly through government financial institutions. In the 1990s they acquired a taste for corporate shares. Their tryst with corporate enterprise rapidly soured as companies disappeared with their money; in the late 1990s, they raised direct physical investment. 
What were these physical investments? The view of my expert friends is that the non-corporates have been building houses. They point to the rise in cement consumption. They observe the blossoming of the mortgage loan market, the increase in competition and the shift in banks’ preference towards mortgage loans. They think that Indians have become consumptionist, and luxurious houses are only a part of this consumption boom; they are called investment only by economic convention.
They may be right, but there is also another possibility. While corporates, stuck in traditional industries like steel and textiles, are bleeding, maybe many new entrepreneurs are investing in potato chips, phone shops and private water supply. In other words, it is possible that the industrial slump after 1996 was not economy-wide, but was confined to old industry which had misinvested in the early 1990s – and that much private investment continued to flow into new areas. But it was not corporate investment, it did not pass through any financial institutions, and so we failed to recognize it.
Thus, what we see is not so much the failure of investment and growth, but the failure of corporate enterprise. Entrepreneurs used the corporate legal entity to cheat savers on a large scale, and the savers are no longer prepared to trust their money to corporates. But they have also ceased to be couch potatos; they have increasingly gone out and set up their own businesses – except that they do not incorporate and raise capital in the market. They form private limited companies to limit risk – which is why corporate tax revenue has been buoyant – but otherwise keep outside investors out of their hair.
The only doubt about this story lies in the mistakes in the statistics, and they are big – so big that they throw doubt on the CSO’s competence. They imply that either investment is lower than the detailed figures for government, corporates and non-corporates suggest, or that their savings are higher. Which is the case? I do not know. But even if the errors were entirely deducted from non-corporates’ physical investment, it would still show a large increase. So my story would hold even after correction.
If it did, would it be such a bad thing? The government has so misused its financial institutions that the people have lost faith in them. SEBI has cleaned up the capital market, but there is no one to make corporates more responsible to the investor, so the public has lost faith in corporates as well. So the people have begun to develop the country without the government, the financial institutions and the corporates. It is grass-roots capitalism. I do not think it is such a bad thing at all.