This column from Business World of 8 September 2003 records the crisis in the information technology industry. After almost 20 years of frenetic growth, it entered a slowdown. American firms realized that Indian firms' success rested on their low labour costs in India, and began to open branches in India to capitalize on them.
The sea gets
choppy
Is Infosys failing to fulfil its promise?
Not yet. Time will tell. And it may well eventually tell a different story from
time today. But the vicissitudes of Infosys are a reflection of the stormy
waters into which the Indian information technology industry has entered. The
rough times are not new; they have already lasted three years. They have seen
the eclipse of hundreds of small firms that throve in the IT boom. A handful of
big firms survived these years; Infosys was amongst the deftest. The hopes of
many ride on its fortunes; hence the extreme reactions. But what matters is the
IT industry, and specifically that part of it that India attracts and keeps.
The global IT industry showed all the
frenetic symptoms of a new industry – the breathless rise in the 1990s, and
then the sudden fall just as the new millennium began. The Indian industry,
with its overwhelming exposure to exports, should have suffered the same fate,
but did not. Many firms suffered, some vanished; but the industry itself
continued to grow at about 25 per cent a year – only half the rate before the
bust, but still much higher than the growth rate of the global industry or of
the Indian economy. Although it faltered, it still remained the rising star of
India. The reason was its low wage cost; it attracted work to India as
competitive pressures intensified around the world.
That cost advantage counted, and still
counts. But the Indian industry had concentrated on legacy applications and
maintenance and won a big market share in them; as the share rose, the growth
of India’s market was bound to slow down. Indian firms had to diversify, but
did not have a clear competitive advantage in any field as they did in these.
Both within their preferred field and outside,
the expectations of the market were changing. Earlier it was possible to pick
up parts of a big job; subcontracting and parceling out were common when too
much work was chasing too few firms and time was of the essence. But after the
global slowdown, clients became price-sensitive. They began to ask IT firms to
do more work for the same cost. This worked in favour of the large firms, and
was responsible for the massacre of the midgets.
But size was not everything; costs also
mattered, and there firms working out of India had an advantage. It seems now
that the advantage was temporary. There are global firms many times larger than
Indian firms; and cost pressures are bringing them to expand operations in
India. As long as competition was global, Indian firms were ahead. But now the
competition is coming home. Global firms are competing for programmers within
India; suddenly, how the programmers are used, how much value they generate,
has become important. It is good news for them, but not so good for their
Indian employers.
Especially when these employers are
trying to cope with the changes in the market. Clients were till now
aggregating work into bigger contracts. Now the process is reaching a stage
when they want to contract out their entire IT-related work. Once they do that, price by itself is not a
decisive advantage. Reliability is more important. Experience of work
outsourced matters. And location as well as cultural affinity come into the
picture; clients like to deal with IT firms that are close by, and firms whose
CEOs play golf or go fishing with them. Earnest, God-fearing, vegetarian
Indians are at some disadvantage when the market goes ethnic.
Although a number of Indian firms have
built up a global presence, they are not global firms. Their operations abroad
are largely manned by Indian employees; they find it awkward to fit in locals
in either the highest or the lowest positions. And because they are not
socially assimilated, they find it difficult to blend into the local landscape.
They are aware of this problem, and will
no doubt work their way around it. At the end of it, they will station a larger
proportion of the work force abroad, and a larger proportion of their work
force will be foreign.
But the fate of the Indian IT industry is
not the same as that of Indian IT firms. For foreign firms are expanding their
operations in India; their entry too creates employment opportunities for
Indians, and adds to India’s exports. It is not ownership of the industry that
matters; what matters is location in India. If there is a conflict between the
two, there can be no doubt which of them policies should aim to promote. The
xenophobic streak in our rulers raises a fear that they will make the wrong
choice. If they do, they will ensure a shrinking share of India in this dynamic
global industry.
