Indeed, the tech industry in India is so pampered by New Delhi, and so admired by ordinary Indians, that they have been lagging behind the competition. Industry trade group Nasscom recently released a report on the necessity of Indian companies to begin to innovate to survive, and suggested the establishment of an ecosystem for innovation, helped by policy initiatives.
But while India lacks a formal innovation culture, one would never know from the assumed superiority over foreign rivals. Indian firms are simply unable, culturally, to absorb a Western company. Industry analysts say Indian companies such as Infosys are hierarchical, and have an elitist view of their business and suffer from "conceptual Brahmanism", referring to the group at the upper echelon of the Indian caste system.
IBM's India buildupThere is a ring of truth in that. While the companies all employ Indians and some foreigners from across economic and social lines, the top rungs of both Infosys and Tata Consultancy are dominated by upper-caste South Indians. Satyam has a big contingent of employees from the company's native state of Andhra Pradesh. Integrating a Western firm into that closed culture could be problematic. Infosys Chief Operating Officer Shibulal dismisses the inability to acquire, saying only: "We are perfectly capable of building things organically."
Companies such as IBM have taken a more democratic approach to building their business. The company began competing with the Indians in the outsourced tech-services business just three years ago, when it acquired Daksh, a call center. Since then, IBM has made plenty of acquisitions in India, absorbed them, and also organically expanded its business. Today, IBM has 3,000 workers dedicated to research and development at its offices in Bangalore. It is the largest R&D operation outside of the U.S. center in Armonk, N.Y., but one that is integrated with all of IBM's nine research centers around the world. Last year, IBM saw a 385 percent increase in patent filings from its India office.
IBM is already the dominant player at the top end of the tech-services market, with its large and established consulting business, and now it has also mastered the bottom end of the market, which offers low-cost servicing. More important, IBM is the leader in the Indian market for technology services, a market that the Indians have always overlooked. According to tech research firm IDC, IBM has the largest market share in India, at 10 percent of the total US$3.7 billion market, and customers across the board from the state tax department to the private players.
Missing homegrown opportunitiesIn fact, IBM is the top choice of India globally. Ambitious Indian corporations such as Bharti Airtel, since 2004, have outsourced roughly US$1 billion worth of tech services to firms such as IBM with global expertise. In March, IBM bagged an $800 million, 10-year contract with Idea Cellular, formerly co-owned by Tata and AT&T but now by the Birla group. In the first six months of this year alone, US$1.4 billion in domestic telecom deals were grabbed by the multinationals.
According to researcher Gartner over the next two years, Indian companies in the private and state sector, from banks to the railways, are expected to spend an estimated US$5 billion on new technology, all of which will need to be serviced. Save for Tata Consultancy, 9 percent of whose business is domestic, the Indian players have largely focused on exports and missed the big opportunity in their own backyard. Nasscom estimates that just a quarter of the revenues of Indian outsourcers are domestic, though it is growing at 22 percent a year. This year, for the first time though, Infosys said that it would bid for domestic business, admitting that the "home market has reached a level of maturity".
Of course, companies such as IBM in India share some of the same constraints as their local competitors. India is in the throes of a severe talent shortage in sectors from tech to retail to research. Part of the problem is the emergence of new businesses such as retail and telecom in which India has no prior expertise. But a significant part is the country's creaking education infrastructure, which is not producing enough qualified engineering candidates who can be productive employees immediately.
Visa restraints hurtTata Consultancy, for example, is now mining deep for potential candidates, hiring not engineers, but math and science grads from colleges and putting them through a seven-month training course. "About 20 percent of our new employees are non-engineers, and that number will increase," admits TCS' Ramadorai. IBM solves the problem by paying higher salaries, but only recruiting engineers.
But what is strictly an Indian headache is the visa situation in the U.S. Just 65,000 H-1B legal worker visas are issued by the United States, a strain on Indian firms that need to send their engineers to work in their U.S. clients' offices. The demand is so huge that for the last two years, on Apr. 1, the day that U.S. immigration officials release the quota for H-1B visas, nearly all are snapped up by Indian tech companies.
With a Presidential election coming up in 2008, visas promise to be a hot-button issue. Already, companies such as Infosys and Patni Computers have been penalized by states such as California for not paying their H-1B employees market wages. The Indians are hiring locally, but it will surely affect their low-cost advantage. The Indians are doing "awesomely well," says IBM's software research chief in India, Harish Grama, "but what are they doing to stay in the game?"
Overcoming a fixation on marginsThe Indians defend their position stoutly. "Now, we are in the same position as IBM or Accenture, where people treat you like a partner and consultant, not a vendor," says Ramadorai of TCS. Indian companies, he adds, are spending increasingly on innovation. TCS says it has developed a full range of services, global network delivery, intellectual property, deep knowledge of different industries, and is starting to invest heavily in innovation, working together with clients. The same is happening to Infosys, which has increased its R&D spending to US$12 million this year, for instance. Wipro has made R&D a business to be outsourced from people, but that too is not sophisticated, cutting-edge work.
The future, say industry analysts, lies in doing things the multinational way: embracing innovation, consulting, and geographical expansion. To get there, Indian companies must get over their "25% margin fixation", says Ashish Thadani of Gilford Securities, who covers Indian tech companies listed in New York. "Those continuing high margins mean you are probably underinvesting for the future."
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