david.pilling@ft.com
http://www.ft.com/cms/s/0/7a4e8e92-d2a5-11e2-88ed-00144feab7de.html
Brainpower alone cannot save India’s growth model
The problems at Infosys raise questions about its role at a national level
For Infosys, a pioneer of India’s outsourcing revolution, the world used to be flat. Now it is looking more pear-shaped.
It was Nandan Nilekani, a co-founder of Infosys, who first put the idea in Thomas Friedman’s head that the world was flattening. Mr Friedman, who was wowed by the oasis of calm and sophistication he found at the company’s shiny Bangalore campus, recalls Mr Nilekani telling him: “Tom, the playing field is being levelled.”
That led him to think about how technology was rendering distance and borders increasingly irrelevant, and accelerating the process by which hundreds of millions of people in emerging countries were pressing into the global workforce.
Many of Mr Friedman’s insights hold good today.Infosys itself, however, is on shakier ground. In the years since the Lehman collapse, its compound annual growth – a heady 41 per cent from 2004 to 2008 – has slumped to 12 per cent. Once known for hitting its targets with metronomic regularity, it has been missing revenue forecasts. So bad have things become that this month Infosys recalled NR Narayana Murthy, its 66-year-old co-founder, to get things back on track.
The problems at Infosys are partly company specific. Yet they also raise uncomfortable questions about the limits of the Indian outsourcing industry and, more worryingly, about India’s development model itself.
Infosys has suffered a leadership vacuum since its founding giants moved on. The company has been divided and recent leaders have lacked the aura of predecessors who were able to reel in lucrative contracts from Fortune 500 companies. More fundamentally, it is running out of road.
The company is good at managing complex information technology networks remotely, repairing them when they go wrong and upgrading them when needed. For this, it employs tens of thousands of Indian software engineers straight out of college, who get paid as little as $5,000 a year. Most employees are in their 20s and the churn rate is extreme. Few stay on more than two or three years. As a result, operating margins are 25 per cent-plus.
Infosys has been unwilling to sacrifice them. That means it has lost out to rivals ready to compete on price or, more important, to invest in new business. Some of its competitors, Tata Consultancy Services and Cognizant, have done better. Both have placed big bets on acquiring clients in new areas, such as European insurance and US healthcare. Both are more able to go up against western companies (some with hoards of Indian engineers) crowding into the same space – from IBM and Accenture to SAP.
Some of Infosys’s problems extend to the industry as whole. Growth at even the most successful companies is nowhere near what it was. There are at least three reasons for this. One is sluggish demand from the US and Europe. India’s IT companies have not done well at breaking into emerging markets such as China, Russia and Brazil. Second, the political environment has worsened. Washington has cracked down on the H-1B visas that allow Indians to work in the US. Theimmigration bill now in the Senate could make things harder still. Elsewhere, regulation – for example on transferring healthcare data out of Europe – is hampering new business.
Third, much existing work is being commoditised and automated. Rather than paying Indian engineers to watch lights blinking on and off and apply off-the-rack software patches, it is becoming cheaper to develop networks capable of fixing themselves. “Automation is a big threat to India’s model,” says Siddharth Pai of research group ISG.
That does not mean Indian IT has hit the buffers. The best companies are still “formidable animals”, says Mohandas Pai, a former Infosys executive. They have reinvented themselves before, notably after the Y2K bubble of 2000. A McKinsey report in 2009 concluded there was a dizzying $1.65tn in offshoreable IT business of which less than 10 per cent had been captured.
Still, there are limits. That leads to the broader question of whether India’s most successful industry has the critical mass to pull the country out of poverty. As the IT industry has slowed, coincidentally or not, so has India’s economic growth – to a wholly unsatisfactory 5 per cent.
Advocates of the industry point out that it accounts for $75bn of exports, which pays for about two-thirds of oil imports. Directly and indirectly, it employs 3m people. That, though, is a drop in the bucket of a vast, impoverished nation. By contrast, some 41m urban Chinese work in manufacturing and 225m, 29.5 per cent of the workforce, have jobs in secondary industries. Joe Studwell, author of How Asia Works, says the IT sector has “emancipated the posh Indian”, but he despairs at the lack of a manufacturing strategy.
India does have manufacturing niches, such as car parts. Yet in sum, it is decades behind China. The new middle class has jumped straight from farm to desk without stopping at the factory floor. Even if the world is as flat as a pancake, it is hard to see how brainpower alone can be India’s salvation.
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