November 22, 2004
India the Land of Service Outsourcing
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
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About twenty years ago I went on a ten day sales and marketing trip to India for Applicon. It was the most fascinating trip of my professional life. We visited New Delhi, Bombay (now Mumbai), Bangalore and Trivandrum. The Taj Mahal is everything you heard about it. Unlike the other foreign countries I have visited, being in India was like traveling back in time. From a beachfront hotel atop a cliff in Trivandrum I saw an entire village fishing. The men rowed out to sea making a large arc with respect to the beach and dragging a net behind the boat. The villagers then pulled the net and the fishes to shore chanting all the while. These and other sights were like something out of
National Geographic.

In those days and earlier it was common for talented and educated Indians to come to the US for graduate study. My thesis advisor and other members of his research group were part of this wave of Indian immigrants. A lot has changed over the last twenty years.

What caused me to think of India as a topic were not my old memories but rather an announcement of the formation of the India Semiconductor Association. The 31-member organization includes global firms such as Analog Devices, Intel and Qualcomm, Texas Instruments, and local giants such as Wipro. The group aims to raise the global profile of India's semiconductor industry, which at the moment has just about 100 million dollars of a world semi-conductor business valued at 200 billion dollars. The association said there are some 125 firms in India doing semiconductor work ranging from electronic design automation and testing to developing software. More than 70 of the firms are based in the
technology hub of Bangalore.

A second item was the announcement on November 8th by GE of the sale of 60% of GE Capital International Services, or Gecis to private equity firms for about $500 million. GE will continue to be the biggest customer of the company, but the firm now will be able to expand the business by selling its outsourcing services to global corporate customers. A public listing for the company is expected some time in the future. The division, which was started in Delhi as part of GE Capital, has annual revenue of more than $400 million and employs 17,000 people with 12,000 at five sites in India. The company also employs 5,000 employees at Dalian, China; in Budapest, Hungary; and in Juarez and
Caborca, Mexico.

According to the Wall Street Journal "Industry observers believe GE's sale of Gecis could be a trendsetter, prompting those not in the outsourcing industry to also sell their back-office operations. Many multinationals have set up their own offshore operations in India, known as captives, as a means to cut costs while also ensuring quality control and security. But today executives at GE and other multinationals are voicing growing confidence that third-party operators in India and other developing countries can provide quality services."

There has been a lot of press given to the outsourcing of American jobs. According to a well publicized November 2002 report by Forrester Research Inc. 3.3 million white-collar jobs-472,632 of them in IT and mathematics-and $136 billion in wages are expected to move offshore by 2015 to countries like Russia, India, China and the Philippines. The same firm said an estimated 315,000 U.S. services jobs had been moved overseas by the end of 2003. Another analyst firm, the Meta Group, estimates U.S. spending on offshore services at $10 billion this year, and that's with 55% of U.S. companies not using any offshore services. They predict the use of offshore services by U.S. companies will grow
at about 20% a year through 2008.

India represents an attractive location for outsourcing. India has a stable democracy, an enormous English-speaking population, and an excellent education system that produces more than a million college graduates a year who are willing to work for a fraction of their American counterparts.

In the eighties and nineties there was a considerable shortage of technical professionals. To meet this shortage, US corporations, such as IBM, Microsoft and Sun, signed contracts with Indian IT corporations, which brought over their Indian employees, using the greatly expanded H1-B visa program, for the duration of projects. Since these programmers were employees of Indian companies, the US corporations were not required to pay Social Security taxes and other workers' benefits, thereby realizing massive labor cost-cutting. Some estimates place these "savings" to US corporations as high as 80 percent of the amount they would have spent using US programmers. More recently in response to
rising unemployment in the technical ranks the annual H1B visa quota has been scaled down to 65,000 from 195,000 effective September 30th. This annual quota was filled on the opening day October 1st and has been a cause for concern in the industry.

Today Indian firms like Wipro Limited, Infosys Technologies and Tata Consultancy account for a significant amount of service outsourcing by American firms.

Before examining these firms, let's step back for a moment and look at the big picture from the Source World FactBook published by the CIA and from the US State Department.

Country Population Landarea GDP Exports Imports Trade GDP

  million m sq km $T $B $B $B %
China 1,287 9,596 5.99 326 295 621 8.0%
India 1,050 3,289 2.66 44 54 98 4.3%
US 290 9,629 10.45 687 1,165 1,852 2.4%
Table 1 Country Characteristics

Although India occupies only 2.4% of the world's land area, it supports over 15% of the world's population. Only China has a larger population. Almost 33% of Indians are younger than 15 years of age. About 70% of the people live in more than 550,000 villages, and the remainder in more than 200 towns and cities

Real GDP growth for the fiscal year ending March 31, 2004 was 8.17%. Growth for the year ending March 31, 2005 is expected to be between 6.5% and 7.0%. Services, industry and agriculture account for 51%, 27% and 23% of GDP respectively

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-- Jack Horgan, Contributing Editor.


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