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To survive, IT sector will have to innovate

To survive, IT sector will have to innovate
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First Published: Thu, Jul 02 2009. 10 49 PM IST

Updated: Thu, Jul 02 2009. 10 49 PM IST
As we were writing this column, Infosys Technologies Ltd co-chairman Nandan Nilekani was appointed chairperson of the Unique Identification Authority Of India.
We are delighted that a prominent person from the private sector has decided to dedicate his time to public office, a rare phenomenon in India. This also seemed an opportune moment to comment on where India’s information technology, or IT, industry is headed.
The land that gave the world the decimal system turns out about 300,000 engineering graduates every year, about five times the number produced by the US.
Conversely, the US produces more than 20 times the number of computer science PhDs that India does. Somewhere in there is hidden a corollary for the Indian IT industry.
One can’t argue with the scale that India’s largest software firms have achieved. With combined annual revenue of at least $17 billion (Rs81,260 crore) and a workforce of almost 400,000, the four largest IT companies have taken process streamlining to a different level.
To avoid getting tangled in the jargon of verticals, horizontals, business areas and all such, which are beyond our comprehension, a simple gauge of the sophistication of an industry is pricing power. And pricing, as most who follow the Indian IT industry would know, has failed to keep pace with inflation at even the most marquee names.
The focus remains on volume—an estimate by CLSA suggests that Indian IT firms might have a share of nearly 20% of their addressable market, but in volume terms this share jumps to 40%. Inherently, to play a volumes game implies a tight control on costs.
Unfortunately for the industry, two variables— salaries and the foreign exchange rate—will be moving against it for the next several decades.
Economists believe that incomes move up disproportionately once a country has been on the development path for a few years. India then could just be on the cusp of an explosive, secular growth in salaries.
In our view, the Indian rupee is going to be on a one-way appreciation street in foreseeable future, especially against developed country currencies (a longer-term trend, shorter-term gyrations notwithstanding).
Cost structures are already more attractive in other parts of the world—countries in Central and Eastern Europe and some other Asian countries. What keeps these from being a serious threat as yet is the sheer scale that India has built up. But again, we come back to the fact that the expertise developed by the Indian IT industry is driven by its processes—almost analogous to a Toyota of the IT world, but without the intellectual property, unfortunately.
History teaches us that nothing that has ‘cheap’ as its only selling proposition ultimately survives. A competitive cost structure tends to spring up in a different part of the world. A classic case of this is Taiwan.
Until recently the influential electronics industry in Taiwan was commonly referred to as “anonymous” manufacturing—products were made cheaply in Taiwan, branded and sold elsewhere. This should sound familiar to anyone involved in India’s IT industry.
As costs kept going up, the country quickly adapted and moved from what’s commonly known as original equipment manufacturing to original design manufacturing, the two differentiated by the level of intellectual property going into the product and considered to be a realm of the developed world, especially the US. Taiwan now outsources low-end manufacturing, retaining the branding and higher-end manufacturing.
Taiwan didn’t just stumble on to the path of higher value add; a shift of that nature requires vision, something that unfortunately seems to be missing in Indian IT companies.
For all the talk of a focus on consulting, a large part of the revenue continues to come from low-end services such as maintenance and coding small modules without actual problem solving; consulting itself isn’t envisioned to be in the classic advising model.
Research and development continues to be something to talk about as a promotion element; whatever little research and development (R&D) is envisioned to be result-oriented is process-driven. Even Infosys spends only 1.5% of revenue on R&D.
We can’t help but come back to a premise of ours that India hasn’t achieved its export potential yet. But that will be achieved by harnessing India’s manufacturing base, not by its IT services.
As far as the IT industry is concerned, the time to rejig processes is behind us; if the Indian IT industry wants to survive, innovation is the only way out.
Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They will write every other Thursday. Send your comments to globalbeat@livemint.com
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First Published: Thu, Jul 02 2009. 10 49 PM IST