While America’s proposed immigration reforms could be very challenging in the short term for India’s information technology (IT) services companies, they could also be the catalyst for the transformation they must make to survive. There is a powerful historical precedent for this.
In 1981, the Reagan Administration forced the Japanese automobile industry to sign an agreement limiting exports to the US to 1.68 million automobiles a year. That deal was supposed to protect America’s floundering automotive manufacturers, but it did nothing to help General Motors, Ford, and Chrysler become more competitive. Instead, the restriction dramatically boosted the Japanese companies’ fortunes, in four ways. One, the ceiling on American imports, coupled with growing demand, allowed the Japanese manufacturers to raise prices and boost margins. Two, since they didn’t have to compete based on price, they started trying to differentiate themselves. Three, the new law encouraged Japanese corporations to develop bigger cars since they could no longer sell as many small cars as they wanted to. That’s when they launched premium brands such as Lexus and Acura.
The message from H1B visa reforms
Finally, the agreement forced the Japanese companies to localize manufacturing. They created efficient union-free factories in Tennessee, Kentucky, and South Carolina, which insulated them from currency fluctuations. Thus, US import restrictions enabled the Japanese automobile makers to transform themselves from manufacturers of cheap automobiles to competitive corporations that could hold their own in the US.
India’s phenomenally successful IT services companies have known for some time now that the writing is on the wall and that they need to shift their business model away from labour cost as the fundamental source of competitive advantage. Commoditization, technology shifts, automation and now growing protectionism and fears about jobs in all countries are working to undermine their global delivery model. The boards and CEOs of all these firms understand intellectually that they need to abandon cost arbitrage and shift from “renting out IQ to creating IP". They understand that they must look at new services for growth, focus more on innovation and automation, localize work forces and leadership teams and gradually turn their units in the US, UK and Europe into hubs in a global network.
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However, intellectual understanding alone is seldom sufficient to drive transformation. The leaders at Nokia, Blackberry, Microsoft all saw the writing on the wall when it came to smartphones. These phenomenally successful companies had everything going—resources, brand, distribution, technology and core patents, smart people —yet were unable to respond to the disruption created by Apple and Google. A variety of factors –mindset, culture, capabilities, incentives, budgeting processes and the pressure to deliver—all conspire to hobble the shift to the future. The larger and more successful the company, the harder it is to make the change. So the risk is high that like the proverbial frog in the pot of hot water, incumbents could slowly boil away to irrelevance.
One of two things are necessary to avoid this fate. The first is an extraordinary leader who, like Lou Gerstner at International Business Machines or Steve Jobs in his second act, is able to lead the company decisively to a new future. Such leaders are uncommon. The second is a shock, an existential threat, that galvanizes the whole company into decisive action. An executive order or legislative reform of immigration laws at this point might impose huge short-term costs on IT services companies and their clients, but it is possible that this may be just the swift prod they need to get moving more decisively. Employees and shareholders too may be willing to bite the bullet and attribute the short-term costs and pain to an externality.
Indian IT companies need to stop using H1B visas: Narayana Murthy
If IT services companies seize this window of opportunity to transform, they will be perceived not as “Indian" or “body shops," but as global technology giants that don’t need visas to succeed.
(Ravi Venkatesan is the Chairman of Bank of Baroda. This article is second in a series on immigration and IT.)