IT industry bashing – the wrong reasons

I write this in response to Giridhar Rao’s comment. He brought a scholarly paper to my attention that in a section on the Indian IT sector claims that the sole basis on which India is competing is wages. (You can find the paper here. You can directly scroll down to the section on The IT sector if you like). It also claims that India should not be called a ‘knowledge economy’ but a ‘low wage economy’. The article seems to be well researched but reaches odd conclusions at least for the IT industry.

My response to the thrust of the entire paper, if it has one, is ‘So what?’

So what if the Indian IT industry exists solely because of a large wage differential between India and developed markets. So what if they don’t have more patents or don’t own proprietary software. Does that make the industry less valuable to the Indian economy? Or is there a fear that the whole industry will evaporate when the wage differential closes at 12 noon tomorrow?

China’s entire manufacturing exports industry exists because of the low wages in China. I doubt if even 5% of China’s exports are designed by a Chinese company for a developed market. Most of it is low-value added merchandise manufactured for mega-retailers like Walmart who mark it up by 2 to 3 times in their stores. Sure they have high-tech manufacturing industries too that manufacture chipsets and components, but rarely are these designed in China Why does the world beat a path to China? Because of low wages. And their low wage manufacturing economy produces strong GDP growth and jobs. Exactly what India’s IT industry does.

With some differences. India’s IT industry on average has a higher value-add. It produces higher paying jobs largely for college graduates. (Although there definitely are other jobs created because of the spending of IT companies and their employees). And it does not depend as much on infrastructure as does the Chinese manufacturing industry. Otherwise, with India’s creaking infrastructure, it wouldn’t have come up in the first place.

The Indian IT industry is 3% of the Indian economy with a variety of trickle-down benefits for the rest of the economy. It has put India on the world map again. The common man in America now associates India with software engineers and not snake-charmers. Be proud.

And stop moaning about why the Indian IT industry isn’t more like Microsoft. For that is what many well-informed Indians expect. That Indian IT Services firms should be more like Microsoft, which writes and sells licensed software. This is not just unlikely to happen, it would be downright irresponsible for Indian companies to attempt that. I wrote an article on Rediff three years back which will help the reader understand why.

Most Indians call the IT Services industry the Software industry. It is not. This is the cause of great confusion. There are two distinct industries in all markets. The Software industry has companies like Microsoft, Oracle, SAP in it. The IT Services industry has Accenture, CapGemini, Infosys and Satyam. Like all industries, the boundaries are not etched in stone. Some companies like Amdocs which does Telecom billing software have a large Services business and services companies like Keane sell licensed software. But by and large except for IBM no company straddles both industries. The DNA required to be successful in each industry is very different.

You might say – So I shouldn’t hope for Infosys to become like Microsoft, but can I hope for an Indian Microsoft? Understand that you are asking for a global multi-billion dollar software company that dominates in some sector of the industry. I can’t stop you from dreaming, but I would ask you – why did you pick the software industry? Why not say a global automobile company, or a global banking and financial services company? What’s the largest software company in India? Not even $100 million. On the other hand we have huge, competitive auto companies like Maruti and TELCO and banks like ICICI Bank. I’d say they have a much better chance of building a global business.

Just because an IT Services company and a Software company both have programmers doesn’t mean a thing. Don’t expect one to be like the other.

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9 Responses to IT industry bashing – the wrong reasons

  1. Balaji says:

    Well Basab,

    That was a good rant. I feel what determines an organisations success is in understanding what it wants to do/achieve.

    I reckon we should not call the computer industry in India as Software Industry but rather call it IT Services/ IT enabled services industry just to be clear. There is no use claiming what we don’t have as what we are isn’t it?

    Like

  2. Prakash says:

    Basab,
    Great post! It is high time people stop expecting “products” to be a natural evolution of the services model.
    Regards,
    Prakash

    Like

  3. Siddharth says:

    Mr. Basab, Thank you for expressing a clear opinion. We, culturally, excel in being a Service Economy because we are the fastest adapters and have abundant brain power (I dont know whether we should be thankful to Mr. Nehru for ignoring the population control part of Bombay plan).

    This is How we excel? –

    Our Politician Class is a master of Service for Self.

    Salaried Class fully understands the cause/effect relationship between skills and service.

    Our Lower Class is a master of Sweat Service.

    BTW, my school’s motto was – “Service Before Self”

    I can predict that with better infrastructure and modernization, India’s lower class will be largely reduced. Salaried class will lead the world in design, patents etc. — R&D will become our forte.

    We may be the Service Economy of today, but are definitely the R&D economy of tomorrow. One patent generating MNC lab in Bangalore today will be surrounded by dozens of home bred entrepreneur labs of tomorrow.

    Classes will be redefined – Thankfully!

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  4. Swapnil Pundle says:

    Couldn’t agree more with what you say. We should be proud to see Indian IT services companies successfully leverage the wage differential. I am sure many countries have a wage differential comparable to India but haven’t been able to do anything with it.

    I have a point on the trickle down effect you briefly mentioned. I moved to Bangalore recently and have quite a few times noticed the local population detest the IT industry.

    Part of this could certainly be politically motivated. I however think the root cause is that the IT industry has created a sort of enclave economy with trickle down effects not reaching a large segment of the population.

    Any opinions / data on the kind of trickle down effect happening?

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  5. Senthil says:

    I have found people bashing the Indian IT industry for various reasons – Prejudice, Ignorance, Fear, unwilling to acknowledge and digest the success of something that one cannot associate oneself with.

    Let us start with Software Product companies – Yes India is yet to produce a Microsoft, google, yahoo or oracle or ebay. Let us count how many such successful are there in US. Handful. May be 15-20 who have achieved high level of success in the past 15-20 years. It’s not like that there are hundreds in US and none in India. Keep in mind US has been way ahead in the game in all parameters that are critical – start-up funding, critical mass of talent, environment, market receptiveness, etc. All of these things are only beginning to improve in India. So you cannot expect a miracle like Google to happen overnight. Second – one needs to have deep pockets and phenomenal marketing muscle to succeed with products in the west. I think this will also happen for the Indian IT companies over time. Thirdly, just because one doesn’t have or create proprietary software, it doesn’t mean the work is less challenging in any way.

    Now coming to the IT services side of things – The success cannot be put down to low wages or English. If you look at the IT companies, Infosys and Cognizant are not the cheapest but are growing at a faster clip compared to many others. It’s vindiacted by Forrestor’s latest report, which states that the Indian services companies are setting new standards on transparency on project execution and quality which the US majors are finding it tough to emulate.

    Second – All of the companies are moving up the value chain. Some faster, some slower. It’s not low end programming work alone. Only those are ignorant would put that tag.

    Lastly which is at a personal level, which is the biggest reason for the bashing –
    A) Unable to digest the success, come to terms with success of something thing that one is not part of.
    B) Highly prejudiced – I met a guy in Seattle in late 90’s who was working for Microsoft. He thought every one else was a lesser mortal. The first thing he asked me “You must 2 years of experience and must have come through a body shopper” with out bothering to really ask what I was doing.
    C) Ignorance – Some of my client managers have asked this – “Do you have paved roads in India ?” “Do you really have 50,000 people working for Infosys” ?. One of the vice-president asked if we were really a 2 billion dollar company and many such questions ( She sheepishly mentioned that she owned Infosys stocks and rues not buying it 5 years ago- another story on how people invest with out knowing what they are investing on ). They cannot comprehend that a company based in India can manage 50,000 people and generate 2 billion in revenues. It’s the lack of knowledge and also lack of the temperament to take the time to understand what it is. I see the some of the questions, opinions of Indian IT bashers in the same light. Only coming from a different part of the world from different set of people
    D) If you are not popular and getting the attention that you seek criticize that’s popular and successful. I see this happen quite a bit with journalists, writers and some Indians who work in the US.
    E) Deskilling of people by BPO – India needs jobs. These are decent jobs and pay well and are growing the economy and reducing poverty. We cannot have 1 billion scientists or inventors. Way back in early 1990’s people questioned the benefit of IT industry. It has proven it can generate jobs in a big way. More than a million people are engaged directly or indirectly by the growth of IT/BPO. It has fueled the India economy. There is no switch that can turn all the Indians rich over night. I can’t understand why people expect that. Indian IT has proven to the world we can compete globally. The global competitiveness has rubbed off in other sectors too !

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  6. Natarajan Ramachandran says:

    Senthil,

    I took some pains to read through the entire blog and the “scholarly” paper and I am not quite sure what the debate is about. (Confession: I suspect the paper has a strong left leaning smell, so I kind of skipped many paragraphs.) On the one hand the paper states that India is not anywhere near being a global super power and discounts the apparent success in the Indian IT industry. On the other hand your responses to the blog seem to be aimed at stemming the Indian IT industry bashing.

    Few disclaimers to start with: I am not in India currently and I am not in the IT sector either. My knowledge, insofar as the state of affairs in both of these is concerned, is minimal. However, I do understand the Indian mindset and that of the IT industry because I was born and brought up there and I worked in the Indian IT industry briefly. Having been around the same milieu as other IT fellows, I can appreciate and understand what they say; however I might disagree partially or fully with all of what they say.

    I think that however successful Indian companies have been and will be—and I have no ill will against any Indian success story, including Infosys, whose stock I frequently bet on—it still does not take India, as a whole, anywhere near South Korea, a recent success story. At the expense of belaboring Gandhi’s message, yes, India still lives in villages. Gandhi’s strategy to invoke khadi as a symbol of Indian struggle was in no small part due to prevalence and dependence on spinning in the countryside. It had predictable responses during the Indian independence struggle. The story still remains the same: If India is to achieve higher growth rates and bring down poverty levels, something has to be done in the textile sector. Other sectors cannot be as helpful in lifting all the boats though they may contribute in their own way. (e.g., I remember your story about the cook from Orissa making good money in Bangalore, a choice that wouldn’t exist if the Indian IT sector was not as successful as it turned out to be.)

    It really doesn’t matter to me if anyone characterizes Indian IT success as being driven by low wages. WalMart’s success is, quite expectedly, due to low wages. That’s how markets are supposed to function: price in the product sector and wages in the labor sector are mere signaling devices in a free market economy. People voluntarily opt in to buy products at a certain price and labor opts in to sell its services for a wage. If all labor wants only to be in ‘highly valued’ labor, they would have done so. (In Kerala, most of the construction jobs and muscle demanding labor is supplied by people from Tamilnadu because Keralities think they are beyond such ‘menial’ labor, as they characterize it. Wages drive unemployment rates and is, expectedly, fairly high in Kerala. So much poor for their prejudices.)

    In the middle of the 19th century, an economist named David Ricardo formulated the theory of comparative advantage which was then given a different twist by another duo named Heckscher and Ohlin. HO’s theory was simply this: If your country compared to another one has more people, then your country’s comparative advantage is in labor-intensive sectors. With a billion plus population in India and 300 million plus in the US it easily translates in haircuts: a haircut in India costs Rs. 20 and a haircut in the United States costs $20 (~Rs.900). Does this get reflected in other sectors? Absolutely and so will it be. Anything wrong with that? Why? What’s wrong in ensuring another million people get to do what they want to do (buying cars, partying in expensive restaurants, …)

    I yearn for a different India which I may never see during my life time. It is solely confined to the political sphere where the bulk of Indian energy gets spent. In my world view, the rest – including the economy, IT, stockmarkets, culture, cricket, entertainment etc., – are all mere reflections of what happens in the political sphere. First is liberty and freedom of speech, both of which are nominally enshrined in the Indian constitution but Jayalalitha can toss it at her will, as she did by sending the police inside the premises of the left-leaning The Hindu, when it wrote a critical editorial; the same holds true if the Bombay-based Midday were to write something critical of Bal Thackeray. Such threat manifests in almost every aspect of Indian life: marrying an outsider in an Indian village is an invitation for death; asking a question in the classroom is an invitation for a nice beating from the teacher; choosing to go to work at a striking factory because one needs to feed one’s family is a sure way to be stoned and killed by fellow striking employees.

    Freedom of speech is valuable because people should speak, write, convey what they want to say. Anything short of it—however it may be reflected—is an oppressive society. Oppressive societies decay because of the lack of diversity in opinions and lack of freedom to dissent. Modern day North Korea or Mugabe’s Zimbabwe comes to mind. Because of the adherence to constitutional rights when it comes to individual liberty and freedom of speech, this country is where it is. (I strongly recommend watching the movie titled, Larry Flynt v. The People. Flynt the publisher of The Hustler magazine is an embodiment of testing the boundaries of smut peddling and the kind of tribulations of free speech that a nation has to endure)

    Tagore beautifully said it:
    Where the mind is without fear and the head held high

    Into that heaven of freedom, my Father, let my country awake

    (Long winded response … but you asked for it ☺ )

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  7. Basab, your point on Lower wages in India is well made. Why shy away from saying it ? America boasts itself as the world’s leading capitalist economy. A lower cost base makes its own case.

    I think all this talk of india not having enough “product” companies just challenges Indian companies and engineers to do better. All it needs is a handful of guys to create one company to bury this “myth”

    Historically, a significant barrier has been cultrual and business disconnect between indians and the developed world. This leads to ideas that are less commercially relevant. With increasing Internet penetration and more “instant global” information this drawback should decrease over time and chip away at a significant intangible barrier.

    Its also a question of confidence among Indian businesses in going and building an international business (Tatas buying Corus or Mahindra launching scorpio internationally, Glenmark and Dr. Reddy’s licensing new molecules to MNCs)

    These are small steps but increasingly more frequent. I think the next big product company or even an Indian movie with a global footprint (a la Crouching tiger hidden dragon) may be round the corner …

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  8. aman says:

    very well written.
    Our nation is really a “low wage” economy than a “knowledge” economy
    Engineers in US demand anything from $30,000-$85,000 /year or $2,500-$7,800 /month in US in indian terms salary should be anything from Rs1,12500-Rs 3,5100/month (exchange rate Rs 45 to a dollar).
    Is the indian salary structure even close to 50% of that???

    Seeing this Indian desi companies are the greatest fuckers of indian talent. They are the ones who earn huge money in dollars after servicing clients in US and Europe, each project running over $100,000, but how much of this is every distributed to the indian IT engineer who works day and night to make the project a success. NOTHING just his peanut salary and a small dinner as appreciation.

    But let us review how strong these so called indian MNCs are.

    Barring 2-3 indian companies none of our indian companies have a product of their own. Exceptions are i-flex:FlexCube, TCS, and Infosys. What if Uncle Sam’s MNCs decide to leave india for some other low cost base, what will happen of the poor indian companies. Whom will they provide services to when the masters have left indian shores. Unless indian companies are “product oriented” -which requires huge investments running over 2-3 years of developments without expecting any returns – our indian industry stands on a very weak base.

    Lets take a look if our bigwigs like TCS, Infosys and Wipro are able to compete head-on ORACLE,IBM,ACCENTURE,ADOBE,MICROSOFT,CISCO
    ever.
    NO. Because first of all what our big 3 companies are doing today these companies have already done years ago, been there done that kinda thing.
    Let’s look at the revenues. The ORACLEs,IBMs, MICROSOTs, ACCENTUREs are already fortune 500 companies their revenues running between $15 billion- $90 billion. How much revenue does our desi indian counterpart earns: If i talk about TCS revenue would not cross $2-$3 billion. If i include not only TCS but also Tata Sons as a company as a whole i can safely say that it is not among the Forture 500 companies. Fortune 500 companies are dominated by US companies. Fortune 500 list is dominated by US companies which are would’s highest revenue earners all around the world.

    So when these U.S heavyweights come to India they don’t look TCS, Infosys and WIPRO as their competitor AT ALL. They just compete among themselves. They look at indian companies as a child just started to see the big picture.

    Summing up i would say that unless Indian companies move their focus to being product based, and are able to sell their products in the world markets like hot cakes someting like ORACELs database, Microsoft’s Windows, ADOBE’s acrobat reader Indian companies and Indian IT software engineers will just continue to serve their US masters till donkey’s years and ultimately will be slip into oblivion in the future.

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