Thursday, September 27, 2007

rupee-shining dept.

The Indian rupee has quietly made its way into the 39s against the Dollar. I anticipated at the beginning of the year that it would get into and perhaps cross the 38s. That still remains to be seen. The rise of the Indian economy and the massive inflows of foreign investment into India make this inevitable. The implications for the software industry in India are interesting.

Cheap Labor?

Right now most of the industry located back home is based entirely on the labor cost differential and the Rupee-Dollar ratio. Indian programmers and software technologists are paid much, much less than their American counterparts *and* Indian software company executives :-) even accounting for purchasing power parity. Both these differentials were so high until recently (as recently as 2 years ago, the Rupee was still orbiting in the 47+ per dollar range), that companies had no motivation to change their business model, which was essentially a form of labor arbitrage. Companies made money in one of two ways:
1.) Hiring programmers in India and paying them a low salary, and earning more dollars per hour on their behalf from their customers.
2.) Hiring programmers, getting them H1Bs, and paying them a low salary in the US :-), and etc., etc., etc.

Cheap is not Cheap Anymore

However, two things are rapidly changing this scenario and threaten to change the industry as we know it. The first one is of course, the rise of the rupee. The second is the gradual entry of software multinationals into India. This is putting pressure on salary packages and increasing the attrition rate in Indian companies. There have always been engineers who looked down upon the 'Labor Arbitrage' way of doing business. The difference now is, these people don't have to work for these companies in India if they have the right skills. There are just too many better choices. Maybe these choices are available only to the top 5-10% of engineers right now, but over time, I can see it lead to a cascading series of attrition.

Its getting easier and easier for multi-national companies to set up base in India, and most are doing so. They are gradually cutting out the middle men and managing their own set ups, leveraging their existing Indian employees to manage their India operations. The days of the "Offshore Development Center" managed by an outsourcing company are definitely numbered.

This does not bode well for indigenous companies. They will now have to look at product development as a *real* and focussed business model. In most companies today, there is usually some "in-house product development", which is a euphemism for keeping people busy during lean times, and for maintaining some staff redundancy. The up-side is that the growth of the Indian economy means that soon, India in itself will be an attractive software market, and the companies that have products targeted for this market will reap rich dividends.

Some Crystal-Ball Gazing

The worst case scenario would be this nascent market for software products and services being gobbled up whole by muti-national software companies, who have the financial muscle to overwhelm Indian companies. This is a pie that Microsoft, Oracle, IBM and SAP could neatly divide among themselves.

We could draw a parallel to what happened to the Indian car industry after liberalization. The biggest names -- Hindustan Motors and Premier Automobiles -- all but disappeared. Some plucky companies that innovated and adapted to new market conditions (Tata, Bajaj, M&M) survived and even thrived in the era of globalization.

Its all going to be interesting to watch. Just make sure *you* aren't working for a 'Premier Automobiles' of the software industry, when the time comes :-).

2 comments:

P said...

dont you think it is very easy for you to say all this sitting here in US.. i guess for your friends and foe's if any it is not so easy back home...
anyways thinking ahead i guess india is in US's 70's when suddenly every small company around was setting up chains throught the country...
the biggest winners obviously were who started then as you mentioned microsoft, intel, etc..
so want to be indian'n version of bill gates, yes you know the answer.. the ruppes is getting strong, get back home and setup a company..in long run you will defenitely come near become a winner...
guess what, if you are keeping track of market it suggest that ruppe could reach an all time high of 35.. dont beleive it,, just wait and see ;) ..

W0lf said...

Well, actually, I think employees will have it much easier -- its the entrepreneurs who are going to be hit hard. They will have to build companies based around innovative ideas, and fight to retain the best talent.
Much like what happens in Silicon Valley.
Its definitely a good time to set up companies that can capture some niche in the product space. I mean make almost *any* investment in India today, and its bound to pay off in the long term.
Even I anticipated Rupee reaching 35, but put down a conservative value when blogging about it ;-).