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Monday
November 22, 2004
From: EDACafe
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About This Issue
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India the Land of Service Outsourcing
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| November 14 - 20, 2004 By Dr. Jack Horgan |
| Read business product alliance news and analysis of weekly happenings |
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Introduction
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
Growth |
| |
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
The rapidly growing software sector is boosting service exports and modernizing India's economy. Revenues from IT industry are expected to surpass $20 billion in 2004-05. Software exports were $12.5 billion in 2003-04.
The United States is India's largest investment partner, with total inflow of U.S. direct investment estimated at $3.7 billion in 2003.
The U.S. and India announced on January 12, 2004, the Next Steps in Strategic Partnership (NSSP), both a milestone in the transformation of the bilateral relationship and a blueprint for its further progress. Progress has been made on this initiative with the conclusion of Phase I in late September 2004. In October the US announced that it would post a Commerce Department official in New Delhi to help US companies understand the opportunities in high technology sector in India and also help Indian companies understand US export control systems and requirements so that US technologies that are transferred are used in the manner they are licensed for.
Figure 1 Bilateral Trade figures between US and India
Source US Census Bureau
The imports and exports add to a trade imbalance of $8.1 billion in 2003 up from $7.7 billion in 2002 and $4.7 billion in 1998. This pales in comparison with the $124 billion trade imbalance with China in 2003.
The EU rivals the United States as India's leading trade partner, accounting for 23% of the country's exports in 2002. Two-way trade between India and the EU nearly tripled to $33 billion from 1992 to 2002, according to EU figures.
NASSCOM is India's National Association of Software and Service Companies, the premier trade body and the chamber of commerce of the IT software and services industry in India. NASSCOM is a truly global trade body with around 850 members, of which nearly 150 are global companies from the US, UK, EU, Japan and China. NASSCOM's member companies are in the business of software development, software services, and IT-enabled/BPO services. NASSCOM was set up to facilitate business and trade in software and services and to encourage advancement of research in software technology. NASSCOM's vision is to establish India as the 21st century's software powerhouse and position the country as the global sourcing hub for software and services.
According to NASSCOM the Indian software and services exports industry recorded growth of 30.5% growth with revenues of $12.5 billion in FY 2004. NASSCOM predicts software and services exports to grow 30%-32% and to reach revenues of over $16.3 billion in FY 2005. The total Indian software and services market (domestic + international) would exceed $20 billion. The financial services sector accounted for around 40% of exports followed by manufacturing sector with around 12%.
The business process outsourcing (BPO) segment, made up of customer-service call centers and administrative facilities handling airline reservations, mortgage applications and insurance claims, is projected to grow by 54 percent this year, to $3.6 billion, on top of a 59-percent growth rate last year. The information technology services and products industry is forecast to increase 17 percent, to $8.4 billion, after an 18-percent jump the year before. NASSCOM also estimates the number of IT professionals in India at 650,000, up dramatically from 6,800 in 1985. McKinsey & Co. predicts the Indian outsourcing market will reach $77 billion by 2008 with 2 million employees, up from 770,000 currently.
Before looking at the major players in the Indian outsourcing market, lets us examine the presence of some leading EDA and Electronics vendors in India
Cadence India was established in 1987 as an R&D site at Noida, on the outskirts of New Delhi. With more than 600 employees, it is now the largest Cadence R&D site outside of North America. It includes such R&D groups as PSD, Custom IC, Digital IC, DFM, and SFV as well as Customer Support and IT. The sales and marketing organization was established in 1997 in Bangalore, India. Cadence India claims to have a 30% to 40% market share.
Synopsys India started operations in Bangalore in 1995 as an offshore development center with $4 million initial investment. It inherited a development center based in Hyderabad through its Avanti acquisition. Synopsys India is now a $25 million corporate R&D center with representations from every major Synopsys business unit. Over 100 people work for different product teams, whose activities include software development of EDA tools, verification, chip design applications and methodologies, design services and consulting. Synopsis India employs over 250 people. The firm is currently housed in a 25,000 square feet office space in Koramangala equipped with a state-of-the-art computing and network infrastructure. In April 2004 Synopsys announced plans to expand by about 30% in its Hyderabad center. In June the company announced it has opened an office in Noida. The office, located near Delhi, will initially have 20 employees providing sales and support services to customers in northern India.
Mentor Graphics has had a presence in India since 1996, with research and development facilities presently located in Noida and Hyderabad. These R&D facilities are currently working on 12 different projects in different EDA segments Noida focuses on simulation, emulation and test benches, while the Hyderabad center targets hardware and software co-verification and PCB design. In September the firm announced that it has opened a new sales and support facility in Bangalore with the addition of a 16-member team of direct sales specialists and expert application engineers.
In September 2003 Magma Design Automation announced the establishment of an R&D center in Bangalore along with a team of sales, marketing and field engineering personnel. Magma expects to invest ~$7 million and to begin with about 40 people. The team will be ramped up to 100 engineers by the end of 2005.
In February 2004 STMicroelectronics inaugurated its third state-of-the-art design and development facility in India in Noida. STMicroelectronics, which employs over 1,400 people in India, is possibly the largest semiconductor research and design operations in the country. It has been designing integrated circuits and developing software solutions in India since 1992. The Noida center is the Company's single largest design facility outside Europe. India has recently become one of ST's major centers for developing key applications such as set-top box (STB), DVD, wireless-telecom, multimedia, imaging and automotive. ST India has filed more than 100 patents, of which more than 40 were filed in 2003 alone.
Intel India, located primarily in the city of Bangalore, originally began as a sales and marketing office in 1988. Today the majority of work done at Intel India is software and hardware engineering within the Intel India Design Center Intel (IIDC) established 1989. This is Intel's largest non-manufacturing site internationally with around 2,000 people. There is also a sizable sales and marketing organization located in Bangalore, which provides world-class sales and support. There are reports that a future Xeon processor, dubbed "Whitefiled" and targeted for 2008, will be designed exclusively in India. Intel may also be seeking to establish a microchip manufacturing facility in Chennai with an investment tag of Rs 200 crore.
On November 15th Microsoft signed software partnerships Monday with India's leading outsourcing firms, Infosys Technologies Ltd. and Wipro Ltd., and stepped up plans to hire more programmers in India. Infosys and Microsoft said they would together invest $8 million in the new venture. Microsoft CEO Steve Ballmer opened a Microsoft office in Hyderabad, India's leading high-tech hub. About 1,500 Microsoft employees, mostly software programmers, have worked out of a rented building in Hyderabad's outskirts. The new Microsoft campus, its largest outside the United States, will eventually house 3,000 programmers
On November 15th Korea-based Intellect Inc, a semiconductor/chip fabrication company, announced decision to set up a plant in Hyderabad as India Semiconductor Manufacturing Company (ISMC). June Min, founder of the Korean company, has been instrumental in setting up eight fabs around the world. The Korean company has proposed to invest $600 million in phase I and another $1 billion in phase II. Coming up in an area of 50 acres near the proposed international airport at Shamshabad in Hyderabad, and expected to provide direct employment to 10,000 people, the company will manufacture chips for SIM cards, micro processors and other applications, including telecom.
The three largest outsourcing firms in India are Tata Consulting Services, Infosys Technologies and Wipro Ltd. These firms had revenues in FY 2004 of $1.56 billion, $1,062 billion and $1.36 billion respectively. Other Indian major outsourcing firms include Satyam Computer Services Ltd and HCL Technologies Lts. Indian tax law provides incentives to software firms including an exemption from payment of Indian corporate income tax for a period of ten consecutive years of operation of software development facilities designed as "Software Technology Parks" and a tax deduction for profits derived from exporting computer software.
Tata Consultancy Services (TCS) Limited is a world-leading information technology company, engaged in consulting, services, and business process outsourcing. It envisioned and pioneered the adoption of the flexible global business practices that today enable companies to operate more efficiently and produce more value. Established in 1968 as a division of Tata Sons, it took the decision to go public in 2004.
Tata Sons is the promoter company of the Tata Group. The Tata Group has worldwide revenues of $14.25 Billion from 80 companies in 7 sectors: Engineering, Materials, Energy, Chemicals, Consumer Products, Services, and Communication and Information Systems. Established as a trading company by Jamsetji Tata in 1868, it evolved into the custodian of the Tata companies that were to follow. It was the promoter of all key companies of the Tata Group for nearly a hundred years, till the role of promoting new ventures was taken over by Tata Industries in the 1980s. Tata Industries was set up in 1945 as a managing agency for businesses promoted by Tata Sons.
Tata Consultancy Services had revenues of $1.56 billion in FY2004 ending March 31, 2004. TCS employs 36,000 associates in nearly 150 offices in 32 countries. The firm has 490 current clients including 7 of the US Fortune top ten companies. It added 52 clients in the last quarter. Five clients provided revenue over $50 million. The top client (GE) accounted for 5.1%, the top five for 21.2% and the top 10 for 33.6% of total revenue. The firm has had CAGR in revenues of 32.6% over the last four years and 27.5% in net income.
Recent operating results are highlighted by the fact that the firm had half year revenue in excess of US$1 billion. For the quarter ending September 30th revenue of ~US $540 million was up by 43.58 % YoY and 13.93 % QoQ. Net income excluding exceptional items at $128 million was up by 52% YoY and 14% QoQ. During the quarter the company added 52 clients. The firm also had a net addition of 3,974 employees so that the total number reached 40,948.
Figure 2 TCS Annual Revenue
Revenue breakdown by geography has been consistent over the last three with America around 62%, Europe around 20%, and India around 13%.
Figure 3 TCS 2Q FY05 Revenue by Geography
Figure 4 TCS Revenue Segmentation 2Q FY05
Infosys Technologies Ltd is a leading global technology services firm founded in 1981. Infosys provides end-to-end business solutions that leverage technology for its clients across the entire software life cycle: consulting, design, development, re-engineering, maintenance, system integration, package evaluation and implementation. In addition, Infosys offers software products to the banking industry, as well as business process management services through its majority-owned subsidiary, Progeon.
Figure 5 Revenue Breakdown by Geographic Sector
Revenue for fiscal years 2002, 2003 and 2004 ending March 31 were $545 million, $754 million and $1,062 million respectively. Net income for the same fiscal years was $165 million, $195 million and $270 million respectively. Over the last five years Infosys has racked up CAGR of 55% in both revenue and net income. Net income as a percent of income has fallen from 30.2% in FY2000 to 25.4% in FY2004. Revenue for the first half of fiscal 2005 was $714 million. Revenues for fiscal 2005 are anticipated to be around $1.55 billion, a growth rate of over 45%. In the last reported quarter Infosys hired 5,010 employees bring its headcount to nearly 33,000.
Figure 6 Revenue Breakdown by Geographic Sectors
The revenue split by geography has been relatively constant with North America at 72%, Europe at 19%, India at 1% and ROW at 8%.
Figure 7 Revenue Segmentation by Client Industry
Wipro Limited was incorporated in 1945 as Western India Vegetable Products Limited. Wipro Limited was initially engaged in the manufacture of hydrogenated vegetable oil. Over the years, the company has diversified into the areas of Information Technology or IT services, IT products and Consumer Care and Lighting Products. The Consumer Care and Lighting segment manufactures, distributes and sells soaps, toiletries, lighting products and hydrogenated cooking oils for the Indian market. The firm is headquartered in Bangalore, India and has operations in North America, Europe and Asia. In 2002, the company acquired Spectramind to facilitate its entry into the BPO business and the Global Energy Practice of American Management Systems to augment its IT consulting expertise in the energy and utilities sector. In May 2003, Wipro acquired Nervewire, Inc to enhance its IT consulting capabilities in the financial services sector.
The Company has three principal business segments. The Global IT Services and Products segment provides research and development services for hardware and software design to technology and telecommunication companies, software application development services to corporate enterprises and business process outsourcing (BPO) services to global corporations. The India and AsiaPac IT Services and Products segment focuses primarily on addressing the IT and electronic commerce requirements of companies in India, the Middle East and the Asia-Pacific region. In FY 2004 Global IT accounted for 74% of total revenue, while India/AsiaPac accounted for 16%.
Figure 8 Wipro Limited Revenue by Geographic Sectors FY 2002 thru FY 2004
In FY 2004 the US accounted for 53% of total revenue, India 25%, Europe 18% and ROW 4%. There were 44 customers generating revenue more than $5 million, 19 with revenue between $1 million and $3 million and 74 contributing more than $1 million. There were 339 clients in total.
Figure 9 Wipro Revenue by Vertical Application Segments
Comment
First, not all outsourcing is offshoring. Firms like IBM, EDS and Accenture have had major outsourcing businesses for a long time. Press announcements on contract signings speak of acquisition of facilities, equipment and personnel from their clients. Second, not all offshoring is outsourcing. Many companies establish a presence in geographies to better serve the local or regional clients. For example, Japanese auto companies have set up large manufacturing facilities in the United States. Third, many, arguably most, jobs are simply lost to productivity improvements, a combination of technology and best practices. Voice mail, email, online shopping and customer service have changed the way we live our professional and personal lives and eliminated many jobs.
Still it can not be denied that a considerable and growing amount of outsourcing involves the loss of US jobs by offshoring to locations that offer very favorable wage differentials. If a firm wants to move its manufacturing operations overseas, a considerable investment must be made in plant and equipment. Efficient logistic operations must be set up for both suppliers and customers. If a company transfers its manufacturing operations to an existing outsource firm, there is considerably less risk and upfront capital expenditure. A foreign outsourcing firm can amortize its investment across multiple clients and use the wage differential to provide profit as well as cost reductions to clients. The value proposition for customers is that they can concentrate on their own core competencies and thereby become more competitive.
When a firm wishes to outsource a service such IT, human resources, debt collection or call center, far less investment is required. Inexpensive and widely available telecommunications bandwidth, enable businesses to hand over more white-collar work to specialist outside suppliers, in the same way as manufacturers have been doing. VoIP will also help lower communication costs. Occupations like medical transcriptions, radiology interpretations, software programming, and business process operations are already being impacted. In fact any service that does not require face to face meetings, any service that can be performed via the phone or internet is at risk for offshore outsourcing.
The theory is that firms that outsource will become more competitive, more profitable and thus able to invest in areas that will create jobs for the 21st century. Unfortunately, the theory does not say what those jobs will be or how quickly this will happen. The transitions from an agrarian society to a manufacturing economy and from manufacturing age to the information age were neither quick nor smooth. We are now in a shift from a goods-producing to a service-providing economy.
Last quarter the big three Indian outsourcing firms, Wipro, Infosys and Tata, hired 5546, 5010 and 4312 employees respectively. Given the number of annual engineering graduates in India and the number of experienced Indian engineers in the US who might be enticed to return, these firms could easily move into the design of semiconductors and the products that use them. In fact they already have. The paragraph below is taken from a Wipro white paper on Extended Engineering.
"With more than 20 years experience, Wipro is the largest 'true' third party R&D Services provider in the world with revenues of over $270 million employing over 6500 engineers. Wipro works with nine of the top-ten telecom equipment providers along with the leading technology product companies. Wipro has proven expertise in the areas of computing systems & peripherals, storage, consumer electronics and automotive electronics."
EDA vendors claim their move to Asia is driven not so much by cost as by available talent. The table below shows engineering employment in 2002 according to the US Labor Department Bureau of Statistics. The 1.5 million engineers account for slightly more than 1% of the 144 million total employment figure in 2002.
| Field |
Number |
Percent |
| Electrical/Electronics |
292,000 |
20% |
| Civil |
228,000 |
15% |
| Mechanical |
215,000 |
14% |
| Industrial |
194,000 |
13% |
| Aerospace |
78,000 |
5% |
| Comp HW |
74,000 |
5% |
| Chemical |
33,000 |
2% |
| All Others |
364,000 |
26% |
| Total |
1,478,000 |
100% |
Table 2 US Engineering Population 2002 per US Labor Department
In 2002 computer software engineers held about 675,000 jobs. About 394,000 were computer applications software engineers, and about 281,000 were computer systems software engineers. The bureau, noting trend towards offshoring, projects slow growth rate in engineering employment. Such projections are unlikely to draw US students to engineering disciplines.
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