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Lessons for India Inc

August 28, 2003

Part I : The Gurgaon factor

Part II: Lessons from North First Street

The warning signs in the Indian context may be different than what they were for the Silicon Valley boom, but they are there and are portents of things to come. In itself, this is not a death-knell, but just a sign of things India has to manage well. India's ability to manage this boom into the next phase will decide the long-term success of the economy.

The Next phase is coming: That this phase of unlimited growth will at some point end and will perhaps be replaced by one with intense competition perhaps from the Chinese, is already being seen. Business Week reports: 

'India is a powerhouse in high-end IT services, latecomers these days must pay higher wages for experienced engineers. That's one reason Bearing Point chose Shanghai for its new software-development center, says the company's Greater China President, Bryan Huang. Bearing Point pays $500 a month for engineers in Shanghai. In India, he says, the pay would be $700, and $4,000 in the U.S. "Where can we sustain our cost advantage for the next 40 years?" Huang asks. "We're convinced that China is the only place."'

This trend is visible in manufacturing too. Once again, Business Week tells us:

'American manufacturing companies are discovering that cost advantage, too. Sweetheart Cup Co, an Owings Mills (Md) maker of plastic plates, cups, and utensils for customers such as McDonald's and Wendy's International, hired consultancy E5 Systems of Waltham, Mass, to develop a system to track production processes at its 14 North American factories. E5 is doing the job in Shenzhen, where it has a joint venture. Sweetheart figures it saves 40% by sourcing in China rather than India. In a business where pennies matter, "cost is a consideration in everything we do," says John McGregor.'

Author's Note: Meinhardt International from Singapore made exactly the opposite decision last fortnight -- deciding to move its focus from China to India.

Nonetheless, most businesses, especially the large ones realize that the next phase will be here within the next 24 to 36 months, but are they taking the steps necessary to navigate it. Cost-cutting by moving to second tier cities in India and China is making India, Inc more competitive, but is it enough for survival when outsourcing gets far more competitive? Poor Decision Making and Investments: For burgeoning segments of the Indian industry, such as pharmaceuticals, a crippled reputation can be the death knell. The fact that 35% of the world's spurious drugs are made in India, is beginning to do serious damage to our reputation. But, consider what our decision makers have done in the last few weeks -- they've endlessly argued about Ayodhya, but cannot fit into their priorities, any discussion on economic catalysts or sink-holes. Ever hear of a parliament adjournment for the lack of infrastructure for our industries. Nope. But, truth is that the risks and inefficiencies in the path of India Inc are rarely the focus of our national decision makers. Risks, which can only be controlled through appropriate legislation and enforcement, are creeping into the system, and as a recent report notes: 

'"India is fast becoming the capital for counterfeit drugs, accounting for one-third of the counterfeit drugs produced worldwide," he points out, citing World Health Organization statistics. "The scourge of counterfeits is particularly bad in Asia. India accounts for 35 per cent of the counterfeits produced, Nigeria produces about 23 per cent and Pakistan accounts for 13.3 per cent. And such statistics give India's fledgling pharma exports a bad image," said Mr Shahani, Vice-Chairman and Managing Director of Novartis India Ltd' -- Hindu Business Online

Author's note: Sushma Swaraj, based on the Mashelkar committee report, has threatened all kinds of action against fake drug manufacturers, like the death penalty; but judging by the fact that 1 in 3 fake tablets in the world come from our shores, I'm not holding my breath.

This poor decision making is not limited to our political decision makers. Consider the leaders of some of our large conglomerates -- almost none of them have setup the kind of research facilities, that say, GE has built up in Bangalore. The result -- little forward thinking on creating high business value inventions gets done. Most of these conglomerates, you'll notice, have spent oodles of money on lavish campuses or office buildings, though. Priorities and decision making, once again.

Eggs only in the outsourcing basket: The Gurgaon boom in a certain sense is an example of how India, Inc, or at least the IT and computer technology part, has put almost all its eggs in the basket of services outsourcing, where price differentials give it an edge.

'"India's growth is being limited by one drug and that is the service drug," said Tushar Dave, co-founder and managing director of New Path Ventures LLC …India's IT industry must wean itself away from the "service drug" and seize the opportunity to design semiconductor chips with its large, talented and cheap labor pool, analysts said.'

Much like the dot-com-boom threw caution to the wind and relied only jazzy idea with no care for operational efficiencies, the Gurgaon boom seems to focus solely on operational efficiencies. Leaning too far on the other side, aren't we? Vinod Dham, the leader of Intel's Pentium team in the early 1990s, seems to recognize the need for Indian companies, to go beyond playing only the price-point or the low-cost engineering service games and getting into producing real Intellectual property. Dham puts his thoughts forward through a comparison:

'A company like Infosys was valued at six billion to $10 billion, compared to the 60 billion to 80 billion dollar price tag on Oracle. If we deliver a solution to the world instead of being told to deliver a particular solution then there will be a dramatic difference in the way we are being perceived.'

Inadequate Governance: Now coming to governance -- in India, the issue is an acute decider of success. After all, for the most part, all that the GoI is supposed to do is to remove the shackles that have weighed down the Indian economy and then just get out of the way; letting the Indian citizens lead achieve true economic success. But, even in Karnataka, probably the best governed state in India, poor governance and infrastructure is slowly throttling growth. Indian Express reports:

'Bangalore is creaking under its own weight. Bangalore Metropolitan Transport Corporation buses move at a stately pace of 9 kmph through the city. In a city of 60 lakh (18 lakh of which is the floating population), there are 17 lakh vehicles, 11 lakh of them two-wheelers …

'For the past one year, he (Narayana Murthy) has been trying to convince the government to allow more Lufthansa flights out of Bangalore to promote business ties with Western Europe. ''But no one has bothered to reply. No one has even heard me as yet,'' he says ruefully. …

'"Firms in Karnataka are reported to face, on an average, daily power cuts of 2.4 hours. The average industrial production losses per unit outage is reported to be Rs 5, imposing substantial costs on the firms,'' says a World Bank report on Karnataka's power sector. Premji (of Wipro) recounts facing four black-outs in an hour-long meeting with a client. Clemons, the Wharton professor, saw 10 power cuts in a span of 35 minutes.'

If these road bumps to growth are impeding Bangalore, think of the poor entrepreneur who is in the grasp of  the state government of Bihar or perhaps, West Bengal. Scary, indeed!!

All this does not even talk about the high deficits that various state governments and the central government have racked up -- oh! yes, the same deficits that the World Bank keeps warning us about. So, the Gurgaon boom will have to demonstrate that it can handle the business innovation of outsourcing better than North First Street managed the innovation of the web. After all, our economic future depends upon it.

End Notes

No -- gloom and doom is not the picture, I want to leave you with; especially since, we should rejoice in India's successes. And a success, the Gurgaon boom definitely, is. Comparing India and China, Hugo Restall, editor of the Asian Wall Street Journal, calls China 'the economic colony of the US,' but goes on to say:

'As a recent article by Yasheng Huang and Tarun Khanna in Foreign Policy suggested, the true competitive threat to Western multinationals comes from India. Entrepreneurial companies are growing up in truly competitive conditions and are starting to challenge on the world stage in sectors where the U.S. has enjoyed a very profitable edge, such as software.'

But, as Ashok Soota of Mindtree tells Indian Express (August 3, 2003):

'There is a lot we need to do. Because what was good enough in the past will not be good enough for the future."


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Arindam Banerji

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