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Ashutosh Sheshabalaya On Indian Issues
India - An Emerging It Superpower
by Ashutosh Sheshabalaya

Published in September 1998 issue of Business Eye, London.
From modest beginnings in the early 1980s, the Indian information technology industry hit the $1 billion mark in 1993 and continued to grow consistently to pass $4 billion last year. An above-40% growth rate will see revenues cross $10 billion in 2000, according to forecasts from Information Technology in India, an Ascendex study published in late 1997 by Find/SVP Inc., New York.

This blistering pace of growth is most visible in the high-profile software sector. However, hardware sales too have been impressive, a fact thrown into relief by the deepening slump across most of Asia. In the first quarter of this year, while southeast Asian PC shipments dropped by 40-90%, Indian sales rose by 39%, outstripping China's 28% and Australia's 12%, according to figures from International Data Corporation. Domestic sales of software have also been galloping, for instance, for Parametric Technology at over 200% a year and for Oracle and SAP by 80-100%.

With projections of $5-6 billion in revenues by the year 2000 and a renewed government drive to boost its fortunes further, the Indian software industry is likely to continue drawing international attention. Today, an estimated 150-200 Fortune 500 companies use Indian software engineers, while most major software vendors either have an India development centre or employ Indian programmers at home and offshore.

Though much emphasis has been given to cost advantages, international companies increasingly see a differentiated mix of advantages in determining the benefits of an Indian presence.

For maintenance, customization and migration, companies choose India for inexpensive talent, and one that (like much else in the country) is available in large numbers. At the other end, many employ world-class (and not necessarily less expensive) Indian talents to design and improve products. Examples include Hughes, Oracle, Computervision and most recently, Microsoft, IBM and Sun, for systems software and processes, or Citibank and Verifone, Siemens and Philips for applications.

Ankoor, TI's innovative new DSP chip, was launched last year in India, where it was designed, as was Siemens' Access integrator, its ADMOSS operator service system and its MagicView telemedicine system. So too were Hughes' newest communication stacks and Citibank's Microbanker. The quality edge afforded by India is displayed vividly by the ISO ratings of most of these companies, and in some cases by stringent CMM (Capability Maturity Model) certifications from the US Software Engineering Institute (e.g for Motorola, Citicorp and Honeywell), which even their US parents lack.

For most middle-sized international companies, however, India's promise lies in leveraging a mix of skills from across the spectrum, and paying adequate attention to devising the most appropriate cost-benefit combination, that is vis-a-vis home country operations. Indeed, it is this approach which lies behind the success of several international companies in India as well as Indian-owned software companies in the US such as Mastech, i2, CBSI, Cadence Systems, Duet and others.

Some international firms have also begun to see value in Indian buyouts. FI Group of the UK has acquired IIS Infotech, while ING Barings has taken over BFL Software. In August, American International Group was reported to be considering a 10-20% stake in PCL Mindware, an Indian company especially well positioned in Japan. More such moves are inevitable in the near future.

With Indian industry broadly transforming itself from a low-cost identity to a new value-for-money approach, some software companies (e.g Ramco Systems, Infosys, TCS and Polaris Labs) are taking systematic steps to build global brands. Others are making a determined push for value addition. Thus, while in 1996 Japan's Canon was able to purchase color compression technology more advanced than its own from India's Newgen Software, HCL this year struck a better deal - to license its ASIC technology to Samsung of Korea. Smaller companies too have developed scores of products (from financial simulation through healthcare and logistics software to document imaging). While India's proven service and support credentials will help such companies, many make it clear they will compete on the basis of that most persuasive argument - price.

Indian firms are also internationalizing operations, through subsidiaries and joint ventures in the US and the Far East, and now increasingly in Europe too. Indeed, newer Indian companies like Aditi Corporation have started life with dual headquarters in India and the US. Others have undertaken brand valuation and issue US-style quarterly balance sheets. With CMM certifications at the US Software Engineering Institute now increasingly looking like a `Who's Who of the Indian IT Industry', software stars such as Infosys, HCL Infotech, Hexaware and NIIT plan to issue ADRs (American Depositary Receipts) and list on Nasdaq. Some have also earmarked funds for acquisitions in the US or Europe.

The Indian government has not only moved to give `blanket' permission for overseas acquisitions. It has also simplified procedures for ADR issues and will permit employee stock options linked to ADRs, thus greatly facilitating staff retention - an intensifying problem given the explosive growth rate of the industry. Other measures announced recently include sweat equity for employees, 100% depreciation on all IT products, the setting up of special IT finance cells at Indian banks and bank investment in dedicated IT venture capital funds. Though proposals to set up software parks in rural areas will finally bring substance to Gandhi in the age of silicon, more excitement has been evidenced by the government's resolve to completely deregulate Internet access and service provision.

While such moves form part of the federal government's strategy to build a $50 billion industry during the next decade, State governments and the private sector are also getting in on the act. Andhra Pradesh, Karnataka, Maharashtra and Orissa are competing fiercely to churn out an unending stream of incentives and draw in more IT sector investment. The private sector too has seen the emergence of the first domestic IT-dedicated funds such as Kothari Pioneer AMC.

The outlook for India remains buoyant. On the back of continuing sales growth of 50-100%, several large Indian companies reported profit growth of 100-150% in the first quarter. Indeed, since January 1997, the eight leading Indian software companies have registered an average price appreciation of nearly 465% against a rise of just 5% in the BSE Sensex. Needless to say, foreign funds are amongst their most avid proponents.

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