Infy Guidance: Impact on years to come.

The result by Infosys yesterday were not that bad, they were almost on expected lines but what guidance Infy gave for the year ahead was really SHOCKING. Infy gave guidance of just around 1.5% of growth in rupee terms (a negative growth in dollar terms, worst still). This was the most shocking news of yesterday and I would say of this year so far.
Implication of this piece of news is:
1. Infosys is considered the bellwether of the overall Indian IT services industry and any trend set by it is considered to be replicated by the overall industry. So we can safely assume that the overall IT industry would also grow at the same rate. That is almost a 0% growth.
2. As there would be hardly any growth in IT service industry so there would not be need for new recruitment and certainly IT industry would like to rationalize their existing bench (generally Indian IT companies maintain up to 30% bench strength). This means there would be lay-off of resources that are currently on bench in companies.
3. Real estate in India is almost singularly dependent upon the uptake from IT industry be it for commercial or residential sector. So as a result I would say it’s safe to say that there would be no takers for real-estate that means the property prices are going to CRASH badly and LOUDLY in a years’ time.
4. Indian IT industry employs a huge no. of youth. As there would be hardly any growth this year so there is going to be significant problem of unemployment this financial year.
5. As lot of industries, home loan, financial industry to some extent and many more industries depend directly or indirectly for their growth on the growth of IT industry, so these industries would not be growing and that would impact employment too. So ultimately India would see huge unemployment problem among the educated youth (thankfully for political parties the election would be over by that time).
6. Infosys is saying that there would be hardly any new requirement for IT services in their target markets (western world), that clearly says that there would be no growth in those economies for this financial year. So a badly needed pickup in economic activities are still at least a year down the line. This means if we reasonably assume that economies in the west would start picking up only after this financial year (if nothing goes wrong now of which there is no surety). It would take at least a year for western economies to take off and then they will generate the requirement for IT offshoring so Indian IT companies should wait at least 2 year for their services to be required.
7. When in 2000 dotcom went bust, IT industry in India was impacted in 2001 and it took another 3 years for requirement to pick up. It’s only from 2003 end that serious recruitment started by IT companies. Which means a small problem like dotcom took two years off from the job market growth in India. Assume how long it will take this time as the problem is far far serious this time.

Impact of the World Recession on Indian economy

Recession has already arrived in US, UK and major EU economies; China is also going to be affected badly. China’s growth is going to come down from 12% last year to around 8% this year which is a big hit on its growth. So there is overall slowdown in the growth of the world economy so the impact of recession is going to be felt definitely in India. Here in my view how some of the sectors would be impacted in India.

Stock Market
As already seen, Indian stock markets are down more than 60% from their high point. So we can already see the impact there. As more money dries up in the world this is going to impact stock market in India further. The bull run on Indian stock markets have been due to easy availability of cheap money in the world market but this is no more the case now so we are not going to see the same high for few years now.

IT and BPO
Indian IT has always survived because of the western economies, as major western economies slowdown the work being offshored to Indian IT companies is going to freeze in near terms as client cut on all unimportant work (and some important work too). So there will be less work for IT companies in near term. This will trigger job cuts in IT in west and India. This is already happening in India, though will be on very low scale as compared to the west.
But in the long term, as the western economies start getting back on their feet, they will generate more IT work and then they will not have enough IT workers (after having laid off in current recession) so they will offshore more of that to India. Also the rush for efficiencies in the operations would drive more work to offshore so we will see better future for Indian IT in medium to long term.

Housing and real estate
Real estate in India is going to suffer badly, even if govt. tries to provide any incentive, which real estate industry is asking for. As most of growth in this industry came from speculation and false future projections, the industry is going to have a hard landing before picking up again. With likes of Lehman brothers gone with the wind, there will be less of outside money to invest in real estate in India, so realism will set in here. Already the stock prices of major real estate players are down more than a shocking 95%. It was pure speculation.

Infrastructure
Infrastructure projects like, roads, ports, power etc. will suffer because of difficulty in getting money and general aversion among investor for any risk now. Also Indian govt. does not have money like China which can spend on such project to stimulate the economy.

General Economic Reforms
Already Indian govts. have always been reluctant to go for far-reaching reforms. Now they will be more so. And political parties like Left would be making more noises now. Seeing the mayhem in the world financial markets govt will be very cautions to go for any reforms. Also earlier US govt used to push for reforms in India but now they would be shy in doing so one for the mess in their backyard and second they do not have a face now to show to the world that free capitalism is the only way to go. This will slowdown the economy.

Non-IT export
We have already been hearing news of layoffs in export oriented industries like gems and jewelry, apparel, leather, auto component etc. The impact of this is definitely there on general economy.

General Economy
Though we hear people say that Indian fundamentals are strong and we can sustain our own growth but that is like running away from reality. Because of globalisation we are now more linked to the world economy than anytime in future so if world is suffering we cannot remain immune to it.
When all industries are slowing how can we expect the general economy to grow. Never. If IT slows down it impacts job market and the easy spenders, related ancillary industries gets affected too due to this. If there is slowdown in infrastructure then that would impact cement, steel and other industry. So we can see that almost all the industries of the economy are going through the rough phase so there is overall slow growth.
But we in India have lot of optimism as we can see the light at the end of tunnel. So this time is just for reflection and to prepare ourselves for better times which are just around the corner.

Credit Crunch to hit Indian IT? No

Most of the Indian IT companies work in supporting legacy application, application development & management, BI & data warehousing and BPO services. These are the areas, which are very essential to support the day to day running of businesses. These functions are crucial to running the businesses. So these are the areas where businesses can not afford to cut back. Because even if these are bad times they can not abandon their existing systems or cut back to support services to their employees or customers. They need continued support to run them.
Also businesses need to keep enhancing their IT systems and processes that are required by regularatory requirements like BASEL II, SOX, etc. Such requirements can not be postponed by businesses just because there is recession.
So I strongly believe that Indian IT outsourcers would keep on getting their business from international clients.
In fact during recession, businesses would be looking at cutting cost down so they would be evaluating more areas of their IT spending which could be outsourced/offshored. So it may even open up new business opportunities and increase the business for outsourcers.
It’s the high-end consulting business which may be affected in big way as businesses may not want those services and Indian IT companies have hardly any significance presence in that area.

Emerging IT hotspots in world and competition to Indian IT

A lot is being made out of Chinese threat to Indian IT industry and also threat from other emerging cheap IT labour markets like Eastern Europe (Hungary, Poland, Czech Republic), Latin America (Brazil, Argentina), China, East Asian Countries (Malaysia, Philippines), Russia, etc. But I don’t think any threat from any of these countries at least in next 10 years.
The reason why I think so is because the Outsourcing industry in the world is flourishing because of following three reasons:

• Cheap IT/ Engineering labour,
• English speaking skills and
• Easy and quick Scalability.

All of these three skills or differentiators are equally important for a country to be a real outsourcer and a real threat to India. Because if you have engineers and they are not cheap no point (case is Russia), or you have cheap engineers and also in abundance but no English (China) no point and you have English speaking engineers but not in abundance (Latin America, East Europe and East Asia) then again no point. And all these three above criteria are satisfied by India only.
A lot is being made of China that China will be able to teach English skills to all its engineers in no time and it'll be a threat. But teaching English is no child's play, it take years to be comfortable wit it. The biggest Chinese IT outsourcing company's turnover is not more than $300m in 2006 and that is no match for TCS and Infosys of India. Also most of Chinese companies’ work is domestic.
Another thing IT project management skills (5+ year experience) are costly in China than in India. So the so-called cost advantage of China over India is just a mirage not reality. Also China mainly caters to Japanese market because Dalian area in China provides Japanese speaking resources. There is hardly any work being done for non-Asian market in China. Similarly other countries like Russia, Brazil, Philippines, etc. can not provide scalability which is required in any service industry. Outsourcing jobs requires huge numbers of engineers which are not available in these countries.But all these countries can be very good partners for Indian companies. Indians can utilise these countries by setting their operations in these countries and can tap their local market. So I feel there are more opportunities for Indian IT companies in these countries then threats. Like Indian can open centre in Russia for high end IT work and product development work because of the excellent talent there. Latin America and Eastern Europe could be used to cater for non-English clients. China and Eastern Asia can be used for servicing local and Japanese market. So emergence of these new hotspots should excite India rather intimidate.

Advantages of Offshoring

Apart from obvious advantage of saving money, there are huge benefits for entire world, some of them are listed here:

1. The first and obvious is benefits of lower cost for the business offshoring the work to cheaper locations like India, China, etc.
2. Improve the quality of their work by taking advantage of excellent and quality oriented workforce of India.
3. Saving huge time and tension to the Client top management which would have been spent in interviewing a lot of prospect to fill a few posts. To adress urgent requirement for people, they have to spend time which can be cut when they engage offshorer who can supply people fast, saving opportunity cost as well.
4. Assemble teams and projects much faster than possible as offshorers already have people of all skills on bench ready for deployment.
5. Huge profits for banks like HSBC, Barclays as they save more by cutting cost.
   They save lot in cost-cut. The US healthcare costs have dropped by 30% since all the data is processed in low-cost locations. And these profits definitely benefits local by way of either dividend distribution or by creating more job, or by investing in new R & D, etc.
6. More opportunities are generated for UK / US business like more sales for airlines, Microsoft, IBM in hardware and software sales. As countries like countries grow demand for UK/US’s high end product grows so UK/US. American products and services are highly regarded and popular among this new breed of Indians creating growth opportunities for US businesses in many spheres. Similarly more businesses for food chains, sport accessories chains as more spendable money in hands of Indians
7. More stability in Indian region as job keeps people busy making world a peaceful place.
8. Ripple effect to Indian economy improving entire economy.
9. More lean and mean UK/US corporations so more values for shareholders
10. More profits so more new innovations and more high end job creation in US
11. Better services to customers, as without offshoring all services would not have been possible due to higher cost.
12. Lower cost so cheaper services and products to consumers
13. Lower jobs go to India so people in developed nations have to go for higher education to remain employable and improve overall education level in developed world.
14. Higher education so more entrepreneurial public creating more jobs in newer areas.
15. It’s more a tool to increase growth and boost efficiency than just pure cost saving exercise.
16. Companies have cut down time to market by more than half and also reduced their investment in product development as it shares the same with outsourcers.
17. It helps corporate clients meet their tech needs without worrying about h/w or s/w trends
18. These create local jobs also, recruiting local skills which are not available in India, setting up office.
19. Offshorers also create local jobs and employ local people.
20. new skills sets like handling offshore team, etc. come up in local markets
21. Vendors, having worked with several customers in same area, can provide a lot consulting advice from their experiences, share the experiences of other organizations and their use of particular solutions. This knowledge would not have been possible to corporations otherwise. It's like learning by others' mistakes so save time, money and stress.
22. Can be used by all areas of business, from software development to claims processing, HR administration, and accounting and finance, reasearch, legal, any service you can think of.
23. Thirty years ago, electronics companies such as Motorola, Texas Instruments, and Intel sent manufacturing overseas to cut operating costs and speed product development by taking advantage of wage gaps and time zone differences. Without global resources, these companies couldn't cost-effectively develop the hundreds of new product designs needed each year.
24. Studies have shown that with globalization, gross domestic product figures have gone up for all participants in the global economy, both in emerging and developed regions.
25. automation brought a host of new conveniences and capabilities to American companies,
    the species that survives is the one that is "most adaptable to change."
26. by having design teams working in multiple time-zones companies can reduce time to market, so save cost and also remain first to market winning more market share.
27. Indian software industry association, Nasscom, figures that each new worker in the info tech sector creates seven indirect positions, from janitors to security guards. it's a virtuous economic development model.
28. the labor savings from global sourcing can still be substantial. But it's peanuts compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.
29. If we want to recruit a great engineer in Silicon Valley, our lead time is three months and in India it is just 2-3 days.
30. Clean, well-paying service jobs boost demand for educated workers, an impetus to improving schools and training. And the high-level skills learned "spill out to the economy as a whole,"
31. Other industry advantage: Over 60% of the commercial real estate in India in the last 3 years was leased to the IT and BPO industry players. The automobile, hotel, airline, catering, computer, telecom and construction material industries and many professional services industries like legal, recruiting and accounting get a major boost from the IT and BPO growth.
32. the most optimal use of global resources and challenges the benefits of trade based on comparative advantage.
33. faster service X-rays that are taken at night in a U.S. hospital when the radiologists are not on duty are e-mailed to foreign doctors in another time zone who analyze the x-rays and either e-mail the diagnosis to their American counterparts or call them back to discuss the results.
34. Products are broken down so that their respective parts are simultaneously manufactured in the U.S. and abroad -- all with close collaboration among the manufacturers. The finished product, when all of its parts are ready, is then assembled at the most convenient and economical location, faster time to market.
35. Due to globalisation, inflation remain arrested that creates a stabilizing factor in society.
36. Things become cheaper so that more people can afford things improving overall lifestyle and prosperity and bringing more homogeneity in society.