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.

China a Threat to India in IT? Not at least for now!

In last 4-5 years if anyone has said that China could be a major competitor to India in IT outsourcing & BPO business, it would have definitely sent shocking waves among big IT players and even among IT professionals (they stand to loose jobs).
Media, especially the research firms like IDC, Gartner & Forrester had been proclaiming from perch top that China was going to be a big powerhouse very soon in IT outsourcing and India should worry about dragon. They were predicting for this to come true as early as by 2007. Everyone was saying so looking at the way China had been making strides in manufacturing and the way it was improving its hard infrastructure. And for us as well there was no way but to believe because if Chinese think of doing something they would make that happen at any cost. That’s the kind of reputation they have got.
But nothing significant in IT outsourcing industry has happened so far in China and I don’t see this happening for at least another 7-8 years. That’s when it may be starting to emerge a contender for competitor, still it would not be a competitor. That would still take few more years from there if Chinese are prepared.
Today there is not a single IT vendor in China worth its salt. There are many outsourcers like Objectiva, Bleum, etc. but they are just fringe players who would either never become serious players or would have to try too hard to become one.
Here are some of the reasons why China can not just become a serious IT player in IT outsourcing business:

1. There are no big IT companies comparable in scale to Indian giants like TCS, Infosys. Today to bag a big outsourcing contract you have to show scale. Otherwise you can just become a body-shopper.
2. Project management experience is one thing which you can not learn in an institute or college that comes only from work experience and India has that in abundance. Indians have been working in IT industry for decades now and so they have built formidable skills in this area which is their selling point and also huge differentiator.
3. Even though the IT industry is so small there in China still attrition in China is more than 20% as against 15% in India. Not so goon signs at the inception.
4. The experienced IT resources in China are 50-70% costlier than in India. Even the entry level resources are not very cheap in India and those are also not English speaking so the cost factor is hardly an advantage.
5. Patent and IP protection is biggest problem in China and IT being such an important and sensitive area for customers they would think twice (or more?) before sending work to China.
6. Should we mention English as one of the reasons? Can Chinese learn English in few years to become strong contender? Most of the business world over happens in English, even in non-English speaking countries.
7. Nothing works in China without guang-xi i.e. connections, so for an outsider if they have to set up shop they either have to tie-up with local partner just for guang-xi or wait for years to grow whereas in IT you have to be very fast and nimble. International players like IBM, EDS, and TCS may not find it easy to grow there as they have grown in India.
8. IBM, Accenture and EDS have been in China for 15-20 years still their service staff is minuscule that tells what the current IT environment there is.
9. Indian IT is not because of government support or any institutional support but because of entrepreneurship of some individuals. In China it’s government that is pushing, but govt. can set up manufacturing companies not IT. It’s a people business. Better the people, more is success.
10. China’s one child policy hampers employee movement between different Chinese cities as people normally are hesitant to leave their parents and grant parents.
    
    This is not to say that China can never become a serious IT player and Indian IT should also not become complacent. I’d hope China to come up fast in IT so India also improve its quality and there is overall improvement.

Infosys lapping up Capgemini: will politics allow it.

Ever since the rumours of Indian IT service giant Infy taking over Europe's largest IT serices & consulting company Capgmini cropped up in the media last Friday, the shares of Capgemini on european bourses have gone up substaintially whereas Infy's shares hardly moved that shows how much European shareholders expect to gain from this deal, whereas Infy shareholders hardly see any short-term gain out of this deal.
Shareholders are mostly the creatures who see just the short term gains. They want to see how much money they can make from now upto a year or two. They hardly see if the deal is a strategic fit or it's going to be a good one for long-term or it's good for social fabric of the area where the company operates.

Definitely if eventually Infy does take over Capgemini, the first thing shareholders of CG would expect is to cut the cost. Since the operating margin of CG is hardly 5.5% whereas that of Infy's is above 25%. So shareholders of CG would expect this margin going up significantly up. For since cost cutting is the most important step management can take to improve margins in service companies. And service companies being people intensive, they would cut down employees in Europe and such other high cost western markets and hire more and more in India and other low-cost markets.
This would surely create a huge political and workers-union tension in Europe, where already unemployment rates are high.
And problem Infosy management would face is that of retaining consulting unit employees. Main reason why Infy wants to buy this is to make easy and fast inroads into lucrative consulting pie which have so far proved to be tough nut to crack for all Indian players. This business is mostly dependant on how good people you have in your team. So if Infy can not culturally merge CG than all important people would leave CG and making deal meaningless for Infy. So Infy have to leave core consulting business of intact in the way it functions and have to give full freedom to operates then only it can reap the benifit of deal in the long term.