Why TCS, Infy are yesterday’s heroes

Tata Consultancy Services, Infosys, Wipro – they are the hallowed names that established the Indian IT industry. They brought about a revolution in India’s image abroad and in the process, earned the country a lot of valuable foreign exchange. Although they trace their roots back to several decades, they came into their own and established themselves as world beaters only since 1995 or so. This was the era of the internet and the Y2K bug, which they exploited to the hilt. The world suddenly realized that they could get a lot of things done very cheaply using these service providers. These companies (along with many others) saw an opportunity when it presented itself and positioned themselves for it. Storied personalities such as Mr. Murthy, Mr. Nilekani, Mr. Ramadorai, Mr. Premji and several others guided these companies during their growing phases to get where they have reached now. They have built a $50 billion industry that today competes with Accenture, IBM and others – the best in the world in this sphere. So, what is there to worry about, right? Well plenty, for India.

Having tasted income and revenue growth of 30% year-over-year for a decade or more, these companies have grown so big in size that they can no longer be steered any better than the Titanic. Their business models have relied on the tried and tested service models where the scramble is to garner bigger and bigger slices of the contracts given out by large companies in the US and Europe. This model is a low-risk one where your brand and past performance gets you in the door and the pricing determines who gets the deal. Thus, these companies’ focus solely rests on operational efficiency and innovative sales models. For a country, this is alright if this is a piece of a bigger pie, but not if this in itself is the pie. The Indian IT industry is turning into a one-trick pony of service companies. It is time we built more tricks for ourselves for the future.

The one trick that Indian IT companies have yet to master is that of building and selling products. The reason is that it is a high gestation high risk-reward model that none of our companies are used to. Product companies start off as small organizations with a lot of investment using small dedicated teams that spends a lot of time researching and selling their big ideas. The big Indian companies do not have R&D as a component in their DNA, so it is not possible for them to turn on a dime to move into such projects. R&D projects are often hit-or-miss games where rewards are huge if the idea succeeds and so are the losses if it fails. It is interesting to note that while many of the older generation large companies of today – IBM, Intel, HP etc – started off as small operations that took several decades to scale up, the newer generation companies scale up in a fraction of the time – e.g Google, Facebook. The time period from initiation to success has moved into internet time and is the greatest opportunity that companies in India have, if only they could identify their niche.

One big problem Indian product companies face is the lack of a viable domestic market. For product companies to grow, it is necessary to have a market that they understand nooks and crannies of. Today the biggest markets are not in India but elsewhere. Since there are lot of companies who understand their own domestic markets, it is doubly difficult for Indian companies to build products, compete and sell them there. Thus it is crucial for India to develop a market within the country for sophisticated products. This is one area where the government can lend a helping hand. Rather than provide cheap land and tax incentives, if only the government could be more inventive by actively participating in promoting massive computerization of its offices, procurement of solutions that are specific to our country’s problems and give preferences to Indian products, the path can be cleared a little bit. When done on a large scale, an ecosystem could begin to get built around it. There are opportunities in mobile, banking and various other spaces where India-centric products are needed. Today, we retrofit US-made products to India to solve our problems. We need to take a leaf out of the examples of DARPA, NASA etc and adapt it to modern times.

The development of a product based IT industry is vital to the country’s future as it is a goldmine of opportunity. Now that we have established credibility across the world with TCS, Infosys and others as far as our IT service prowess is concerned, it is time to move onto the next level. And it is not going to be yesterday’s heroes who will do it for us. We need new champions. Products like Notion Ink Adam, the Simputer and many other such attempts are the beginning. The energy is out there. Let us hope that we can build products for India and the market demands such products so that there is every incentive to build them. Beating our chests about TCS and Infosys is only going to turn our chests blue. It is time we looked for alternatives.

Frittering away the advantage

As years pass by it is becoming more and more difficult to be overly optimistic about India. Although the world continues to eulogize India (a lot less than China of course) for the rapid GDP growth of the country, it is becoming difficult to believe that it will last. Several incidents and news reports from the recent past are giving even incurable optimists like me, jitters. Topping the charts is the ineptness of the central government. Dr. Manmohan Singh is beginning to look like Nero, who is fiddling (rather, twiddling his thumbs!) while the country is slowly burning bit by bit.

The old India before the economic reforms of the 1990s was a poor country with very few rich elites. A majority of the people were poor while the few rich lived in their own enclaves. Exhibitionism was not a trait encouraged in those days. Occasionally one would hear about a corruption scandal, a grand wedding here or a lavish event there. The newspapers were occupied with reporting about the harshness of life especially given that the avenues for escape were not within reach of most people. The tight leash of government control kept every one limited to a low level of affluence that wasn’t easy to break out of. Making money was considered bad. The movies of the times reflected this mentality by portraying the industrialist or the rich banker as a villain. Income inequality wasn’t something to be concerned about as everyone was equally poor. However, since the economic reforms of the 1990s, new opportunities have opened up for a lot of people, many of them asymmetrically so. The freeing up of the energy of the people has resulted in exactly what was expected to be achieved. A lot of people have figured out ways to make money and wealth is no longer a bad word. There is now a scramble for wealth. This actually unleashes a lot of pent up demand among people who look at their neighbors and wish they had what their neighbors have. This is not abnormal behavior. In Economics 101, that would be called “animal spirits”. Where India has erred is in harnessing that animal spirit in ways that could benefit the country the most. As a result, very strangely, the word “reform” has slowly turned into a bad word for the same people who started the whole thing! Dr. Singh no longer believes that he has the mandate to proceed with more reforms. As a result, it is difficult to predict if the rosy projections of 9% GDP growth is really achievable. Growth is the only way to build the resources needed to achieve equity (notwithstanding the latest debate between Dr. Amartya Sen and Prof Bhagwati). What is urgently needed is to sell the idea of reform to the people and follow through with more reforms. India used a measured approach to opening its economy by ensuring that the various sectors were opened up one by one over time with a lot of debate. However, India forgot to make sure that further reforms were put in place to ensure that the fruits of the reforms would reach the wider population in due course of time. The original idea of “trickle down” economics stagnated before it could really trickle down. What I mean by this is that there are certain important reforms which are hanging fire simply because the government is unable to form a consensus on the path ahead. For instance, land use reforms is so important to ensure agricultural land is converted for industrialization appropriately and the owners are compensated fairly. Labor reforms are required to make sure manufacturing as a sector can take off. Contract farming and agricultural reforms are vital to ensure that the Indian farmer has an even chance of making it in the globalized world. This is where the government is frittering away valuable time twiddling its thumbs.

A few news items from recent past are pointers to the malaise that is building. I am not even talking about the corruption scandals, scams, the land grabs and illegal building scams. A few newspaper headlines caught my attention:

“Philippines overtakes India as the preferred country for call centers” screamed USA Today on Jan 9th 2011. DNA India cried on Jan 20th 2011 “Wall St sees China’s VanceInfo, Nuesoft toppling TCS, Infy”. The same page also had another headline saying “How India lets slip its clinical trial advantage, guinea pigs and all”. In isolation, these are probably harmless headlines about business opportunities of the past. TCS and Infosys are perhaps yesteryear’s success stories. There is perhaps no need to cry over them. But then, India needs new champions, or these champions need to remodel themselves for the new future (more about that in a later post). The fact is that there is nothing new in the horizon for India. At the same time, we seem to be preoccupied fighting each other on every topic. When will we get back to the main business of the day – moving the country forward? Our history does not give a comforting answer and that is what is making me feel less optimistic!!

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$30 billion

$30 billion is the amount of annual subsidies provided by the Governments of various countries to the fishing industry. This is significant because riding on this subsidy, a lot of companies are extending their fishing reach and equipping themselves with highly sophisticated systems that we are in real danger of not having any fish to eat in a few decades. No one has yet understood the dangers and so no one is stopping this Ponzi scheme.  

A great article written by Dr. Daniel Pauly, a professor at the Fisheries Center at the University of British Columbia titled “Aquacalypse Now” in “The New Republic”  has triggered off a debate about the extent of overfishing that is going on in the world and how it can be controlled. The situation has reached such a point that fishing companies have begun to bring newer varieties of fish to your table as the older ones are depleted. The entire ecosystem is in imbalance as a result. The article tries to highlight the differences among scientists and their agendas and why Governments need to get involved.  

Here is the article:

http://www.tnr.com/article/environment-energy/aquacalypse-now?page=0,0

66

That is the number of pages contained in Gen Stanley McChrystal’s (the commander of the US forces in Afghanistan) report that was recently submitted to the President of the United States. In the report, the General is reported to be seeking a troop increase of at least 40,000 or so (this is a guestimated assumption). This entails a near doubling of US troop presence in the country which is not music to any one’s ears. After this report was leaked to the press a fierce debate has ensued with in the US about their occupation of Afghanistan and how to control the runaway situation. The general assessment all the way from Mr. Obama to the various experts is that the war is not going well and a serious rethinking is required. A chorus had been forming in recent months from many well respected commentators and experts that the war in Afghanistan was not going to achieve any aim that the US had when they got into it in the first place eight years ago. The primary aim at that time had been to decimate Al Queda and the method was to bomb their safe haven (Afghanistan) and their enthusiastic hosts (the Taliban) into oblivion so that they would never again be able to raise their head. Well, all that was wishful thinking. The whole approach of the US showed their lack of understanding of the Afghan territory, the resourcefulness  of Al Queda and the geopolitics that encompasses the region. The bombing of Afghanistan helped disperse Al Queda and the Taliban for a short period, but they found their safe haven in nearby Pakistan. The hills of Tora Bora and the vast mountainous territory of Afghanistan is a perfect place for guerillas to hide and wage war. Osama bin Laden (if he is still alive) has retreated to his cave and has successfully dodged any attempts to unearth him, helped not in small measure by his political friends of the region including perhaps Mr. Musharaff. The regime that the US propped up in Afghanistan (albeit through a legitimate election in 2004 and a sham and illegitimate one in 2009) of Mr. Hamid Karzai has not been able to establish any sort of control in the country beyond the area around Kabul. The vast hinterlands have now been recaptured by the Taliban and their writ runs as effectively in those regions today as in the days prior to 2001. The Karzai regime has lost its legitimacy among the people of the country due to the corruption that has been unleashed and the deals that they have tried to strike with the Taliban across various regions in the country. There is also a feeling among several quarters that Afghanistan has proved over and over (first Britain in colonial times and then Soviet Union in the eighties, fought unsuccessful wars) that when it comes to war, they are an undefeatable lot. All in all, the US is in a quagmire and they have only two choices. One would be to plod on knowing fully well that they are in a situation that will increasingly be unpalatable on the ground as well as for the people back home.  It is a war that they probably cannot win. What is also interesting is that winning the war in Afghanistan does not in any way guarantee that the Al Queda would remain obliterated. As a matter of fact, it never existed in one place. Ironically, Al Queda is a very federal organization with high levels of autonomy in the hands of regional leaders who loosely outsource their activities to their cells in various parts of the world. The central leadership sticks to their core competence which is the spread of jihadist ideology. So, winning in Afghanistan in no way saves the US from a terrorist threat from Al Queda.  The second choice would be to simply cut their losses, look for an honourable settlement that will give them a face-saving victory, give up on the nation building exercise by leaving it to the neighbours to sort out. Perhaps the US may want to keep the option of launching air strikes from time to time and fly their drones into the territories in Afghanistan and Pakistan when necessary. Beyond that they may have no interest in the region. This is where India is likely to come in. According to some of the informed experts, the most possible choice that the US Special Representative of Af-Pak  Mr. Richard Holbrooke,  is likely to come up with is to invite India, China, Pakistan and Afghanistan into a quartet responsible for the safety and development of the country with the US acting as the mid-wife. This would mean identifying the “good Taliban” (an oxymoron in itself ) from the “bad Taliban” (there, is a pleonasm for you) and striking deals with the former and perhaps promoting them to power in the country. All this is going to be messy and could blow up in our faces even with all the planning and consensus across various countries with diffeing agendas. But this seems to be perhaps the only way out short of the US entrenching themselves for the long haul and suffering a lot of misery and thereby losing much of the political capital they still hold. It is going to be interesting to see what they will do in the coming 2-3 months. The troop increase may still happen in the short term but that may be just a precursor to massive withdrawals in the mid-term.

The US has so far tried to build and shape countries into their mould in three different countries and have come out a cropper in each of those occasions. The first was Vietnam – from where they had to leave in defeat. Iraq is the second, where they have managed to bring in a semblance of democracy but there is no telling how long they will need to be there to provide security and to nurture the country to health while warding off aggressors like Iran. The third one is Afghanistan which is going way out of control. Afghanistan’s history suggests that they have never been conquered by any foreign power so far. Of course, history is only a guide and does not mean that it is meant to be repeated. However, that is a lesson that needs to be taken cognizance of.

20

That is the number of deaths in India since the Swine Flu epidemic began in right earnest in this country about a month ago. Pune has curiously become the Swine Flu epicenter of India for no known reason. So far the schools have been closed, malls and movie theaters shut down and there is talk of the vegetable market and wholesale markets being shut down as well. Masks are out everywhere. It is a very different feeling these days in Pune. When you walk into any public place, you are always suspecting the other person to be carrying the virus. You are looking to see if any one is looking a little run down and about to sneeze or cough. You would rather say “namaste” than shake hands – if you are brave enough to meet any one, that is. Kids are mostly grounded at home. Thankfully my kids are quite resourceful about finding ways to spend their time so they have not yet complained of boredom or wanting to meet other kids. Each time you hear about a death due to the flu or you think the situation is getting out of hand, one begins to wonder whether you are going to be the next victim. Your nose starts tingling and you wonder if you are running a little temperature! I have already decided about keeping my Investment spreadsheet up to date so my family will get to all my money without me being around in an eventuality! Guess these kinds of things have a strange way of making you think about your own mortality and fragility. The fact of the matter is that you are more likely to die of an accident or any other 100 diseases far more than by Swine Flu. But the immediate “Clear and Present danger” hits you like a ton of bricks.   

Here’s hoping that we are going to get over this situation soon….

$825 million

That is the deal size that Anil Ambani’s Big Entertainment has signed with DreamWorks. Perhaps many in India are gloating at the great Indian takeover of Hollywood, what with Spielberg in the kitty. However, the celebrations may be simply premature. The only reason why DreamWorks looked at Ambani as a messiah was because he had the moolah and the earnest wish to get attached to some famous names. As one of the original promoters of DreamWorks mentioned a couple of months ago when news of this impending deal broke, they were stupified to see how little Big Entertainment demanded in return for this largesse. Apparently, as he put it tongue-in-cheek, all that Big Entertainment wants in return for giving this money is a seat with Spielberg at the premier of their movies. Of course, as I said that was tongue-in-cheek, but the point is that the Indian company is overawed by the glamour of Hollywood and probably considers itself gratified to be seen as a big player in the world business of movies. This suits both players perfectly. Big Entertainment simply needs some exposure internationally and wants to build their brand by being seen alongside Spielberg, which would give them legitimacy. DreamWorks simply needs the money with as few strings attached as possible, after being bitten badly by their previous deal with Viacom. So, there is not much to hope that this marriage made in Heaven would survive for a long time. I for one wouldn’t bet on it as once the slump is over, and DreamWorks is able to get on its feet, they wouldn’t need the Ambanis for much longer. This is not to doubt the shrewdness, business sense or the guile of Mr. Anil Ambani. I simply see it as the melding of opportunism between the two sides which is not necessarily a great recipe for partnership for life.

9.5%

That is the depressing unemployment rate for June 2009 in the US as per the latest report. That means that more than 400,000 jobs were lost in the US in the month of June. This has come as a rude shock and a depressing development since every one was assuming things to be improving on the economic recovery front. Although this might be a blip before things improve, this latest number makes every one tizzy about whether Dr. Doom (Dr. Nouriel Roubini -refer to my earlier post titled “W”) is right after all. It makes every one ask whether we began to celebrate an impending recovery too soon. Sane voices are however saying that unemployment has ways to go  - more like 12-14%  - before we see a turnaround. However, the real concern is also that if the unemployment numbers turn out to be sticky and hover in the double figures while inflation starts to rear its head up due to all the Government spending of the past few months, then the world is headed for a stagflation that could spiral out of control. Definitely, the last nail in the coffin of this recession has not yet been struck, and we need to wait and watch for further developments before concluding that recovery is on its way and that all the trillions of Government spending of the past few months really did avert a disaster.

1

Yes, “1″ is the number that we hope we converge to once we implement the Unique ID (UID) project. The UID is a massive scheme that the Government wants to implement to give a Unique ID to every Indian citizen much like the Social Security scheme of the US.  One number to identify each Indian citizen and for him/her to avail all publice services and benefits; one card to carry anywhere. I am usually an incorrigible optimist except when it comes to implementation of grand schemes in India. Then, I turn into a pessimist because given the massive scale of such projects and the fact that we are born losers when it comes to the implementation of big projects, it is not likely to be a smooth affair. There are plenty of pitfalls on the way. Imagine a technocrat corporate honcho like Mr. Nandan Nilekani getting into the turf that should have been a politician’s or retired bureaucrat’s playground. They would definitely find ways to trip him if they can. Their motivation would be clearer if you think about the amount of money and power he will wield to make this project happen. How many politicians are going to give that up to an outsider? That in itself could cause several roadblocks for him, not forgetting the massive scale of implementation, technology decisions, data collection and other such issues that he will need to handle. I have always maintained that the Indian IT industry was never invaded by the politico types simply because they never understood technology. The IT industry managed to rid themselves of their bad influence as a result and therefore managed to be a beacon of hope for the entire country in the way they conducted business transparently and treated their employees. Politicians and their goons will mess up any territory that they have some idea about. A great example of this is the cable TV industry. Just look at the mess  the television cable industry is in simply because it is a low-tech industry and these guys can get in and establish themselves to make money. For the Unique ID project, the technology challenges are the easier ones to solve. The other challenges in terms of reliable data collection, policy decisions on exclusion and inclusion of various people etc are much bigger challenges with lot of political ramifications. This project is therefore not immune to raids by the politico types. Therefore, I am definitely worried about it getting implemented properly. And an improperly implemented UID project will kill the goose so badly that no government will ever again try to implement a similar scheme for fear of being ridiculed for backing a white elephant. That is why it is that much more important for this scheme to succeed. I  hope that all the well wishers including the Prime Minister put their combined weight behind this project to make it a success. The country needs this success badly and we cannot afford to fail.

4.8 kms

That is the length of the Bandra-Worli Sea Link in Mumbai – a major infrastructure project – that is finally seeing the light of day today, after 15 years of planning, politics and disputes. This is a project that was conceived in 1995 and was supposed to be finished in 2003. However, true to the way infrastructure projects get executed in India, this was mired in red-tape, delays and cost overruns. The project finally cost about $400 million (original estimate: $100 million) to complete and is at least 6 years behind schedule. However, it is a proud day for Mumbaikars and Indians that we have been able to complete this project and throw it open for public use. This sea link is expected to reduce the travel time between Bandra and Worli to 6 minutes from the previous 40-45 minutes that commuters used to endure during peak hours. Let us hope that some of us learn the right lessons from this project and execute them better in the future although it is a tall order to expect that from our babudom.

And while we gloat, let us keep our Shanghai fetish aside for many more years, as we are a nobody in the infrastructure race compared to China.