Speaking Of Asia

Indian IT industry loses its swagger

The good, it is said, is often the enemy of the great, and this has proven true in India, where software and service companies are suddenly struggling for growth

Starting with the time their programmers rose to global prominence by helping fix the bugs for companies bothered by the so-called Y2K threat - the threat of havoc in computerised systems coded to abbreviate four-digit years to two digits, thereby resetting to "00" at the dawn of the new millennium - India's information technology companies have stood tall.

Swiftly grabbing ever more complicated work, their stellar progress against tough odds - poor infrastructure for one thing - became the stuff of legend. As the number of professionals in the industry grew to more than three million, entire subcultures grew around the staff of these firms, which soon began to deliver almost any knowledge-based service that could be remotely performed.

To get a sense of how breathless the ride had been, witness this: In January 1994, when Mr Goh Chok Tong, then Prime Minister of Singapore, laid the foundation stone for the iconic Bangalore technology park, the Indian IT services industry had just passed US$300 million in annual revenue and employed a total of 9,000 professionals.

Two decades later, the industry body Nasscom, which is short for the National Association of Software and Services Companies, was projecting that the industry would have annual billings of US$350 billion by 2025.

Even the captains of industry were bemused at the pace they had grown. It took industry bellwether Infosys 23 years to reach one billion dollars in billings, Mr Nandan Nilekani, its chief executive officer at the time, said in 2006. The next billion came in just 23 months.

Indians, the wags said, did well in beauty contests and IT - two areas the government mercifully did not regulate.

The good, it is said, is often the enemy of the great. In my book, India Rising: Fresh Hope, New Fears, published a year ago, I'd drawn attention to Nasscom's forecasts and suggested they were overly optimistic, and predicted that growth in the sector was poised to slow dramatically. "India's media, prone to bouts of great ebullience, pronounced the nation a 'knowledge superpower' long before the title was earned."


ST ILLUSTRATION: MANNY FRANCISCO

I suggested, listing the challenges the industry was facing, the apparent slowness to adapt to emerging technologies and the tendency to cling to using labour arbitrage to grow profits.

Much as I would have wished otherwise, the prediction came true sooner than I had expected. The bad news emerged in the quarter ended September last year when results of Infosys and industry pioneer Tata Consultancy Services (TCS) indicated stalling revenues. TCS had its worst second quarter in its half-century of existence, its CEO admitted ruefully.

ANNUS HORRIBILIS

There was little joy elsewhere as the year wound to its close. Revenue growth slumped from the double-digit expansion the industry had grown used to and hiring dropped dramatically. The industry was at about US$150 billion (S$212 billion) in revenues at the end of last year, of which US$110 billion was exports.

Cognizant Technology, a US-based firm promoted by Indian engineers and considered one of the hottest movers in the industry, saw its growth targets cut three times over the space of 12 months.

Not that any of them fell into losses; TCS, for instance, had profit of US$3.7 billion on revenue of US$16.7 billion last year.

But the go-go days of double-digit expansion were clearly over, and with Britain deciding to leave the European Union and Mr Donald Trump in the White House with his "America First" policy, political uncertainty made the outlook even cloudier. Without question, 2016 was annus horribilis, the year India's IT-enabled services industry had to surrender its swagger.

The new year was hardly better with Mr Trump making plans to put the squeeze on H1-B visas, the route used by Indian IT firms to place their low-cost engineers in the US. The Indians had gamed the system, with some companies applying for three times as many visas as they needed, in order for the lottery system to give them the required number. Now, with the minimum wage for those visas poised to grow substantially, "that model is no longer workable", says an industry veteran.

How did things get this way?

That Indian firms were slow to evolve from essentially a cost arbitrage model is too well known; indeed, they perfected the model of having a few client-facing engineers on-site with their clients while the bulk of the work got done at home in India, where costs were about 60 per cent less. Now, the swift march of automation, robotisation and machine learning, starting from around 2013, means work is no longer as people-intensive as it used to be.

The labour advantage had begun to shrink. When Infosys CEO Vishal Sikka wrote a New Year message to his staff from the Singapore Airlines lounge at Changi Airport, he noted that he was surrounded by at least five magazines that had artificial intelligence as cover themes. His note warned that a tidal wave of automation- and technology-fuelled transformation was "almost upon us" and that Infosys will not survive "if we remain in the constricted space of doing as we are told, depending solely on cost arbitrage, and working as reactive problem-solvers".

Other factors were at play as well.

For instance, within many companies, IT-buying had begun to shift from the technology office to people who owned responsibility for the profitability of business units such as sales and marketing, as these functions began to use more and more digital technology. Many Indian companies failed to grasp this trend quickly enough and were inadequately prepared. They also did not have enough people who could talk to CEOs running the transformation.

CASH PILES

Besides, they had not moved fast enough in acquiring the technologies they did not possess in-house, particularly in the digital space. Many companies, therefore, are sitting on huge cash piles - fruits of corporate victories past that, unless well spent, do not mean much for the future. Infosys, for instance, has a hoard of some US$5 billion. It is said to be considering a share buyback, following in the footsteps of Cognizant and TCS, who too are buying back shares from the market. Since this is a manoeuvre usually executed to arrest a slide in share prices, the signals it sends out are not healthy ones.

Still, fear of getting left behind could be spurring things, especially in the top dozen companies. Yesterday, Cognizant, last year's laggard, announced it had bought Japanese firm Brilliant Service Co, which specialises in digital strategy, product design and engineering, and the Internet of Things.

To be sure, India's IT sector has faced down challenges before. As a people, they also are generally quick to adapt and innovate. Having done that with the Internet revolution, there is no reason to think they will not succeed in the digital era as well. Also, it is a fair point that some of the doubts gathering about the sector are because of the outsize expectations attached to it. Few industries that have a worldwide footprint can consistently expand at multiples of average global growth. The next two years - that's just about how little time they have - will show us how nimble the Indians have been. Should these companies fail to adapt, it will mean taking down the brightest feather in their topis.

That would be a pity, not just for the industry, but for wider India.

A version of this article appeared in the print edition of The Straits Times on March 03, 2017, with the headline 'Indian IT industry loses its swagger'. Print Edition | Subscribe