Where to Next for India?

The country's talented workforce has made it a global IT challenger. Now, it's time for domestic successes as well as export-focused triumphs

It's no secret that India presents multiple challenges for business—the logistics, overwhelming bureaucracy, official corruption, and leftist political influences. Which is why scores of people often wonder if it is even worth the effort. But from what we can see, the vast majority of the global Fortune 1000 companies agree that India is indeed worth the effort.

When the problems you are attacking and opportunities you are chasing match what India can provide, we also believe India is worth the effort. We estimate that as the largest IT services provider, India will add 15,000 to 30,000 employees annually, on average, for the next several years in anticipation of continued rapid growth in global demand.

Until recently the Indian IT industry has been the story of the widely differing fortunes of two cousins—the export cousin and the domestic cousin. The former has been fabulously successful and richly applauded throughout the nation. The latter has been regarded as backward and hardly worth the bother.

Now, an IT Leader

This perception is largely because of differences in the success enjoyed by the export and domestic sectors of the industry. India's total exports of IT services—dominated by domestic companies, not foreign-controlled subsidiaries—were worth $21 billion in 2005. In comparison, India's domestic market for IT services was worth an estimated $2.7 billion that same year—which is minuscule compared with 2005 IT services spending in other countries in the region such as Japan ($83 billion), Australia ($12.1 billion), and even China ($4.5 billion).

The intensive activity that supports an export-focused industry has distorting effects across India's economy: It changes the focus of local IT firms; it influences government policy (such as incentives and the establishment of software technology parks); and it hampers the ability of non-exporting local employers to find and retain quality staff.

In the early 1990s, the export side of the Indian IT industry got its big break when U.S. companies began hiring large numbers of skilled systems analysts and computer programmers. Demand for Indian companies' staff in the U.S. was driven to frenzied levels by three factors: concern about the millennium bug, the dot-com boom, and a corporate craze for enterprise resource-planning software. It is only within the past five or six years that India's IT industry was transformed from a source of labor for hire to the formidable leader in IT services it is today. Many Indian companies are not letting the grass grow under their feet.

Local Partnerships

Three works-in-progress serve to demonstrate the opportunities for foreign companies, for the domestic industry, and for the export industry. U.S.-based Intel (INTC)—which already employs 3,000 Indians at its Bangalore research and development center—has invested $250 million in a partnership with local manufacturer Xenitis Infotech to manufacture low-cost computers priced at $250—the cheapest machine for sale with an Intel chip. The target market is rural areas within India.

Domestically, Bharti Tele-Ventures continues to grow in innovative and unexpected ways. Bharti and IBM (IBM) are establishing an IT services business that seeks business from domestic customers.

Looking at the export side, all major Indian IT outsourcers have established beachhead offices in China, with a view to leveraging their IT services skills, not just in China but also in the more insular Korean and Japanese markets.

Great Global Potential

These examples illustrate that Indian companies can innovate, build capacity in areas not generally seen as a strength, and be aggressive in expanding—beyond a predominantly U.S. focus—into Asian markets.

These kinds of talents have put Indian companies on the threshold of what we believe could develop into one of the great economic success stories of the pan-Asian region: the great global potential of India and China together, combining the world's IT services powerhouse with the world's factory.

Anyone doubting India's capacity to play its part need only consider the source of its IT industry. In 1996, India's exports of IT services were worth about $1 million. In 2004, they were worth $13 billion. In 2000, India's share of business process outsourcing (BPO) was worth $148 million. In 2004 it was worth $3.5 billion. Any student of business knows what those kinds of growth rates mean: disruptive, challenging forces that can unseat rivals and destroy business plans.

First Steps for Building a "Chindia" Plan

These days, you must have a China strategy and an India strategy. It is essential to monitor how China and India create alliances in specific markets, alliances under what is coming to be known as the "Chindia bloc." The first signs are already clear in IT services, in automotive components, and in a few other sectors.

Increasingly, China and India will be the dominant economic stories on the world stage, a trend that may well extend through most of the 21st century. Despite mounting stakes, however, the quality of information, research, and advice on how to make key decisions related to China and India is uneven. Executives and managers need a comprehensive view not only for understanding China and India, separately as well as together, but also for gauging future threats to and opportunities for enterprise.

There are a number of important points business leaders should consider in effective decision-making:

•Accurate information on the current state of global IT competitiveness in India and China for their internal markets.

•A set of realistic scenarios that explores not only the possibility of continued rapid economic growth in India and China but also potential social, political, or other disruptions to these economies.

•A series of milestones that define pivotal issues in each scenario and of signposts that over time point to milestone outcomes to help determine when and where to invest, cooperate, compete, analyze, or ignore these countries.

Looking Ahead

The economic futures of China and India, of China and India together, and indeed of China's and India's future impact on the global economy leave many unanswered questions. Can innovation be outsourced? Is it possible to compete in Asian markets without piracy of intellectual property draining away the opportunities? Will China's and India's mounting successes in world markets create a protectionist backlash among developed economies?

The answers to these questions may well be among the most important for setting the long-term course and success of our enterprise. How you pursue them will certainly shape the quality and insight of what you find. China and India will continue to play a role in the future of technology and innovation whether large or small. For any business, working out the best way to partake in this future will be the key to success.

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