IBM vs. Tata: Who's More American?
Quick quiz: Which company is more "American"—Mumbai-based Tata Consultancy Services, or Armonk (N.Y.)-based IBM (IBM)? Evaluate the two based on where they make their sales, and the answer is surprising. TCS, India's largest tech-services company, collected 51% of its revenues in North America last quarter, while 65% of IBM's were overseas.
This juxtaposition helps explain investor reaction to the companies' most recent earnings reports. TCS stock declined by more than 10% on Apr. 21 after it reported that earnings for its fourth fiscal quarter fell short of expectations. IBM, by contrast, beat estimates on Apr. 16. Its stock is up 3% since then and 25% since mid-February.
"No Slackening of Demand"
A tale of two strategies is playing out amid shifting global economic conditions. TCS, like the other top Indian tech-services outfits, has long focused on big American and British corporations. Now that the U.S. is slipping into a recession, the Indian companies are vulnerable. TCS, though, insists its financial shortfall doesn't signal a fundamental weakness. It says a handful of U.S. clients canceled expansion plans in the fourth quarter, and the company agreed to defer payments by two big customers. "There's no slackening of demand," says N. Chandrasekaran, the company's chief operating officer. "The pipeline is good. We just had some specific situations."
IBM's strong results stem from a strategy of diversifying into emerging markets by its services business, which represents about half of overall revenues. Chief Financial Officer Mark Loughridge says IBM has a two-track approach: In the U.S., where clients are economizing, it helps them cut costs, while in emerging markets, it helps customers build out their technology infrastructure.
In India, where IBM is now the No. 1 seller of technology services, its revenues grew 41% last quarter."Our success starts with how global we are, which is intentional," says Virginia M. Rometty, who runs global business services for IBM.
IBM and Accenture: Setting the Bar?
TCS is the most geographically diversified of the top Indian tech-�services companies. Others rely on the U.S. for 60% to 70% of sales, and all are scrambling to broaden their business. TCS, which last year set up a unit targeting emerging markets, saw revenues increase 40% there in the past fiscal year. Infosys Technologies (INFY), India's No. 2 services player, on Apr. 15 warned that it might face a slowdown in demand. It, too, has launched an initiative aimed at China, India, Latin America, and the Middle East. Kris Gopalakrishnan, the company's chief executive, cautions that Infosys is playing catch-up with the likes of IBM and Accenture (ACN). "It will take three years to make a significant difference to our revenues," he says.
Meanwhile, the Indian companies aren't in a terrible spot; after all, their services are designed to help clients simplify their businesses and save money. Until the U.S. economy pulls out of the doldrums, though, they will have to sell more aggressively and plan carefully so they don't end up with too many employees, which would pinch margins.