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Monday, September 15, 2003

Where is Gurgaon?

Gurgaon is a little village outside Delhi. It has no special significance, except for the fact that Indian journalist Arindam Banerji's sister lives there, and she likes to talk on the phone:

Three weeks ago, inappropriately early on a Wednesday morning, my sister called me. She lives in Gurgaon. She filled up most of the 45 minute call, with rants and complaints about the sad state of life in Gurgaon. Rampant construction of office buildings, traffic gone amuck and endless commutes were on her mind. Office space was at a premium and land was four times as expensive (some exaggeration, here) as a few years ago and worst of all, the new hires these days were making outrageous demands. Too many jobs and not enough qualified people and every day a new company, seemed to sprout up to hire away office workers. Worst of all, it seems the US returned guppies -- Gurgaon-yuppies, for those not in the know, were kicking the cost of living and prices through the veritable roof. So, these were the problems in Gurgaon, a little village outside Delhi, till recently.

All in one's stride till you consider what happened, later that afternoon. At about 1:30 pm that same day, I was supposed to pick up an old friend of mine for a quick lunch catch-up session. So, I drove up to his office in North First Street, San Jose. North First Street in San Jose is one of those mini-hubs of technology nirvana in Silicon Valley, much like Page Mill Road, in Palo Alto. The street and its immediate environs house the Who's Who of global technology companies. So, it struck me as odd, that when I walked into this office-space complex of about 14 large office buildings -- everything was eerily quiet. Countably few cars in the parking lot, no crowds of people milling between the offices, large signs of rent/lease lying around somewhat disinterestedly and that silence, again.

Remember, this was the same office complex that would have charged you $12.50 per square foot as rent till three years ago; where parking on the premises was impossible and in fact you had to walk almost a mile from alternate parking spaces. And the noise of people, traffic and endless construction would have driven a sane man batty. But, today there was just this eeriness about the place that I could not explain and office space was being given away for $0.50 per square foot.

The stark difference between my sister's picture of present-day Gurgaon and the forlorn presence of those office buildings in North First, can hardly be described. Then, it hit me. North First Street of '99 had given way to Gurgaon of 2003. The boom-town spirit of Silicon Valley had suddenly got up and moved from Northern California to a town in Northern India. The 'Gurgaon boom' had finally settled in. And, I haven't even started talking about Bangalore, Mohali, Kochi or Mangalore. The Gurgaon boom is today's snapshot of India, Inc. In fact, it's a good name for what's happening throughout corporate India, today. Ok! Ok! call it the Bangalore boom if you want -- but, the explosive nature of the boom, especially when compared to what's happening in Europe and the US, is cause enough to celebrate.
Source: Rediff.com

All of which prompts Arindam to an even more profound reflection about the future of India's Silicon Valleys. India needs good governance, sound infrastructure, a reigning-in of corruption, and diversification. One small quibble with the line he's pushing: the North First Street boom ocurred in the first flushes of a huge bubble associated with the infancy stage of a new technology, the ICT/Netscape cold fushion process. This technology is no longer in it's infancy. India's IT outsourcing boom is not speculative in the way the earlier NASDAQ was (which doesn't mean it is in no way speculative). India is now reaping the benefits which the US industry would have realised in a non-globalised age. This doesn't mean it cannot be undercut from below - as the Chinese outsourcing example shows - but it is on more solid ground. Also effective human capital attracts work like a magnet. Wage differentials are secondary. It is not like moving a garment factory out of China and into Vietnam to save wages. Skills are difficult to replicate. Of course, if you get as far out of line as the US differential then you're going to pay the price. But meantime, the guarantee of India's IT industry is quality, experience and the value placed on its precious human capital.

The warning signs in the Indian context may be different than what they were for the Silicon Valley boom, but they are there and are portents of things to come. In itself, this is not a death-knell, but just a sign of things India has to manage well. India's ability to manage this boom into the next phase will decide the long-term success of the economy.

The Next phase is coming: That this phase of unlimited growth will at some point end and will perhaps be replaced by one with intense competition perhaps from the Chinese, is already being seen. Business Week reports:

'India is a powerhouse in high-end IT services, latecomers these days must pay higher wages for experienced engineers. That's one reason Bearing Point chose Shanghai for its new software-development center, says the company's Greater China President, Bryan Huang. Bearing Point pays $500 a month for engineers in Shanghai. In India, he says, the pay would be $700, and $4,000 in the U.S. "Where can we sustain our cost advantage for the next 40 years?" Huang asks. "We're convinced that China is the only place."'

This trend is visible in manufacturing too. Once again, Business Week tells us:

'American manufacturing companies are discovering that cost advantage, too. Sweetheart Cup Co, an Owings Mills (Md) maker of plastic plates, cups, and utensils for customers such as McDonald's and Wendy's International, hired consultancy E5 Systems of Waltham, Mass, to develop a system to track production processes at its 14 North American factories. E5 is doing the job in Shenzhen, where it has a joint venture. Sweetheart figures it saves 40% by sourcing in China rather than India. In a business where pennies matter, "cost is a consideration in everything we do," says John McGregor.'

Nonetheless, most businesses, especially the large ones realize that the next phase will be here within the next 24 to 36 months, but are they taking the steps necessary to navigate it. Cost-cutting by moving to second tier cities in India and China is making India, Inc more competitive, but is it enough for survival when outsourcing gets far more competitive? Poor Decision Making and Investments: For burgeoning segments of the Indian industry, such as pharmaceuticals, a crippled reputation can be the death knell. The fact that 35% of the world's spurious drugs are made in India, is beginning to do serious damage to our reputation. But, consider what our decision makers have done in the last few weeks -- they've endlessly argued about Ayodhya, but cannot fit into their priorities, any discussion on economic catalysts or sink-holes. Ever hear of a parliament adjournment for the lack of infrastructure for our industries. Nope. But, truth is that the risks and inefficiencies in the path of India Inc are rarely the focus of our national decision makers. Risks, which can only be controlled through appropriate legislation and enforcement, are creeping into the system..............

This poor decision making is not limited to our political decision makers. Consider the leaders of some of our large conglomerates -- almost none of them have setup the kind of research facilities, that say, GE has built up in Bangalore. The result -- little forward thinking on creating high business value inventions gets done. Most of these conglomerates, you'll notice, have spent oodles of money on lavish campuses or office buildings, though. Priorities and decision making, once again.

The Gurgaon boom in a certain sense is an example of how India, Inc, or at least the IT and computer technology part, has put almost all its eggs in the basket of services outsourcing, where price differentials give it an edge. '"India's growth is being limited by one drug and that is the service drug," said Tushar Dave, co-founder and managing director of New Path Ventures LLC …India's IT industry must wean itself away from the "service drug" and seize the opportunity to design semiconductor chips with its large, talented and cheap labor pool, analysts said.'

Much like the dot-com-boom threw caution to the wind and relied only jazzy idea with no care for operational efficiencies, the Gurgaon boom seems to focus solely on operational efficiencies. Leaning too far on the other side, aren't we? Vinod Dham, the leader of Intel's Pentium team in the early 1990s, seems to recognize the need for Indian companies, to go beyond playing only the price-point or the low-cost engineering service games and getting into producing real Intellectual property. Dham puts his thoughts forward through a comparison: 'A company like Infosys was valued at six billion to $10 billion, compared to the 60 billion to 80 billion dollar price tag on Oracle. If we deliver a solution to the world instead of being told to deliver a particular solution then there will be a dramatic difference in the way we are being perceived.'

Now coming to governance -- in India, the issue is an acute decider of success. After all, for the most part, all that the GoI is supposed to do is to remove the shackles that have weighed down the Indian economy and then just get out of the way; letting the Indian citizens lead achieve true economic success. But, even in Karnataka, probably the best governed state in India, poor governance and infrastructure is slowly throttling growth. Indian Express reports:

'Bangalore is creaking under its own weight. Bangalore Metropolitan Transport Corporation buses move at a stately pace of 9 kmph through the city. In a city of 60 lakh (18 lakh of which is the floating population), there are 17 lakh vehicles, 11 lakh of them two-wheelers … 'For the past one year, he (Narayana Murthy) has been trying to convince the government to allow more Lufthansa flights out of Bangalore to promote business ties with Western Europe. ''But no one has bothered to reply. No one has even heard me as yet,'' he says ruefully. …

'"Firms in Karnataka are reported to face, on an average, daily power cuts of 2.4 hours. The average industrial production losses per unit outage is reported to be Rs 5, imposing substantial costs on the firms,'' says a World Bank report on Karnataka's power sector. Premji (of Wipro) recounts facing four black-outs in an hour-long meeting with a client. Clemons, the Wharton professor, saw 10 power cuts in a span of 35 minutes.' If these road bumps to growth are impeding Bangalore, think of the poor entrepreneur who is in the grasp of the state government of Bihar or perhaps, West Bengal. Scary, indeed!!

All this does not even talk about the high deficits that various state governments and the central government have racked up -- oh! yes, the same deficits that the World Bank keeps warning us about. So, the Gurgaon boom will have to demonstrate that it can handle the business innovation of outsourcing better than North First Street managed the innovation of the web. After all, our economic future depends upon it.
Source: Rediff.com

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