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Responding to India's looming crisis in IT sector

Publication Date : 25-07-2012

 

In the general gloom concerning India’s dramatic economic slowdown, scant attention is paid to the challenge confronting India's cherished IT industry.

As a global centre for software development, India is under serious threat from countries like China, Romania and the Philippines, who are taking over an ever-larger share of the international services sourcing market.

The companies, that had started the Indian services boom, are still doing very well; they have evolved into multi-national corporations and are experiencing their fastest growth outside the country. Tata Consultancy Services has more than 65 overseas offices, while Wipro is planning to hire 50 per cent of employees for its global IT services outside India by 2015.

Such companies do not face problems, but it is India as a centre for IT business that is suffering. After two decades of substantial growth, a slowdown in the services sector would come as a complete surprise and there is hardly any strategy to combat loss of market share. Just doing the same thing as everyone else, but a little cheaper, was never a viable long-term strategy, and the success achieved over the past years has created a false sense of security.

The few solutions being contemplated in fact suggest a superficial appreciation of the problem. The most persistent argument is that India suffers from the lack of development of new software products. This may sound eminently reasonable: after all, products, once developed, have the potential of being installed and sold repeatedly, and products with a "Made in India" label may appear an attractive way of escaping the looming crisis.

However, a closer look at the product sector belies such hopes. There are good reasons why India has never specialised in software products. Product development requires a much longer period of sustained funding than a service-oriented business model.

The development of a successful software product could take years before it can be sold, and there is a dearth of Indian venture capital for such high-risk enterprises. In addition, there is a severe lack of skilled personnel for such activity. Having concentrated on services, India has a reservoir of manpower for application development, but not for creating a product. Indian experience in global marketing of software products is negligible, and research in India on the potential for software products is minimal.

While it may be desirable, and even necessary, to overcome the above limitations, the switch from services to products would no longer be a sufficient step forward for the Indian IT industry in the present global scenario.

Products are no longer of central interest, not even the latest Google Lexus  and Microsoft’s Surface. Product creation is far from being a total solution because we no longer live in a product era. Even Microsoft, a company nearly synonymous with software product development, is struggling to adapt to contemporary trends.

It has now launched Office 365, an alternative to the famous Office package, which was being locally installed for two decades and is now running remotely on a server. Office 365 is not sold as a product but rented to customers as a service. The Indian software service sector should not ape outdated business models of the last century, but look at where profitability is now located.

The prevailing trend in the knowledge industry is to sell a service rather than a self-standing product. An ever-larger share of revenue is earned through pure know-how. In the most basic version, know-how on consumer preferences is used for targeted advertisements, including political campaigns in the USA first perfected by Barack Obama in his 2008 campaign. When using the free platforms of companies like Google or Facebook, the customer should keep in mind that he or she is the product being sold: the real asset of these platforms is their millions of customers with idiosyncratic profiles who can later be specifically targetted with advertisements for other businesses.

Even the creation of consumer profiles may soon become only a small portion of the huge knowledge market that is taking shape.

Not so long ago, people visited shops to purchase books, and movies were seen in cinemas or on TV, or later purchased on VHS, VCD and DVD. Music made the transformation from vinyl records to tapes to CDs. Today, all these products are sold digitally online with Apple’s itunes, Amazon’s Marketplace or Microsoft’s Zune. We now accept that we are only paying for a service providing the movie, game or book. The multinational corporates are creating their own digital universes, and the knowledge industry is impacting not only on distribution, but on our consumer methods and habits.

The hardware and the software of the devices of Microsoft, Google, Apple and Amazon have become completely secondary. Google took over Motorola for several billion dollars, not because of its factories and mobile devices, but to gain possession of Motorola’s patents. This was a move to protect the Android OS, Android being the key for reaching more potential customers. Microsoft became rich by developing and selling operating systems, but Android today comes totally free.

The question to be pondered over is India’s positioning in the global knowledge industry today. From a commercial point of view, India is a leading service nation, but it is, for better or worse, our call centres that come to mind when the term ‘services’ is used here.

Future directions in the knowledge industry have been foreshadowed for some time but awareness by itself does not lead to action. India is not alone in missing out on the latest developments: European business entities have also failed to secure their share in the rapidly booming knowledge market. India and Europe are still in the mindset of the pre-knowledge industry era. Both regions are restrictive and protective in the IT sectors, whereas the Americans have less of a problem in allowing huge corporations like Amazon or Apple to overhaul the whole traditional publishing business.

Of course, because  all  such  companies  are US-based, there are also political considerations at play. American firms continue to push the frontiers of innovation, and the latest software is highly profitable as long as it continues to evolve.

In the USA, there is strong legal protection for intellectual property, combined with ready availability of venture capital--companies backed by such capital today account for 11 per cent of private sector jobs. The fully wired and mobile global economy is a reality, and US companies are at the forefront of making it work.

In India the burning desire to produce something original and innovative is missing. Indian start-ups in the IT field find it very difficult to attract the right talent, as the majority of young engineers prefer to work with established brand names.

One of the main reasons for Silicon Valley to become the global hub of technological innovation was because it offered enthusiasts an environment in which to flourish, and Microsoft and Apple are not the only two companies that started production in garages. But for Indians, joining a start-up and building something from scratch is not the chosen career option; they prefer the comfort-level of the seemingly secure outsourcing services. But copying services at lower costs should be recognised as a dead end, and when the cost advantage no longer exists, only visionary ideas that compete on a global level will provide for survival and growth in this industry.

The knowledge industry, first envisaged more than half a century ago, is now an actuality, and it is this that must offer the solution to the emerging crisis for India. Over the centuries, value was created in agriculture, then in manufacturing, then in more and more complex and even solely digital products, and finally in pure services. Now the locus of value creation is again shifting, and if India wants to continue the profitable growth of its IT sector, it must create an environment where a new entrepreneurial spirit can flourish and helps to increase our share of the monetisation of the global knowledge business.

To continue as a global centre for software development, India cannot escape the logic of technological Darwinianism--adapt to the evolving circumstances or become obsolete.

The writers are respectively the owner of netzrezepte.de, an IT company in Kolkata, and India’s former Foreign Secretary

 

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