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India has to move up the Value Chain

By | Ramesh Ranjan | Editor www.humanengineers.com

The integration of new players in the global economy challenges existing comparative advantages and the competitiveness of countries, forcing them to search for new activities in which they can excel and confront competition. The main drive is for countries to move up the value chain and become more specialised in knowledge-intensive, high-value-added activities. Specialising in more traditional cost-based industries & activities is no longer a viable option for most countries.

True to it, Indian IT companies are at an interesting intersection and in a major dilemma. For too long, we leveraged  Cost arbitrage as the only trump card for success and built huge markets for ourselves overseas.  No doubt the  IT industry played a key role in putting India on the global economic map, thanks largely to Narayan Murthy and the likes that followed. But, how long can we bank on this trump card alone. The question uppermost on the industry leaders’ lips is how to move away from linearity — where growth is inextricably linked to the number of bodies (no wonder the term “body shoping”/headcount — to a more non-linear model which thrives on adding strategic value to the customers .

In the current scenario, Indian Software companies are faced with competition from low-cost countries.  Inefficiencies and high costs have crept in these Indian companies largely due to unwieldy growth in head count and other fixed costs.  Suddenly they are no longer competitive at the Bottom of the Value Chain Pyramid.

Customers are asking “Are you willing to provide me with more value-added services so that we can work as partners, rather than deploy number of employees who can churn out 1000 lines of code at the cheapest rate?”.  This is the new language that customers  are beginning to speak and forcing the way they conduct their businesses or engage with their Indian Vendors.

For long, Indian organisations have talked about ‘moving up the value chain’ as a way of enhancing their service offerings, protecting their dominant market share and increasing their opportunities for profitability.

The last decade has brought enormous changes to the Indian IT industry. The high corporate IT spending of the late 90’s, fuelled by global investments in IT – hardware and software to cope with Y2K issues, and later the dot.com bubble, created important markets for Indian companies to thrive. Initially these companies focussed on low cost, high quality labour and leveraged the Time Zone advantage for delivery. This strategy has since become unsustainable any more, as the inevitable pressure from alternative low-cost, high-quality labour markets such as Russia, the Philippines and China increases. With nearly 6 percent of India’s GDP accounted for by this industry, the pressure is on to change strategy.

Concurrent with their successful growth over the last decade, Indian companies  like Infosys, WIPRO, TCS, Cognizant etc. aware of the long-term problem of relying solely on a low cost/high quality advantage, have sought to move up the value chain, into higher value-added work as a solution.

MoveupValue
Source : https://goo.gl/fNf6b7

These companies are desperately trying to move from low value-add services like software maintenance , IT Infrastructure management or call centres, to increasingly higher value-added services such as systems integration, product development, R&D, market entry and consulting services. Such services enable vendors to take on increasingly partnership-like, strategic roles with their customers instead of being seen as mere body shoppers.

They are desperately trying to change the perception from being mere “coders” to “business architects”.

The rhetoric of moving up the value chain has been persuasive as well as prolific, but whats the ground reality. What does it mean to move up the value chain and how successful have Indian companies been in making this crucial shift?

The latest rounds of Quarterly results of the IT Companies – Infosys, WIPRO etc is not encouraging. This reinforces that the honey moon is over.

The Presidential Race in the US is adding to our woes. No one is sure what the Policy stand is of the two Presidential candidates – Hillary Clinton & Donald Trump. We are hearing numerous voices and with divergent views about opening up of the Job Market in the US. Should they continue to encourage low cost countries to flood their market with cheap labour or should they protect their turfs and offer these jobs to local Americans. How much H1B Visas should be permitted and under what terms. What about Naturalisation / Citizenship etc.

This is going to have a great impact on the future of our IT Organisations who are largely dependant on Export Markets and its beginning to show on their balance sheets. Its also beginning to show on the Job Market in India. No longer are these companies going to the Campuses and hiring in droves. The latest Campus Hiring reports suggest that there is only 50% of Students who are placed in reputed Engineering / B Schools. One can imagine the plight of other colleges. There is a huge drop in Campus hiring.

The IT Companies are themselves to blame. In order to outshine each other some of them pitched high salaries at the Campuses. When Infosys, TCS, WIPRO were offering around Rs.2.4 -3 lakhs per annum, there were organisations offering  Rs6, 9, 13 lakhs are Start salaries. Suddenly every campus grad wanted to join a Start Up. The honey moon didn’t last long. Soon the funding in these start-up’s dried up and when faced with the reality, soon started downsizing, right sizing and deferring offers & joining dates in the Campuses. But the damage has been done.

Every one agrees and the recent report on Employability of the College Graduates, said that 93% of these College Graduates are not employable ie. Industry ready. Organisations had to spend huge amounts of time, money & effort to make them employable at their own costs only to see flight of these trained graduates to competition. Attrition hurts and is really hurting the Indian organisation & its image.

However with the  advent of digital technologies its  having a profound impact on reshaping the $118-billion Indian IT industry and challenging conventional business models based on labor arbitrage. Disruptive technologies such as social, mobile, cloud, analytics and emerging technologies have presented the firms with an opportunity to invent and incubate new products and  services that can help customers change their business drastically. Offcourse, there is an added urgency to innovate.

Companies are making heavy investments in training the workforce. For instance, Infosys is training its engineers in design thinking, it is training sales teams to sell non-linear services. Companies are investing in building out infrastructure such as digital labs,” said Sundararaman Viswanathan, associate director at consulting firm, Zinnov.

Now organisations are waking up. Vishal Sikka, Infosys CEO is now talking up automating the jobs at the lower end of the Value Chain Pyramid. Coding, Testing can be done by Robots at a more affordable price, high quality, highly predictive & reliable and with zero-attrition.

WIPRO was the first to outsource their R&D and throw it open to the US Markets and thus grew the concept of India Delivery Centre.  They are once again starting to focus on their R&D capabilities than just the coding & testing, which they too are planning to automate.

There is a silver lining out there. There are many success stories of Indian companies innovating:

  1. UNIQUE IDENTIFICATION AUTHORITY– For amassing a trove of biometric identification to activate benefits for millions of Indians.
  2. ZIPDIAL -For dialing into the very Indian “missed call” money-saving tactic.
  3. INNOZ – For bringing the Internet to India’s vast underconnected masses.
  4. GOONJ – For galvanizing a behavior shift in urban India to care for those in need.
  5. ERAM SCIENTIFIC SOLUTIONS – For improving the country’s mess of a public-toilet network.
  6. MITRA BIOTECH -For rethinking conventional cancer drug therapies by applying data analytics.
  7. INTERVIEWSTREET – For leveling the playing ground for coders all over the world
  8. MYDENTIST – For putting smiles on thousands of faces with a Starbucks-inspired chain of dental offices.
  9. OLACABS – For smoothing the journey of India’s growing but scrappy car rental market.
  10. CLOUDNINE – For delivering world-class services and health care to expectant mothers

Source : http://www.fastcompany.com/most-innovative-companies/2014/industry/india

Offcourse we have many other examples like UBER – accepting cash, Cash on Delivery by Amazon and other innovations in the logistics space, Portea, Practo, Oya Rooms, etc.

I used to work for a large IT Infrastructure company and it used to be a world leader in UPS, IT Infrastructure & Data Centre solutions.  Way back in the 90s after India opened up its economy, the US Company set up a manufacturing plant in Bangalore India for manufacture of its UPS. They quickly converted a garment manufacturing industrial shed into a makeshift electronics assembly plant. Over time, they become the leading exporter of Electronics Manufacturing in the Country and for years used to be the winner of the Countrys Highest Exporter Award from the Government of India.  Every day a train runs from Bangalore to Chennai with 24 containers to be shipped from Chennai every day. Such was their scale of operations.

Uninterruptible power supply
Uninterruptible power supply

When they first started the UPS operations, the cost of labour on the shop floor would be Rs.3000/- per month. Most of them were Trainees or Contract Labour. They have stuck to this model even to this day and kept their costs down.

The UPS would cost around 28 USD for manufacture. However as time progressed the input cost began to rise due to increase in labour rates & other fixed costs (rent, electricity, taxes, inflation etc) while the cost of finished goods was either static or coming down.

The Global Supply Chain head and his Indian Operations Head were very smart. They moved this UPS low cost product manufacturing to Phillipines and then they outsourced to a local company in Phillipines. With the same infrastructure & labour, they replaced the production line which used to assemble a 35 USD product  with a 100,000 USD product. They move production of 3 Phase Industrial UPS product from France to India. It used to cost around 100,000 Euros to manufacture this product in France and they moved it to India and the Indian operations were able to produce the same for around 60,000 Euros. It was not just because of Labour Arbitrage, they re-engineered the design, localised a lot of the parts in India with Indian vendors and also sourced many of the components from India and the Asia pacific region at a cheaper rate from Europe. Truly an example of JUGAAD.

So what the Indian Operations Head did was to move up the Value Chain and replace low cost products out of India and replace them with Higher Cost product. Suddenly the labor cost per unit from about 15% dropped drastically to less than 1 %. It also helped in lowering the costs in other products being manufactured.

So it is about time that Indian organisations move up the value chain pyramid if not for any thing else but to protect their own interests. Companies have to invest more in R&D, in its Human Capital- training its people, changing their mindset, adopt more non-linear strategies for growth.

It has to focus on innovation & moving up the value chain in these Key Areas :

  • Technology
  • Manufacturing
  • Services
  • Education
  • Agriculture
  • Social Responsibility

It has to partner and work closely with the Government, the Academia and its customers in co-creating Products & Services and significantly add value to all its stake holders.

“No Single ‘Earth Shaking’ Invention From India In The Last 60 Years”, Says Narayana Murthy -IT czar (Ex. promoter and founder of Infosys)

Will India and its Corporates rise to prove this wrong and break away from this legacy, only time will tell….


RanjanLRamesh Ranjan is the Founder & Chief Editor of Human Engineers  an organization being formed to help Organization’s to “make the most of its People” and co-creating value thro’  People”.  He is a CEO / Leadership Coach, Mentor for Startups, Blogger & a Speaker.

In a career spanning nearly 3 decades, he has been Head of HR and held leadership positions in India & globally in organisations like Schneider Electric India, American Power Conversion (APC), Chevron Texaco/Caltex India, Praxair India, Co Systems India, Indian Herbs & ITI. He was the Honorary Secretary of the National HRD Network, Bangalore Chapter – 2000-2002, Cluster Lead – NHRD Bangalore Chapter (Whitefield & ORR) in 2014 and currently the Vice President – NHRD Bangalore Chapter. In the past, he was the member of the India HR Council of the AMCHAM, New Delhi, Panelist on the Roundtable of HR Directors of Petroleum Companies, ISP Mumbai and Member of the India HR Council of Conference Board.

He strongly believes that HR is not for faint hearted professionals. He believes that “when the going gets tough, the tough gets going” and can be reached at rameshranjan@humanengineers.com

 

 

 

 

 

 

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