Seattle Times
Monday, August 09, 2004

India parlays education, timing into tech boom

By Brier Dudley
Technology reporter

BANGALORE, India — Back in 1981, Kris Gopalakrishnan practically begged government officials to let him and six pals buy a computer so they could start a software company in their apartment. Indian companies didn't make the machine the young engineers needed, and the government, wary of foreign businesses, placed burdensome restrictions and taxes on global trade.

It took two years to get the request approved, and Infosys finally bought its first computer — a midsize Data General.

These days, if Gopalakrishnan needed a new computer, he probably could ask the prime minister to hand-deliver it. This past April, he received personal attaboys from both the prime minister and the president when Infosys' annual sales broke $1 billion — a record for a publicly traded tech company in India.

"In a sense, it signifies the coming of age of the Indian IT industry, which contributes so much today to India's GDP, to our exports and to the image that India enjoys in the world," then-Prime Minister Shri Atal Behari Vajpayee said in his congratulatory note.

The story of Infosys helps illustrate how, in little more than 20 years, this young and impoverished nation grew an industry that has become the envy of the developing world — and the concern of U.S. tech workers who fear their jobs could move abroad.

It also helps explain how this formerly sleepy town emerged as the heart of India's Silicon Valley. Bangalore is home to several of the country's blue-chip tech companies, and to subsidiaries of most of the leading U.S. software and computer giants.

In an echo of 1990s Seattle and San Jose, it boasts sleek new restaurants, terrible traffic and stratospheric real-estate prices. Hotels and nightclubs are packed, and the locals wonder what happened to the slower-paced world of gardens and retirees they once knew.

"I tell people that for us, the culture shock has not really been so much from Redmond to Bangalore," says native Krish Srinivasan, a Microsoft manager who moved back last summer to work out of the company's new customer-support center. "It's really Bangalore 2003 compared to Bangalore in 1991, before economic reforms."

Microsoft occupies a midrise tower near the airport, next to buildings occupied by IBM and Dell. Not far away: Sun Microsystems, America Online, Google, Novell, Cisco, General Electric, Motorola, Hewlett-Packard, Texas Instruments and Intel.

Those American companies have helped boost the population of Bangalore by more than 70 percent over the past 20 years, to about 6.5 million.

Infosys alone hires about 6,000 people a year; last year, the number grew to 9,000.

India's MIT

School created as cornerstone for achieving India's goals

Bangalore's transformation was not born of chance and has seeds that were planted even before India won independence from Britain in 1947. Coincidentally, it was the dawn of the computing era; scientists were starting to build electric calculating machines, although personal computers were still 30 years away.

Indian leaders saw education and technology as the building blocks of their infant nation's future. The cornerstone would be a school, modeled on the Massachusetts Institute of Technology, to produce engineers, leaders and entrepreneurs.

In 1950, the Indian Institute of Technology (IIT) opened in a former prison where the British had once held revolutionaries. The elite institute has expanded to seven technology schools around the country and a companion network of management schools known as the Indian Institute of Management.

The IITs admit only 2 percent of the 200,000 annual applicants, giving them a cultlike aura in a nation that has long honored education. Admission is seen as a ticket to jobs or graduate schools overseas — and a ticket out of poverty; despite India's growing status in the world economy, only 403 million of its 1 billion residents are employed, and nearly 60 percent of those jobs are in agriculture, according to the 2001 India census.

Modern Indian leaders have nurtured what their predecessors started. When the tech industry boomed in the mid-1990s, the government increased enrollment at the IITs — 50 percent in the past seven years — in order to produce more tech workers.

Education investment

Grads leave country, but India hopes they'll eventually return

IIT Bombay sprawls through a lush, lakeside forest. Students slip off their shoes before stepping into air-conditioned computer labs sponsored by companies such as Intel.

India's federal government provides 70 percent of the school's annual budget directly. Government and industry research projects cover 20 percent, and the rest comes from tuition.

But the campus boasts new buildings paid for with donations from distinguished alumni — a testament to the school's success at churning out not only a technology work force but industry leaders. Among them: Infosys Chief Executive Nandan Nilekani and former Microsoft General Manager Vijay Vashee.

The investment in state-of-the-art education was not without risk, especially given India's pervasive poverty and staggering unemployment. And indeed, most of IIT's 4,000 annual graduates leave the country to find better jobs and pay than they can at home. Although opportunities are growing in India, about half of IIT Bombay's computer-science graduates in recent years left the country, mostly headed to the U.S. to work or attend graduate school.

The gamble was that, over time, India would not just grow a tech-savvy work force; it would cultivate an industry.

"They were supposed to provide leaders in engineering and technology, which has been done," says S.C. Lakkad, deputy director of IIT Bombay. "But the second part was these leaders in technology would be back in India; that has been partly done."

World market explodes

India positions itself to take advantage of high-tech boom

Gopalakrishnan threw in his lot with that gamble, and stayed home. Four of the seven Infosys founders attended IITs; Gopalakrishnan, now 48, graduated from IIT Chennai, on the coast east of Bangalore. All had doubts about starting a software company in 1980s India.

"In 1989 we almost decided to give up," Gopalakrishnan says. "All of our friends were doing so well — they had houses and cars, and we had nothing to show for all the hard work we'd done.

"But we decided to give it another three years. Luckily for us, in 1991, the economy opened up and the government policies were much more conducive."

The world market for technology was exploding. India, poised to take advantage of that timing, made its first major step toward globalization, reducing trade tariffs and red tape and setting aside land for industrial parks.

Infosys established its headquarters at one of them, in Bangalore, on a Microsoft-style campus, where 7,000 workers tap away in 35 low buildings spread around lavish gardens and a small golf course. Visiting dignitaries have planted trees on the grounds. A bull bay, planted by Bill Gates in 2002, stands near a white murdah that Robert Black, the U.S. ambassador to India, planted the same year. Not far away are trees placed by British Prime Minister Tony Blair and Michael Dell, whose college enterprise grew into the Dell computing giant.

Inside, employees enjoy a billiard hall, gymnasium and dining halls open to the tropical climate.

They develop custom software and design information-technology systems, working in four-person cubicles, window shades drawn against the searing sun. Their primary clients are U.S. companies; Nordstrom hired Infosys to develop the system that supports its financial and inventory-tracking operations.

A key selling point is cost. Infosys pays its engineers about $400 a month in Bangalore — a tenth of what comparable U.S. jobs pay — so it can charge clients less for its services.

The price advantage is working for the company and its employees. As of March 31, Infosys had 25,634 employees worldwide. Most work at similarly luxurious campuses across India, including one across the street from Microsoft's new development center in Hyderabad. And while $400 a month is a poverty-level wage by U.S. standards, in India it is impressive: The average Indian lives on $470 a year.

Infosys, which listed its stock on Nasdaq in 1999, was the first Indian company to grant employee stock options; many workers have cashed them into relative wealth. Late-model cars wind bumper to bumper through the campus roads — something unimaginable a few years ago. Software engineers in their 20s are buying houses — something their parents felt lucky to do by their 40s.

The company is also expanding its global footprint. It's opening a software-development center in China, where it can serve Japanese and Korean customers, and an operation in the Czech Republic for customers in Germany and elsewhere in Europe.

The company is also expanding in the U.S. with a large center in Fremont, Calif. In April, it announced plans to invest up to $20 million in a new consulting subsidiary in Texas.

Americans arrive

India offers infrastructure, tax breaks, well-trained workers

After India's independence, the country's first prime minister, Jawaharlal Nehru, called Bangalore the "city of the future." The government located its aerospace company and defense research laboratories there, providing the base for its shift toward computer technology.

Citibank had established the first American high-tech beachhead in India in 1985, with a software subsidiary in Bombay. Two years later, Texas Instruments opened a software-development center in Bangalore, followed by Hewlett-Packard in 1989.

Texas Instruments established a satellite link between Bangalore and its Dallas headquarters and shared that link with other companies. That opened a path for Indian companies to do data entry and basic programming for overseas clients. Rather than send software programmers to work at client facilities, or mail computer tapes back and forth, Indian tech workers could just jump on the Internet.

Again, the timing was perfect. U.S. companies were desperate to meet the growing demands of new, technology-based systems; Indian workers and vendors stepped in with ready-to-go expertise.

Sharing the English language was a plus, although accents and cultural differences can complicate transactions. The 12½-hour time difference from the West Coast to India also proved an advantage: Indian tech workers are on the job during what is night in the U.S., thus extending the productive work day to 24 hours.

As demand for services grew, India kept pace by improving its power and communications infrastructure, especially to serve dedicated technology parks, such as Bangalore's Electronic City and Hyderabad's Hitec City.

Infrastructure led the way to tax breaks and other financial incentives to lure tech companies. For example, companies that locate in Hyderabad's designated technology parks are exempt from zoning and pollution regulations and receive discounted electricity rates and a 50 percent reduction in lease taxes and business-registration fees.

The state of Andhra Pradesh, which includes Hyderabad, also gives companies a $400 rebate in land prices for every job created, and offers grants of up to $40,000 to offset construction costs.

Lure of outsourcing

Practice grows in U.S., as does controversy surrounding it

As Infosys and other Indian software companies were coming into their own, the U.S. had already developed a long track record of outsourcing work.

Work peripheral to companies' operations — from transportation to janitorial services — had been contracted to outside vendors for decades. Throughout the 1990s, business giants such as General Electric's Jack Welch and management guru Tom Peters trumpeted the value of "focusing on core competencies" and farming out everything else.

So when U.S. companies started spending on technology as they started to recover from the 2001 economic slump, India was again poised to step into the void.

Gartner, a consulting and research company in Stamford, Conn., estimates that 80 percent of U.S. companies are considering whether to outsource technology work. Through 2004, about half are expected to increase their use of outsourcing by up to 30 percent.

At a Gartner seminar on outsourcing in Seattle last year, the attendees were a who's who of the region's public companies: Microsoft, Paccar, Safeco and AT&T Wireless.

Governments, too, have embraced outsourcing, both foreign and domestic, as a way to privatize, streamline and lower costs.

But the practice has become as controversial as it is common, especially as the U.S. — and particularly the Pacific Northwest — tries to turn the corner on a struggling economy and stubborn unemployment rates.

Unemployment among computer professionals hit a record high of 5.2 percent last year in the U.S., while electrical-engineering unemployment rose to 6.2 percent, according to the Institute of Electrical and Electronic Engineers, a trade group critical of outsourcing and its effect on U.S. jobs.

State outsources, too

Official says government seeks "best value" for tax dollars

Labor groups pounced on Washington state last winter for hiring two companies using Indian labor for technology projects. One instance involved a $25 million contract with IBM to develop a tracking system for the Department of Corrections that the labor groups alleged would be done by IBM workers in India. The other, a $3 million contract to develop a Web page to administer Department of Social and Health Services benefits, went to Texas-based HealthAxis and Hyderabad's Satyam Computer Services.

"You have state departments that are letting out contracts that are flowing to offshore vendors and the work is being done in India — that's displacing not only Washington jobs but U.S. jobs," says Marcus Courtney, president of the Washington Alliance of Technology Workers, a Seattle-based organizing unit of the Communications Workers of America.

State officials say the contracts went to the lowest bidders. "We go after the best value for the taxpayers' dollar to do the development work," says Roy Lum, deputy director of the state Department of Information Services.

And the 2004 Legislature spurned proposals that would have prohibited the use of foreign labor on state services contracts. Even if approved, such attempts might not have the intended result: Indian companies could still bid on contracts and do the work at their U.S. offices, and the Washington proposal still would have allowed state work to be done by foreign workers in the U.S. with short-term work visas.

While labor groups suggest India and other emerging markets are permanently taking jobs, business groups argue that outsourcing lowers their costs and enables them to create jobs in the U.S. while keeping the price of consumer goods down. They contend that if U.S. companies don't take advantage of global markets, they will lose business to companies that do.

"If you go for a protectionist response, that's going to compound the problem of adjustment because we are a highly integrated international economy," says Jagdish Bhagwati, a Columbia University professor and economist. "We are the biggest traders in the world. We're in competition with countries like Britain. If they outsource to buy cheaper services and we are not allowed to by protectionist policies, we will lose out in the international competition."

But the backlash against outsourcing is being felt in India. At Infosys, some projects have been delayed by U.S. customers who don't want to invite further controversy, Gopalakrishnan says.

"We are sensitive, because losing [a] job is a difficult thing," he says. "But I think it's really driven by macroeconomic factors, more than any individual company's influence. Globalization is here to stay; everybody's looking at the most efficient way to provide products or services. Consumers and customers are demanding the lower costs."

He says it's important to look at the bigger picture: India's middle class has tripled — from 100 million to about 300 million — in the past 15 years.

"All these are new consumers and people who buy stuff," he says. "Look at the most popular drink in India — Pepsi or Coke. All the cars are now imported."

And he notes that concern about globalization cuts both ways. A recent proposal to import U.S. seeds to India was opposed because, in a country that is 70 percent agricultural, there were fears that India would become dependent on the United States.