Thursday, July 31, 2014

Pelsmin Guest Post: The Paradox of India

Frequent commenter/long-time reader Pelsmin is visiting India, and shared these thoughts.  More below the fold...

THE PARADOX OF INDIA

This week I visited Bangalore to tour facilities of my new employer, an outsourcing engineering firm with most of our employees based in India. Companies use us to develop technology better, cheaper and faster.

When President Obama rails against un-patriotic American companies “outsourcing” their work, he’s referring to our customers. And incidentally, he means “offshoring.” Outsourcing is the completely un-objectionable process of allowing another firm, possibly based across the street, to handle non-core business activities. Peter Drucker championed the concept half a century ago and it has led to vast improvements in competitiveness and productivity, and countless American job gains.

 Offshoring can be done without outsourcing, by changing the location of a company’s own employees to India, and outsourcing can be done without offshoring, by transferring work from your own employees to more productive labor situated in the US. They may originate from another country. Think H1 visa.

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Outsourcing is good for business and for society. Offshoring is…even better. It became clear after only a week of touring the labs that no company in the world can compete without taking advantage of the bizarre ecosystem in India. I don’t just mean technology companies. I mean any company that uses technology. Cisco. JP Morgan. Lego. Marie Callander Frozen Dinners. Any company that uses an internal IT system, markets through social media, tracks deliveries of its own products, can’t survive for long if they are not there.

Looking around the city from our office, you see the names on the towers: Cisco, Samsung, Alcatel Lucent, Google. But you don’t see other names. There wasn’t a Nortel facility. I didn’t see the Tandy Tower. Westinghouse wasn’t hiring. As recently as a few years ago these companies were leading the market, unstoppable. They joined the junkpile of companies who blew an insurmountable technology lead, sometimes in only a couple of years.

 What became clear to me was today’s frantic pace of technology development and the razor’s margin separating the winners from the losers. Anyone who isn’t drawing on the massive advantages of tapping Indian engineers isn’t in the game, and even then, they need to do it well to survive.

  My first exposure to Indian business and technical talent came in business school, where it was the Indian students who ruined the curve for the rest of us. But they were among the very few who had the family resources or the sheer audacity to get themselves to the US to compete in our market. For every one of them, there were…thousands just as sharp, coming out of the Indian engineering programs and remaining in India. Separate them from the cost demands of living in the US ($260,000 for a masters in EE, $2,000/month for rent, $3,000 for the custom wheels on your BMW) and you have people with a top-notch technical mind, a low cost basis and no student loans (tuition just doubled at India Institute of Technology, from Rs 50,000, or about $800).

When a major project is won by one of the big Indian engineering firms, they may hire 5,000 software engineers to help on it. The firm will show up at a campus and hire – everyone. Literally make an offer for 1,000 people all at once; “All E.E. and Computer Science majors, report tomorrow.” Try to do that in America. But it’s common in India. I asked each of the managers what his kids were studying in college. Every one of them was studying science or engineering. Every single one. For every engineer you hire in the US, starting out of college, you are facing a loaded cost of close to $100,000/year or more. The engineers in Bangalore aren’t paid dollars.

You can’t make the sob-story that it’s wrong to pay people $20/day there, because we’re paying them rupees. Earning the equivalent of $3,000/year is fine if lunch is 20 cents and rent is $90/month. So what about the idea of “sticking to your principles” and keeping the jobs in America? I looked at the projects we were being brought in on for our American customers. Even for the outright industry leaders, the stakes were clear; create this capability in an impossibly short time or lose the lead and go the way of Blackberry. Companies don’t lose their lead over a few years anymore. They go from #1 to irrelevant in months.

 The engineering companies like mine are able to do the impossible. If an American company decided to pay whatever it cost to bring in 1,000 American engineers immediately and get the project completed, well I can’t even speculate on the implications. It can’t be done. They would turn to Accenture, Deloitte, etc., who would turn to their Indian operations. If you restricted them to US hires, the going rate for an immediate-hire, qualified coder in San Jose is $180/hour. And if Oracle decided to do that, as a regular patriotic policy, they would have to hope that SAP would do the same, because every day the two are locked in mortal combat on the price, availability and quality of their offerings.

Any company that doesn’t avail itself of the talented, ample, cheap labor in India will lose its market to any company that does. It’s that simple. As an aside, the environment in which this work is done is astounding to anyone who’s never been there before. Next to the gleaming Google tower is a field with piles of cinderblocks, a cow and pigs wandering around, and a nursery school that looks like it’s about to collapse. Traffic moves through the streets in what my hosts called “organized chaos.” I thought they were only half right, but I never saw one accident, despite a complete disregard for lanes, right of way, or even agreed direction of traffic flow. Cars intending to exit the ring road were just as likely to jump the median and plow across oncoming traffic as to wait for the exit. Buildings everywhere stood half-completed, often with the finished floors occupied. Not because of unexpected downturns in the economy; it’s just how it’s done there, with some buildings spending years in a semi-complete state.

Despite my company’s facilities having some of the most advanced labs I had seen, power to the neighborhood (in downtown Bangalore) was cut almost every day. No-one blinked, as the battery backup cut in to provide electricity until the diesel generators fired up for the rest of the afternoon. The country is heavy on bureaucracy, and the bureaucracy is riddled with corruption.

The income inequality makes our President’s rants about America seem absurd. Yes, our lower middle class’s wealth shrunk by 1% while the highest quintile grew by 5%. In India, more than half of households do not have toilets, and clean tap water is a rare commodity, but in my hotel room the main shower head was the size of a trash-can lid and dumped 10 gallons a minute of filtered, drinkable water down my drain. (I love a good shower, but I couldn’t bring myself to use it.)

This lifecycle stage doesn’t seem to resemble the path followed by England in the industrial revolution, or America’s own path to prosperity. But it’s how it’s being done now in India. The tenacity with which the people pursue the challenges is astounding and the contributions being made to technology are integral and essential to the business success and the prosperity of the world.

Companies can decide to forego the plentiful, cheap off-shored talent in this incredible place, but as long as their competitors take advantage of the massive advantage it provides, they are deciding to exit the business.

5 comments:

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Anonymous said...

I transferred $15M/year medical device manufacturing from Colorado to Bangalore more than ten years ago. It cut our costs by two thirds. I spent quite a bit of time on the mfg. floor in Bangalore and found the assemblers, engineers, and tech's to be every bit as knowledgeable and conscientious as their US counterparts. As I recall the assemblers were making (at that time) ~$1.5/hour in Bangalore vs. ten times that in the US. Product quality and quantity were identical.

TM Lutas said...

If you want a sustainable living wage, the only route is by throwing so much business at Bangalore that their wages are driven up.

It's not like we lack things to do. So what stops us from doing it?

Kevin Erdmann said...

http://idiosyncraticwhisk.blogspot.com/2014/08/what-disappearing-middle-class-doesnt.html?m=0