Software exports: down 30%

Source: CII and trade estimates

Terror’s toll

The terrorist attacks in the United States, however, have put to rest any hopes of a turnaround - and hit the star of India’s economy, the booming information technology sector.

Several IT industry conferences across the US as well as India were cancelled or postponed after the attacks.

The growth rate for the value of software exports, which used to stand at 50% annually, is likely to slip to 20% in 2001-02, a leading trade analyst predicts.

The Indian software and services industry currently accounts for almost 2% of the country’s gross domestic product.

 

US joblessness at nine year high

US airports have been deserted since the attacks

The attacks on the US on 11 September has helped create the longest dole queues in over nine years, the US Labor Department has reported.

The number of new jobless claims rose by 58,000 to 450,000 for the week ending 22 September, well above analysts’ expectations, with 11,000 new claims coming in New York City alone.

Meanwhile, an index measuring the number of jobs being advertised across the US in August fell to its lowest level since February 1983.

The data is expected to reinforce analysts’ fears that the US economy is now in recession, and has raised the prospect of a further interest rate cut from the Federal Reserve when it meets on 2 October.

Jobless claims

Increases in unemployment were reported in states around the US and further rises are expected, the Labor Department said.

Since the attacks, the aviation industry alone has laid off over 100,000 workers.

Michigan’s auto industry was particularly hard hit after airlines were grounded for a number of days, depriving it of parts deliveries from Canada, the department added.

The data is a further sign that the world’s biggest economy is struggling, after the number of unemployed on benefits rose by 68,000 to 3,298,000 for the week that ended on 15 September.

Help wanted

The business group Conference Board also released its Help Wanted Advertising Index which fell to 53 in August from 58 in July, a eight and a half year low, with a further fall expected for September.

“The souring of consumer attitudes in September seems certain to result in a drop in consumer spending - beyond the obvious categories of travel and recreation,” said Ken Goldstein, an economist at the Conference Board.

“That drop in economic demand will most likely translate into further layoffs... Under present circumstances, continued deterioration in the labour market is very likely over the next few months.”

The Conference Board surveys 51 major newspapers across the country about their patterns of help-wanted ads every month

Job losses to hit 24 million

The overall picture would mean very little improvement in the global employment situation

The ILO said an Asian revival is needed

Twenty-four million job opportunites - more than the population of Texas, or Australia - will disappear by the end of 2002 because of the global economic slowdown.

The projection comes from the International Labour Organistation (ILO), which said its figure for the losses included actual and prospective positions that would have been eliminated worldwide.

Economic growth has to be revived in Asia and developing countries to reverse the trend, which has been fuelled by “fear and insecurity” since 11 September, the ILO said.

Separately, the Geneva-based body said the airline industry, in particular, will take years to recover after more 200,000 of its 4 million global employees lost their jobs after the attacks.

“The overall picture would mean very little improvement in the global employment situation,” it said.

Poor outlook

The ILO report warned the 1.7% average annual growth of the world’s workforce over the past decade had outstripped the 1.4% annual rise in global employment.

“In recent years the global economy has created about 40 million jobs a year for the 48 million annual new entrants to the labour force,” it said.

Over 97% of new job seekers in the next decade will come from developing countries, with 65% of them in Asia, the report predicted.

For the industrialised world, the ILO forecast the labour force would shrink, with population growth expected only in the US.

Globally unemployment rates are expected to remain stable but the number of working poor will rise, the ILO said.

More than one billion people live on less than one dollar a day, according to UN estimates.

The reports were released ahead of the ILO’s Global Employment Forum in Geneva of business leaders and politicians, which will discuss reviving economic growth.

2001: Historical turning point?

The importance of the flag is evident everywhere

Devastation at Ground Zero has become an enduring image

 

The assertion has been made many times since 11 September - the attacks on America have changed the world.

The sight of the twin towers of the World Trade Center crashing down stunned a global television audience.

Watching those images in disbelief, millions must have had the same thoughts. What does this mean for the world, for my country, and for my family?

In the space of a few minutes we seemed to have entered a new age of uncertainty. We instinctively knew things were different, even if we were not sure why or where we were heading.

The extent to which the world really has changed depends on where you are in the world and your perspective on global politics.

 

 

Knock-on effects

The impact of this gradual but painful economic slowdown is now being felt at the most personal level, as urban Indians lose their jobs and recruitment dries up.

Every sector has been affected, from banking to steelmaking, with millions facing voluntary retirement schemes.

And fewer new recruits are needed, even in fast-growing industries.

“Due to the slowdown, software recruitment has been affected by around 30% to 50%”, said Dr. Raj Sharma, Director of the Cistems Institute of Information Technology.

“The demand for software professionals has dropped considerably, and we are not getting any fresh inquiries from software companies. The job market has never been so bad for freshers as it is today,” says Ravi Chaudhary, who runs a placement agency.

“The job market will shrink by up to 25% this year.”

Overall, the recent terrorist attacks on the US are expected to reduce the total ouput of the Indian economy by at least 0.2-0.3%.

Predictions that India’s economy would grow by 6% this year now seems highly unlikely, and some experts are predicting that growth will be below last year’s 5.2% - a blow to the government’s plans for economic expansion.

Phiroz Vandrevala does not play golf but he likes golf tales, such as the one about a US chief executive who disturbs his opponent’s concentration ahead of a decisive putt by asking: “Why aren’t you doing anything in India?”

“CEOs talking about India while relaxing on a golf course is good because it helps spread the outsourcing idea. That’s crucial when companies think India is simply a place near Afghanistan,” says Mr Vandrevala, chairman of the country’s National Association of Software and Service Companies (Nasscom).

In the weeks ahead, the IT lobbying organisation will spread the word in the US-India’s biggest market-and later set its sights on what for most Indian IT companies is virgin territory-Europe.

Nasscom will argue that in weakening economies, outsourcing helps businesses live within tighter budgets yet retain an edge over rivals. India’s lower cost, proven processes and the ability to apply technology solutions to business problems “add up to a compelling value proposition,” says Mr Vandrevala.

Indian companies hold 1.5-2 per cent of the global software services and maintenance pie, the part of the overall IT menu in which they have earned a global reputation built on low costs and advanced processing skills. About 16 per cent of the workforce in this narrow sliver of services are Indian, according to industry data.

Yet after last month’s terrorists’ attack in the US, the outlook is a little gloomier for India’s export-dependent IT industry. There is growing nervousness that the events of September 11 will exacerbate the effects of a slowing US economy as companies cut spending on technology and lay off the hundreds of Indian contract engineers who service their IT systems.

Nasscom has revised downwards its growth to 30-35 per cent for the year to March 2002, corresponding to exports of $8.2bn. This rate of expansion is impressive but still falls short of the 55 per cent growth achieved in 2000-01.

Big companies such as Infosys Technologies and Wipro have slashed their sales growth forecasts, the former by more than two thirds from 100 per cent-plus in 2000-01. Small companies trapped at the less rewarding end of the value chain are dangerously exposed. Across the board, recruitment has slowed, wage inflation has been pricked and attrition tamed. More software engineers are jobless than ever before in India.

“There’s a lot of fog on the windscreen,” says Narayana Murthy, chairman of Nasdaq-quoted Infosys. Yet few can honestly claim to know what lies ahead as India’s IT barons face up to unprecedented challenges. Three forces are at work, posing policy dilemmas for Indian software companies.

First, Indian companies are grappling with the fall out from the US downturn and last month’s attacks in New York and Washington.

The immediate impact is a freeze on deals and visits to sites in India. “If companies want to outsource they must travel to India to see our facilities. But no one is travelling and decisions are stretched out. That will eventually hit home,” says S. Ramadorai, chief executive officer of Tata Consultancy Services, the unlisted software unit of the Tata group and India’s largest IT services company.

Though Infosys and Wipro’s results for the quarter to September topped expectations, the real impact of the September 11 attack is unlikely to feed through fully until the next two quarters.

The slowdown has already forced US technology companies to aggressively slash IT budgets. Reduced budgets mean a change in the mix of work, which imposes pressures on Indian companies with a disproportionate exposure to niche areas

The prime casualty is work on developing new applications, such as internet-based portals. Typically, this lucrative “non-mission critical work” accounts for 60 per cent of a client’s IT budget and its diminution has hit companies such as Bombay-based MphasiS.

The rest of an IT budget goes on systems maintenance, which is low value work but one that offers a secure revenue stream during difficult times. The big companies earn about 40 per cent of their revenues from this source.

The smaller amount of work available has given rise to the second key trend at work, a shift in the mix of clients. Indian companies may be looking for a deeper partnership with Fortune 500 companies by encouraging them to outsource more work such as mechanisms to manage customer relations.

But a parallel hope is to tap a new generation of customers from the Fortune 1000-2000 universe. These companies are less global in their outlook, unfamiliar with the offshore model and lack sophisticated internal IT structures.

Capturing them poses marketing challenges. Indian companies must, for example, persuade an audience worried about the political impact of cutting jobs in a recession to switch to a service provider in an unfamiliar country.

Indian IT companies have never had to do this before because their clients have been global in outlook and have regarded outsourced IT as a “strategic differentiator,” says Gautam Kumra, principal at McKinsey, the management consultant in Delhi.

The scope is huge. The bulk of the 180-plus Fortune 500 companies that outsource to India merely “nibble,” says Nasscom. That means annual contracts of less than $5m a year. Barely 30-40 Fortune 500 companies outsource work in excess of $10m a year, usually linked to mission-critical end-uses such as retail bank services.

The search for new customers is also turning Indian eyes towards Europe, where companies are smaller, family-owned and less experienced in “outsourcing risk”, such as the technology based management of customer relations. India’s top companies have in the past year opened development centres in UK, the dominant European market. In August, TCS opened a centre in Hungary, a bridgehead for its continental European ambitions. Indian companies are desperate to ease their dependency on the US, which accounts for about 60 per cent of exports.

The third broad trend is a virtuous cycle that is making the biggest Indian companies even bigger as they hog the portfolio of reference accounts. The scale and brand quality of the aristocrats of Indian IT-TCS, Wipro, Infosys, and Satyam-is crowding out mid-sized rivals.

This means new and existing customers tend to focus on service providers that are well capitalised, possess a global brand, and an end-to-end capability from consultancy to implementation. “These are uncertain times and clients want companies that are going to be around in the long term,” says Nandan Nilekani, managing director of Infosys. “There is a lower desire for risk,” he says.

Similarly, clients under budget pressures want to rationalise the number of vendors. They are increasingly concentrating on a single service provider of scale and record. One consequence is that dominant Indian players are forced to expand beyond their traditionally narrow range of specialisations to cater for a wider range of demands.

Wipro is investing $10m-$15m in IT-enabled services; TCS and the US insurer AIG are involved in claims processing; Infosys, which recently won an end-to-end consultancy with the UK’s state-run health service, is also toying with call centres.

“The question is how fast and to what extent India’s top companies react to demand for a portfolio of services often from a single client,” says Mr Kumra at McKinsey.

The implication of this trend on mid-sized companies could be disastrous, as they become general purpose companies lacking scale, pricing power or niche specialities.

These broad themes run alongside other changes whose impact is becoming more apparent. The primary one is labour market weakness after several years of buoyancy - typified by golden handshakes, generous share options and wage inflation in excess of 30 per cent and more for specialists, especially duringthe dotcom boom. Nasscom says about 3,000-4,000 software engineers lost their jobs last year, though this is probably a conservative figure given that the shedding at small companies is often unrecorded on a national level.

Satish Doshi, managing director of Sampoorna Computer People, a recruitment agency in Bombay, says the pool of unemployed IT professionals or those looking to change jobs has swollen to about 10,000, including people returning from the US. “I’ve never been busier,” he says.

One sign of the softer labour market is lower utilisation rates. This is a measure of how many expensively trained software engineers are working on projects and generating an income, rather than sitting idle on the bench. The rate is about 60 per cent, or less at smaller companies, from a peak of 75 per cent two years ago.

The lower utilisation level is sufficient to cope with existing work. But, combined with the general job freeze and, in some instances, job cuts, software companies are exposed in the event of a sudden rush of orders.

Many companies have learned to respond quickly to a new orders in effect, becoming nimble “just-in-time employers”.

Like New Year’s Eve revellers, many technology users began 2001 with a thumping hangover. Computer departments in companies had overdosed on investments in software, personal computers, handhelds and internet strategising. And the cure for many companies in the US and Europe was IT abstinence.

The technology bubble had burst and Silicon Valley, the spiritual home of the computer industry, fell into recession. In New York, whose cluster of new media dotcom start-ups had been hit by a venture capital drought and stock market collapse, about the only success was an independent documentary film, called Startup.com, charting the rise and fall of a Manhattan web business. Screenings were packed with investment bankers and former dotcom millionaires.

The chip industry was trapped in the worst downturn in its history. Gartner, a technology research group, predicted that semiconductor markets would not pick up until the second quarter of 2002.

One by one, Silicon Valley’s finest admitted that their bottom line was hurting. Companies such as Sun Microsystems resorted to mandatory office holidays to save money.

Summer came, but failed to provide any relief. The so-called silly season, when news is light, instead focused on the worrying threat of digital attack. Warnings of an internet meltdown, caused by the Code Red worm, scared hundreds of thousands of website operators to install anti-virus software patches.

Even mergers failed to lift the black mood. On Labor Day, the official end of the US summer, Hewlett-Packard suprised the market with a $23bn purchase of rival Compaq Computer. Carly Fiorina, chairman and chief executive of HP, and Michael Capellas, her counterpart at Compaq, insisted the deal was prompted by strategic opportunities as much as it was about the tech bust.

But the capital markets expressed their disapproval by sending HP’s shares down almost 19 per cent a day after the merger was announced, wiping out the notional premium that the all-stock deal would have handed to Compaq shareholders. The dissenters were later joined by the heirs of the Hewlett and Packard families.

A week after the HP/Compaq deal announcement, on September 11, the world was shaken by a distinctly low tech attack in New York and Washington. However, the resulting fear of further terrorist attacks and rush to protect corporate data focused provided a lift for one sector of the IT industry as companies rushed to buy security technologies such as identification systems and disaster recovery services.

The internet was one technology that proved its reliability as people across the world surfed the web for news of the US attacks and sent e-mails to check the safety of friends and loved ones.

The technology industry remained in the doldrums for the rest of the year, with a marked decline in attendance at Comdex, the annual Las Vegas geek festival in November. However, the industry still had a few surprises up its sleeve.

Microsoft and the Justice Department announced that they had reached a final settlement to end the three-year antitrust battle. The deal, which amounted to little more than a slap on the wrist, split the opinions of the US states that had also brought antitrust actions against the software giant. A core group rejected the deal, although Microsoft settled a number of private actions.

2001 was a year that many in the computer industry would rather forget. The hope is that 2002 can only be better.

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