Outsourcing is a big part of the Indian economy. But as the global business landscape shifts and the outsourcing industry evolves, how much will it continue to contribute to India's rapid-fire growth? As wages increase, does outsourcing in India become a less attractive proposition?
Despite changes in both the U.S. and the global economy, outsourcing, which has been a driver of the Indian economy, will continue to fuel growth. That's the view of Pinakin Patel, client portfolio manager for Far East equities at J.P. Morgan Asset Management, a unit of JPMorgan Chase
Punita Kumar-Sinha, chief investment officer of The India Fund
"Outsourcing has been quite resilient, and IT stocks have done well this year, contrary to views that Indian outsourcing in IT is highly dependent on the U.S. economy," Kumar-Sinha said in a recent interview.
Anh Lu, portfolio manager for T. Rowe Price's New Asia Fund (PRASX), recently met with Indian IT juggernaut Infosys Technologies
According to Lu, Gopalakrishnan says he thinks this crisis has actually increased the incentive for companies to outsource operations, making the outsourcing trend even stronger.
Outsourcing evolves
Outsourcing has been a hit because it lowers companies' labor costs. But will its popularity decline as wages rise? Not if outsourcing offers more than just pure cost arbitrage for a company like Infosys.
Lu notes that the wage increases in India are not a new problem. Labor has been tight in India since 2002 to 2003. "I think that [outsourcing companies] would still continue to see growth despite the global economy and wage increases ... these companies continue to manage because their margins are still stable despite that," Lu says. "Every year, they take on more value-added types of projects, where they're able to effectively charge a higher rate."
At some point, pure wage arbitrage will no longer make sense. Although Lu says she thinks we're still three to five years away from that, the smart companies are already positioning themselves for the future. Outsourcing firms are evolving their business models, moving from simple price discounting to more customized solutions. "While you could call it outsourcing, they're providing their clients with overall solutions rather than just purely body shopping," Kumar-Sinha says. These strategic actions are helping them insulate their businesses.
Reverse outsourcing
It's interesting to note that U.S. corporations that are competing with Indian IT companies are also now setting up offices in India; this is called reverse outsourcing. "We're starting to see the likes of IBM
Many investors -- European and American alike -- view India as a base. Patel says it's important to understand that India is strategically placed to meet the demands of the Middle East as well as Asia. Bombay and Delhi, for instance, are only two hours from Dubai. He notes that English is commonly spoken in India, which -- along with the country's fundamental rule of law -- makes it an attractive place for foreign investors to set up shop.
Additionally, Patel says he is seeing more multinationals like Wal-Mart