IBM's chief executive, Sam Palmisano, announced IBM (NYSE:IBM) would invest $6 billion in India over the next three years. Apart from confusing an analyst meeting with a World Cup game -- the event was held in a blue tent in Bangalore with 11,000 people attending and webcast to 330,000 employees - it's unclear how IBM can spend all this money in India, or, more importantly, why. The answer may be more Wall Street sharpness than Bollywood pomp and circumstance.
IBM is already the largest foreign technology company in India, with 43,000 workers. It's almost as big as local Indian IT giants such as Wipro (NYSE:WIT), which has 51,000 employees. Wipro's total annual revenue is $2.3 billion; so, IBM plans to spend the annual turnover of its biggest rivals for the next three years. On what, precisely?
The obvious choice is more staff: All the IT services firms in India need to add 15,000 to 20,000 employees each year to deliver the rapid growth built into their share prices. If being an "Infoscion" -- the Infosys (NASDAQ:INFY) name for new employees -- is your dream, then join the other 1.3 million applicants for the 15,000 jobs available last year. And thanks to globalization, you have to compete with the other multinational firms. EDS (NYSE:EDS) added another 11,000 Indian employees this morning by buying MphasiS. Accenture (NYSE:ACN) already has a staff of 19,000 in India and is hiring 800 new employees a month.
Although India produces 2.5 million new graduates every year, McKinsey estimates that only 10% to 25% of the graduates are up to multinational standards. The result is high turnover and wage inflation -- salaries for project managers have increased 23% annually over the last four years.
Spending $6 billion in India is not easy or especially profitable, but that may not matter. Though couched in grandiose terms, IBM can neutralize the competitive advantages of the Indian outsourcing firms, such as Wipro and Infosys. Once IBM is the same size (or bigger) with the same Indian cost structure, it can apply its superior heft and innovation skills to drive down the margins of the big Indian firms. Then, IBM can go back to being International Business Machines.
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Fool contributor John Finneran is a consultant, investment analyst, and writer specializing in the financial value of technology; he welcomes your feedback. He does not own any of the shares mentioned.
