Indian IT industry's blind craze for the US market begins to backfire
Current Situation
Current Situation
According to stats, close to 70% of the revenue of Indian IT companies comes from the US, a figure which clearly shows how dependent the Indian IT industry is on the US market. It has always made me wonder as to how could the Indian CEO's boast of having an ultra-strong Indian IT industry despite having such a weak base. Was it mere ignorance of the possible dangers in the form of over-confidence or is it that the IT bosses didn't really have an answer to it..However, it doesnt matter what the case was back then, as of now, the wheels have truly started coming off the Indian IT wagon and the reason is none other than over-dependence on a single economy. What was being hidden under the unimaginable growth rates of Indian IT companies, now stands exposed.
The fury of problems
A couple of shocks dealt to the US economy has created huge tremors in the Indian IT industry. The same IT executives who were never tired of boasting about their company's growth, are now running for cover. The ignorance or inabilty (whatever you may call it) to rectify shortcomings has come back to haunt them in a big way. So what exactly are the issues that are bringing in sleepless nights for the IT executives...
1. Appreciation of rupee
Enough has been said about the ongoing appreciation of rupee against the dollar. Coming as it were in the backdrop of sustained rise of the rupee, this development is being tracked and hedged in the software sector lately, which is predominantly US-centric.An ample proof of it is this statement of the CFO of Satyam Computers: "The impact of the strengthening rupee on IT sector profitability will be two-fold. The rising rupee will bring down the margins of Indian companies. Most of the Indian IT companies have a natural hedge given that 60-70 per cent of the expenses are not rupee-denominated. Our analysis reveals that every one per cent appreciation of the rupee against the dollar reduces our margins by 30 basis points." When such is the condition of the fourth biggest IT service company in India then its not difficult to imagine the position of medium and small size IT companies some of which derive upto 95% of their revenue from their US clients.
2.
US Sub-prime CrisisAs if the rupee appreciation wasn't enough, a new hurricane seems to be heading towards the US economy, or should I say the Indian IT industry.Now before we discuss about the impact of this issue on the IT industry, first lets throw some light on what exactly the "US sub-prime crisis" is all about.
A Subprime lending, also called B-paper, near-prime, or second chance lending, is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. The maximum impact of this crisis has been dealt on the mortgage market in the form of 'subprime mortgage financial crisis'. The subprime mortgage financial crisis refers to the sharp rise in foreclosures (seizing of mortgaged lands due to the borrowers inability to clear loans) in the subprime mortgage market that began in the United States in 2006 and became a global financial crisis in July 2007. Rising interest rates increased newly-popular adjustable rate mortgages and property values suffered declines from the demise of the housing bubble, leaving home owners unable to meet financial commitments and lenders without a means to recoup their losses.
The sharp rise in foreclosures after the housing bubble caused several major subprime mortgage lenders, to shut down or file for bankruptcy, with some accused of actively encouraging fraudulent income inflation on loan applications, leading to the collapse of stock prices for many in the subprime mortgage industry, and drops in stock prices of some large lenders. Now here's the nucleus of the problem it creates for the Indian IT companies. Some of these lending companies are high revenue clients of the Indian IT outsourcing organizations. A crisis for the lending companies means that they are rapidly cutting down on their IT expenditure and a direct impact of this policy is being bore by the Indian IT companies. Processing loan mortgages during the US housing boom was a profitable line of business for some outsourcing firms that logged around 50 percent growth in revenue during the last financial year.With the morgaging business drying up completely, these outsourcing firms are now heavily paying for their unicentric approach.
Lessons to be learnt from the downslide
The Indian Government and the IT companies have been working hand-in-hand to tackle these issues and get the IT bandwagon back on track. However, the Indian IT outsourcing industry would do well to make sure that it doesn't repeat the same mistake of being overambitious about one economy and ignoring the rest of the word. Had the Indian IT companies given even the slightest bit of importance to other world economies begging for their presence, they would have still been calling the shots.
Action Steps that could be taken to ensure a safe future for Indian IT companies
# The Indian IT companies would have to take some strong measures to make sure they have a geographically balanced portfolio. This could be done by appointing a fully functional "Risk Mitigation Council" that would decide on the percentage of the portfolio to be allotted to the prospective clients segmented on the basis of their base country. Lets say a particular IT firm via its Risk Mitigation Council decides to allot a maximum of 40% of portfolio to the US. The rest would be distributed amongst the other propective non-US clients. This would help outsourcing firms be in the safe zone.
# The IT outsourcing firms could start looking at clients from countries that have a stable economy and one's whose economy isn't as world dominating as the US. European countries like Germany, France and Italy have been showing huge IT potential off-late. This is where the prospective clients could be residing.
Indian IT industry's blind craze for the US market begins to backfire
By: raam rahim
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