Wharton’s Jitendra V Singh advises Indian companies to recast their business models to suit the rising Rupee than to expect the RBI to intervene. In support of his argument, he draws the parallel of how Japanese Automakers during the `80s reacted to the rising yen by shifting their low margin operations (and costs) to manufacturing locations in the US. That had the twin advantage of margin protection and reduction in protectionist backlash since the jobs have now turned American.
Is that a good comparison, Mr.Singh ? Check some facts out.
India’s leading IT vendors like TCS, Infosys, Wipro and Satyam squeezed out higher margins (27-30%) from clients not just because of availability of low cost workforce or a weaker rupee, they have also been benefitting from complete exemptions from Indian Income Tax (33.6%) on export income till recently. If operations are shifted out, the tax savings foregone will dent their margins.
Many state governments also gave them land on long term low leases to build massive complexes to house their army of coders in thousands. These benefits cannot be expected from foreign governments. Moreover, the resale value of their Indian real estate would tumble triggered by the sudden over supply because the governments may choose to terminate their leases if they move out. Now that's a double whammy.
As of now bulk of the revenues of India’s IT vendors come from mainstay operations like ADM, BPO, low end process automation, testing and validation services. Revenues from high end segments like consulting, process automation, license fee, and remote infrastructure / Data centre management have been insignificant. With competing global majors like IBM, Accenture and EDS setting shops in India, wages are also on an upswing. Shrinking supply of competent engineers, higher visa costs and attrition have also not been helping matters either.
Thus changing their product mix now would mean India's IT vendors having to make significant investments in R&D (read future) to develop high end utility products and building deep domain expertise in clients’ businesses that guarantees productivity improvements upfront (in other words, to partake in clients' business risks also) like the global majors do. These adjustments may (or not) yield gains in the long term, but right now they call for larger cash outlay and would also mean giving up on margins. Neither can the Indian IT vendors be too sure of their own ability to cope if pitted against the behemoths that knew this high end terrain better.
That's why I recommend a sellout. And if they don’t, go short'em all....