Thursday, November 6, 2008

India sliding!

Imagine this - the Obama administration shuts down all incentives to offshore work and forces American companies to size down their India operations, in an attempt to keep jobs in the USA. At face value, this isn't likely to happen in a simple stroke of decision making, for American companies need their offshore operations to remain competitive and be able to offer their products and services at competitive prices.

But, we are still at the beginning of a true recession, and a lot of bloodletting will happen from industries that have expanded under speculative growth conditions, spurred on by high stock prices. Put simply, people have pumped in a lot of money into industries they have perceived will grow forever, and it has been easy for them to raise money to expand into the future. This has summarily come to a halt with the crash in the USA.

India has a few companies that have over the period of the last decade, done their best to diversify and build core competencies that can compete instead of waiting for the outsourcing crumbs, but the majority have indeed run for the handouts brought in by the "cheap labour" sticker. These are the companies that have mushroomed all over India, particularly in cities like Bangalore. Not surprisingly, there isn't a single Indian product that you will find on every computer in the world, and even as HCL has one of its smartypants in its ad. claim that HCL builds software that does some significant things around the world, the irony is not lost on us when the ad. ends with the claim of being a $5billion company, not a Rs.25000 crore company!

In other words, many Indian companies see themselves as totally dependent on the American economy, and the extent of them being global unfortunately is the extent to which they can beg for business from American companies. There just isn't going to be that mad rush forward growth over the next two years, because recessions are not easy to turn around, and while some Indian companies will benefit for the good reasons, many will perish because they are just not good enough.

There are two different approaches with building companies, in general. The first model is the honest model, where investors and core workers come together to build a company that will produce goods or provide services that they believe has a good chance of making the company profitable through revenue streams they can sustain over fairly long periods of time. The intent is to capitalize on ability and demand for whatever this company produces. There is competence, and there is honesty. The other model is to build a company that lasts long enough to make enough noise before going public, and then use the stock market to sucker the public into buying their stock at as high a price as possible, giving an "exit strategy" to many of its founders and early employees, particularly senior management. This is the "get rich quick legally" scheme, which works very well when there is positive sentiment about the sector and the country's economy. Indian animation companies have done well with this conniving intent, and the people who bought their stock are nothing but fools.

The .com boom period brought the second model to light in India. Many Indian companies were overjoyed at how they could con the public into investing in companies that might be duds two years down the line, but how could the investors and senior management care any more if they made tons of money and "exited", leaving the company to flutter as the winds blew? A lot of companies that are not in the core sectors like energy and infrastructure will obviously decline now that the proverbial bubble has burst and if there are Indian software companies that are low in the pecking order of larger companies built up in stock markets rather than in real produce, then they are all on their way down.

The gleeful Indian "technocrat" is about to be exposed for his true incompetence and more importantly for how disposable he is. This is going to shock a lot of people, but Indians are fiercely proud and will find it very hard to cut back on lifestyle, which in the last five years has been the single biggest paradigm shift. All of a sudden, we will witness a robust coming of age of Indian industry, particularly the software and services industry that simply has no product or service the world desperately needs. This is the best thing to happen now, rather than five years later, and it won't be fun if you are one of the people going to lose your job. But it will be fun for the rest of us to watch, since the booming retail sector might need some of your foreign accents and groomed looks - you might even get discounts on groceries and low end consumer goods.

America has been an engine, no doubt. But it has been a fake engine, fuelled by growth based on speculation and financial experts who lost their fundamentals in an attempt to build quick empires. This is a time when empires older than a hundred years old are collapsing. No amount of government intervention is going to help restore the order of a year ago, because that was not order in the first place. It was already in a state of decay, and delusion kept the world going. The US dollar is not based on gold reserves. It is helped by commodities like oil being pegged against it. The Euro is based on gold, and is bound to be much more stable because there won't be any more Euros than there is gold to buy with it. The American dollar is paper money and unless America becomes truly productive, its dollar won't be worth much in the days to come.

America currently imports more than it exports. China holds most of the debt Americans owe, and they can afford to because they are a manufacturing economy. They are regularly producing things that the world cannot live without. India is in a bind being a services economy since it is much more dependent on what others want from us. America wanted cheap programmers, we produced them. America wanted people with fake accents talking on phones, we manufactured them. Now, America wants to reduce its energy dependence on oil and wants millions of solar modules and wind turbines, it is going to ask China, not us, to make them!

That is where we stand today. Our biggest boon is our size and our people have to consume and be the engine for our own economy. But our software "techies" haven't produced much for our consumption, and we basically don't have so much need to drive this overgrown and overrated industry. We did not grow other areas in the same time, because we were shortsighted and highly opportunistic. Now we will witness the reality check. Techies without jobs. The big shots will do fine if they adapt and have saved money, but the middle to bottom rung of fools who can't put a sentence together but have been in the software industry for a few years are toast. These aren't "techies" but low level assembly line workers in an air conditioned environment. If an ape could read code, it could do this job.

Suicides, broken marriages, they're all a coming, my friends. Indian pride will be hurt, and our sense of panic will come to the fore again. It is never pretty, but this time, the show promises to be particularly ugly.

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