Is "cheap labour" India's IT sector success secret
Balaji Viswanathan, Indian by Birth. Indian by Thought.
"Cheap goods" is the secret to the rise of almost every developed nation. In the 18th century, Indian weavers produced exquisite textiles with silk, cotton, wool and jute. They were stunning. But, they were also very expensive. Then the British found cheap ways to produce clothes. These were not anywhere near as good, but were good enough and were dirt cheap. These could also be run by less trained workers who were much cheaper than trained artisans.
This process, now called the "Industrial Revolution" altered world history as Britain jumped to the ranks of developed nations. At no point in time were the mechanized, mass produced clothes better than clothes produced by fine craftsmen. But, they won because they were cheap. Production of cheap textiles led to explosive side effects bringing prosperity to people.
In the 19th century, United States had its industrialization and for a long time produced "cheap" industrial goods that were considered inferior in the continental Europe. However, Americans produced a lot and those were quite cheaper compared to what an Italian craftsmen would make.
In the 20th century, Japan had its industrialization and started mass producing cheap goods. They tried to replicate every major American company with its own cheap alternative. For instance, Komatsu produced much cheaper machines for construction compared to what Caterpillar offered. The quality and support network were not there, but it was cheap.
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You don't become rich by selling very expensive, boutique goods. Mass production of cheap stuff has a much higher odds of making you successful. This is why Toyota is so much more valuable as a company than say Porsche or Ferrari. India's service industry is trying to follow the Toyota model - no frills, cheap, reliable output. It is quite cheap and often relies on cheap labor.
While Indian service industry initially relied a lot on cheap labor alone, it has increasingly climbed to better processes that makes the output cheaper even with rising labor costs. As long as a labour produces output much above what he earns, he is in a good shape.
Dillon Borges, lived in India (2016-2017)
Very much so. Why do you think so many young Indian engineers and scientists and so on hastily leave the country. Labour is cheap, and in India the smarter you are the less you are paid.
There is a massive over supply of these college graduates such that they either work as overqualified labourers or work as underpaid ones. Given the status of engineer, doctor or laywwr in India most go for underpaid.
Why go far, look at this prestigious Mars mission. It costed less than 45 million USD. Meanwhile, India signed a contract with France to buy Rafale fighter aircraft at I believe 150 million USD PER PIECE. Think about that for a moment. 150 million per plane, that sounds normal for a high tech, 4.5 generation multirole combat aircraft... that is mass produced.
45 million for a probe that goes to Mars, not per unit, but including development costs, a one off product, each component painstakingly crafted to perfection. To Mars. How is it possible. The salary of the team alone should have been twice that much.
So while the Dassault Rafale crew in France drives from work in their Mercedes AMG or Maserati to their big suburban house, the seriously underpaid ISRO researcher takes the bus to their small city apartment.
Is it fair? You decide.
Naveen Rauthan, Engineer
1.IT- Software – These companies help in developing and implementation of different software for their clients worldwide. These software could be for documentation, security services, banking softwares etc.
- ITeS Business process outsourcing (BPO) – Major Corporations across the world outsource their back-office operations to some companies. E.g. Employee payroll for a US company’s global workforce is maintained by an Indian BPO. Slowly the definition is expanding to Human resources, accounting, logistics, legal processes etc.
- IT- Hardware and peripherals - The stuff you can actually see and touch, and would likely break if you threw it out a fifth-story window, is hardware. This would include laptops, desktops, Storage devices, Networking devices, LCD, printers etc.
- IT- Education This segment provides training for employment in the other segments. This would include companies providing various certification courses, like Java, Oracle etc. These companies also provide training for employees in corporate sector. Recently, some companies have also expanded this service to cater to schools and colleges.
This sector has made significant contributions to India’s economic growth in terms of GDP increase, foreign exchange earnings as well as employment generation. Its contribution to GDP has increased tenfold in last decade, from 0.6% to 6% till 2009-10. The sector has helped India transform from a rural and agriculture-based economy to a knowledge-based economy. Besides this, the lives of people have been positively influenced by direct or indirect contribution of IT sector to various parameters such as employment, standard of living, per-capita income etc.
In India, the IT Software segment has seen significant growth and has put India on the global map. It contributes for almost 75% of the total revenues of the IT sector. Though Hardware enjoys second place in terms of market share in India, it is quite low as compared to global benchmark. The BPO segment has grown well and is expected to make a footprint in the IT Sector.
Functioning of Software segment is explained pictorially in the figure below:
The software sector is service-oriented and thus the products offered are tailored to the requirement of its client. Hence, major input costs are those of human resources (forming almost 40% of the total costs) and research and development. Companies understand the requirements of clients and the product is developed accordingly.
In the last ten years the IT sector in India has grown at an average annual rate of 28%. India has emerged as the preferred destination for IT services owing to the cost advantage and talent pool.
India accounts for almost 51% of the global sourcing market. Exports contribute around 75% of the total revenue of the IT sector in India. However due to increased export-orientation and lesser domestic consumption the sector suffered major hit in the recession that shook the globe in 2008-09. In the year 2010, different economies began seeing recovery, but at varying pace. Indian companies have subsequently begun tapping other geographical markets and domestic consumption has also relatively increased.
Ashutosh Mehndiratta, Curious Indian
Yes, Labor Arbitrage is a big factor in growth of India's IT sector into a $100 billion business with over 3 million IT workers.
However, if "cheap labour" was the only secret to success in IT, we would have seen following -
- Mexico, which is right next to US in the same time zones, would have jumped and grabbed the $100 billion business rather than having its citizens cross the US border illegally and take up lower end jobs.
- China has millions of cheap laborers who slog in factories in inhuman conditions. Yet it's not hub of IT offshoring.
- Same for Indonesia, Vietnam, Cambodia, Thailand, Nigeria, Brazil that have large populations and millions of cheap laborers.
So why is India winning at this game?
English language - US and UK are largest markets for IT offshoring and India has the largest pool of English speakers.
Engineering talent - I agree, the quality of today's private Engineering colleges in India and their graduates is questionable. But if you look at the first phase of outsourcing in late 90s, it was full of talented, qualified engineers who shook the US IT market by delivering better outcomes at a fraction of prevailing costs.
IT Visionaries of India - It was visionaries like Narendra Patni who graduated from IIT and later MIT who envisioned an offshore model. Infosys founders were initially employees of Patni Systems. Another MIT grad - F. C. Kohli who laid foundations of Tata Consultancy Services was the grand visionary of India's IT industry. Another name that comes to mind is Dewang Mehta (1991-2001) - the young man behind NASSCOM. Note that other populous countries did not have such visionaries. Comparatively, it's the same story in developed countries. Not every technology worker in US is super smart...millions of Americans reap benefits of foundations laid by American Visionaries like Bill Gates, Steve Jobs, Larry Ellison, Mr. Hewlett, Mr. Packard, and so on.
First mover advantage - When the first few batches of IT workers set up a solid foundation in late 90s, India earned a formidable spot in the world. Not just technical skills, there were thousands who had solid understanding of domains like Telecom, Banking, Insurance, etc. When a Western client wanted to outsource work that was worth few thousand employees, only Indian companies could stand large teams who could transition that work and have the Process Maturity to take it on without introducing risk in client's routine business.
Future of India's IT industry - While it has been a good run for last 15+ years, things may not continue in a straight line. New technologies like Cloud, Virtualization, Automation are making IT systems less dependent on armies of people. Future winner's will have to build their strategy accordingly. New set of visionaries will appear. They will not appear randomly out of Timbuktu. They will appear out of regions that have healthy ecosystems of technology as well as hunger to win - US-(Silicon Valley, East Coast, North Carolina Research Triangle, Seattle), Israel, India - (Bangalore, Pune , Chennai, Gurgaon), Europe - Sweden, Finland, Germany, China, Taiwan, Singapore.
Cheap is a relative term. India’s engineers & other graduates that have entered the IT industry include some of best talent that has entered workforce. While their salaries may be ‘cheaper’ in dollar terms, they represent some of the best that India has to offer to the world. So, it is a win-win for both India and the international clients looking for IT services.
However, this cost arbitrage is beginning to erode as salaries rise in IT sector in India, and technology-landscape changes dramatically. The next wave of Indian resurgence in IT will have to come from thought leadership and innovations in product and technology development. ‘Cheaper labour’ can no longer be its USP
Shad Raza, An Enthusiast Strategist & Tech loving guy
In today's global market no one is giving contract just for cheap labour. Price is one of the factors but not the only one. In IT sector Indians have invested not only creating just Eco system of learning where students can learn through robust processes in universities but schools are paying attention since many years. Innovating & contributing to IT sectors through these years are also one of the reason. By these continuous efforts they have created their credibility in the world market through which these peer nations are recognizing them. So are getting success purely based on merit.
The Indian software industry, in most cases, appears
to be like McMcDonald's. The food(software) is cheap, and just good enough to get the job done. No innovation, and the quality is just good enough- the bare minimum to make the cut. The people working here are paid peanuts.
A job at McDonald's does not really command much respect, unless you're in mid-senior management. The same is the case with our software industries. Both command low pay, low status, and are very commonplace
Sunil Prabhakaran, Built IT solutions for Enterprises
Balaji has already given a comprehensive answer.
Adding one more dimension to it with a completely unrelated experience i had in 2014.
It was during an Indian Premier League Cricket game at Chinnaswamy stadium in Bangalore. One such machine used in day-night cricket encounters in the sub-continent is a super sopper to absorb all the dew off the grass so that the batting side don’t have an advantage. Now two such huge machines were at works to dry the ground. Midway into operation one of them broke down in the middle of the ground. Nothing made the machine move and the operator had to call in a mechanic. The umpires were keen to get the game started but the machine didn't budge despite mechanic's efforts. Finally the entire stadium staff were called in and the machine was lifted off the ground.
One wonders what might happen if this were to happen during a cricket match in Australia or England. They would have probably anticipated this risk (considering that there will be limited manpower on ground) and probably have measures (like better maintained soppers or cranes etc) to manage such risks.
The approach to any problem is simple. We apply to the problem, resources that are available in plenty. Labor is very expensive operational expenditure in developed countries and hence they opt for systems with minimal involvement of labor. While here labor is a plentifully available resource. Hence our approach is to put lots of people to the problem. Be it IT or elsewhere.