India Starts Up
by David James
February 22, 2000
UPSIDE TODAY
Ganesha is on the minds of many Indian software companies and IT entrepreneurs these days.
This Lord of all Beginnings and Remover of Obstacles in the pantheon of Hindu gods is
worshipped by 80 percent of India's population. He is the elephant-headed god who gives
support and encouragement to new undertakings and is a source of strength in times of rapid and
uncertain change.
For Indian technology industries, Ganesha's support is in high demand. India's
dominant business model is changing rapidly from one focused on Unix
computer platform services to one focused on a growing number of
Internet-related services. Indian software developers are finding that their
engineering strengths are opening a wide array of opportunities in the
development of Web- and Internet-based activities, such as
business-to-business e-commerce, data centers, application hosting and
medical transcription.
Back in the mid-1970s, the Indian government, then the purchaser of about
half the computers sold in India, standardized on the Unix platform. Indian
software companies subsequently built a solid reputation for Unix-based
software development. Motorola (MOT), Texas Instruments (TXN),
Hewlett-Packard ((HWP) and other multinationals established engineering
centers in India to take advantage of India's large pool of low-cost, capable
engineers. In addition, Indian companies such as Wipro and Infosys
Technologies (INFY), grew wealthy by exporting software engineering talent
(a practice called "body shopping") to provide on-site services to customers
in the United States and Europe.
Despite the huge obstacles facing IT development in India, Indian software
companies are experiencing a boom. IT entrepreneurial activities are picking up and venture
capital and foreign investment are pouring in. According to India's National Association of
Software and Service Companies (Nasscom), India's software exports grew by 68 percent in
1998/1999, totaling $2.65 billion. Furthermore, some $200 million of venture capital is currently
available for Indian technology startups.
Starting up India. Indian software and IT leaders such as Infosys, Wipro, Satyam Infoway
(SIFY), and NIIT are not only enjoying record profits but also are rapidly expanding at home
and overseas to translate their software strengths into Internet capabilities. In addition, industry
observers believe that strong gains in the market value of their shares will enable market
companies to expand into IT-related businesses by acquisition.
In October 1999, Satyam, India's leading private sector Internet service provider, listed
American Depository Receipts on the Nasdaq with spectacular results, of more than $74 million.
Satyam's chairman, B. Ramalinga Raju, says that Satyam will use its new funds to expand its
Internet network and international gateway in India.
Earlier, in March 1999, software developer Infosys, had equally good results and became the
first Indian company to list its shares on the Nasdaq. With an offering price of $34, its stock
commenced trading at $47 and the company managed to raise more than $70 million against a
high-side expectation of $53 million. Infosys, now with first-half 1999 pre-tax profits up 134
percent and high value stock to trade, is reportedly on the hunt for acquisition opportunities in the
U.S., presumably to gain new IT-related technologies or market share.
"The success of these technology companies has ignited a new-found entrepreneurial spirit in
India," claims B. V. Jagadeesh, co-founder and chief technology officer of Exodus
Communications (EXDS). Jagadeesh is one of many India-educated engineers who migrated to
the U.S. and built a successful technology company. "Five years ago, Indian entrepreneurs at
home were focused on starting consulting firms. Now they see the rewards of taking greater risks
and developing new technologies and products."
Jagadeesh recently gave the inaugural address to the new Bangalore chapter of The IndUs
Entrepreneurs, a Silicon Valley networking organization. "The excitement of these young
entrepreneurs is vibrant, a real change from five years ago," he says.
A helping hand. Jagadeesh says that he and other U.S.-based Indians are personally helping to
fund technology startups in India. In addition, Indian and U.S. venture capital firms are investing
in young companies there. Examples:
? Walden-Nikko India Management, an affiliate of San Francisco's Walden Group, and
U.S.-based Draper International, has joined Exodus Communications CEO K. B. Chandrasekar
in backing Gray Cell, a Bangalore firm. Gray Cell has a Web-based product that links mobile
phones with the Internet and can collect requested information from multiple Web sites into one
package.
? Pramati Technologies of Hyderabad, a developer of Internet and middleware software
products, recently received $1.4 million in first round financing from Citibank N.A. Private
Equity. Jay Raghavendra, Pramati's founder and CEO, says, "With venture capital now available
in India, there has never been a better time to build software in India."
William Draper, head of venture capital firm Draper International, believes there will be many
such investment opportunities in the next five years. "In the past, India has provided the grunt
work -- the code-crunching -- for software that was designed in the U.S. But in the next five
years there will be more and more technology design work done in India, and this will require a
lot of venture capital."
New entrepreneurial spirit. The key question is whether India-based techies and entrepreneurs
can to move up the technology value chain. If the successes of counterpart Indian ‚migr‚s to the
U.S. are any indication, the answer is an unqualified yes. The first generation of Indian/U.S.
entrepreneurs includes the following:
? Kanwal Rekhi, who sold the networking firm Excelan to Novell (NOVL), for $250 million in
1989.
? Sabeer Bhatia, co-founder of Hotmail, which was sold to Microsoft (MSFT) for $250 million.
? Vinod Khosla, founder of Sun Microsystems (SUN).
These three examples are only the start of a long list of Indian executives
shaping the U.S. tech community. According to a June 1999 study by
University of California-Berkeley professor AnnaLee Saxenian, Indian
immigrants ran 9 percent of Silicon Valley startups from 1995 to 1998. Now
a new group of Indian/U.S. entrepreneurs is blossoming, often with the
financial backing of first generation successes. Indeed, such success stories
serve as a model and stimulus for their counterparts at home.
Plenty of talent at home. Notwithstanding India's high illiteracy rate, a large
pool of highly skilled, English-speaking technical workers live in the country.
Supplied by 1,832 educational institutions and polytechnics, including the
prestigious Indian Institute of Technology, approximately 68,000 computer
software professionals are trained every year. According to Nasscom, in 1998-1999 the number
of software professionals working in India increased to 250,000 from 200,000 the preceding
year.
Internet and Infrastructure
Where are the big breaks for Indian entrepreneurs? Sri Rajeev, CEO of IStoreData.com, a
provider of backup and application services over the Internet, believes that wireless and Internet
technologies and services hold great promise. "Because of India's poor telecommunications
infrastructure, wireless connections, if cheap enough, can rapidly expand Internet usage and
development. Content creation and Internet-enabled services such as call centers and medical
record transcription are also good bets, owing to India's low-cost, technically proficient,
English-speaking pool of skilled workers," he says. Rajeev's firm supplements its online services
with a call center in India that provides telephone customer support 24 hours a day, seven days a
week.
Jagadeesh of Exodus Communications believes that the big opportunities lie in improving
infrastructure connectivity at all levels. "Because so many new technologies can leapfrog the old
technologies, you can get tremendous capacity to fuel growth. As new fiber is laid and DSL and
cable connections and satellite links carry data, India will have tremendous capabilities."
India's government-owned Internet service provider, Videsh Sanchar Nigam (VSNL), is trying to
play a key role in developing emerging IT technologies. In January 2000, VSNL, the only Indian
provider of global connectivity, announced sharply lower rates for its leased lines, Internet
access, and Web-hosting services. The cuts included an across-the-board 25 percent reduction
for international private leased lines and a 50 percent reduction of rates for private ISPs. (Satyam
Infoway is VSNL's chief private competitor.) For dial-up access, a 100 hour per month account
will cost 1,500 rupees (about $35). The rate cuts are expected to strongly benefit software
developers, ISP companies, and various Internet-enabled service firms that require substantial
bandwidth and depend on secure links to overseas markets.
In addition to the emerging IT-related opportunities, Indian firms continue to provide low-cost,
outsourced software development services. Firms such as Moon-Stone InfoTech of Hyderabad
and Lama Information Technologies of Bangalore are examples. These and similar firms do
labor-intensive programming for offshore customers over the Internet using high-speed datacom
links. Programming costs can average as low as $35 an hour per programmer compared to costs
of up to $200 an hour in the U.S.
IT Superpower Prospects
Ganesha, Lord of all Beginnings and Remover of Obstacles, has also given attention lately to the
Indian political obstacle (see India's Infrastructure Challenge). In India's last general election, held
in August 1999, Prime Minister Vajpayee's Bharatiya Janata Party (BJP), a group strongly
committed to economic and technological progress, won a solid victory. Observers believe that
the BJP may be able to remain in power for the next five years and carry out many of its
objectives. A number of Vajpayee's colleagues share his IT objectives. For example,
Chandrababu Naidu, the chief minister of the state of Andhra Pradesh, who carries a laptop with
him wherever he goes, is typical of many economically progressive politicians who are part of the
BJP coalition.
Ganesha, however, is also known to be the Placer of Obstacles and one of his favorite obstacles
is the Indian bureaucracy. In October 1999, the central government, moving ahead with its plans
for India to become a global IT superpower, announced the formation of a new ministry, the
Ministry of Information Technology. Now other government ministries and departments, notably
those relating to communications, information and broadcasting, and science and technology, are
engaged in a bureaucratic turf battle that is impeding IT progress.
Will Ganesha help India use its software prowess to become a global IT superpower? Probably,
if he decides to improve the connectivity of the Indian bureaucracy. After all, as the Lord of all
Beginnings, Ganesha is surely an entrepreneur.
India's Infrastructure Challenge
Technological growth in India, as with other developments, has long been hampered by a lack of
telecommunications infrastructure, a politically unstable government, a stifling bureaucracy, and
illiteracy in excess of 40 percent of the population.
With a huge population of more than one billion people, India's progress in telecommunications
infrastructure is an enormous challenge. According to the International Telecommunications
Union, India has a teledensity of only seven telephones for every 1,000 people compared to 490
per 1,000 in the United States. In some Indian cities, the waiting list for a telephone line can be
10 years. Electrical brownouts are another problem -- companies typically install backup
generators for electrical outages and utilize leased lines or satellite uplinks for their
telecommunications needs.
In addition, government restrictions and high costs have impeded Internet development in India.
The government did not open the Internet to private subscribers until August 1995, and private
companies could not offer Internet services until November 1998. Since then, more than 100
private Internet service providers have been licensed, and user subscription costs have dropped
to 15 rupees (about 35 cents) per hour. Although India has made great strides to make the
Internet more accessible for its citizens, there are currently only an estimated 1.5 million Internet
users in the country, according to India's National Association of Software and Service
Companies (Nasscom). Because of India's poor telecommunications infrastructure and high
illiteracy, Internet usage and development are apt to remain sluggish.
The Indian government began implementing economic reforms in 1994, but it has moved ahead at
the speed of a 2400 bps modem. The slow pace of government reforms is due in part to weak
political leadership. Power is held from time to time by coalitions among some 176 political
parties representing a wide range of interests in this huge, diverse country. India has had 13
general elections since it gained independence from Great Britain in 1947, three of them occurring
in the last three years. The bureaucracy, on the other hand, has steadily grown and become more
entrenched, expanding the complexity and reach of its regulations and restrictions.
Although it has long been a stated goal of Prime Minister Vajpayee to convert India into a global
IT superpower, efforts to date have been marginal and fragmented, hampered in part by India's
tradition of self-sufficiency; by its nationalist doctrine of Swadeshi ("putting India first"); and by
protective tariffs and restrictions on foreign investment.
_____
Infosys Technologies' Nandan Nilekani
One of India's most successful IT companies is Infosys Technologies of Bangalore. In March
1999, it was the first Indian company to list on the Nasdaq. Now with net profits having more
than tripled in the past two years and with a market capitalization that makes it the fifth most
valuable company in India by that standard, Infosys is rapidly expanding internationally. Upside
recently spoke with Nandan Nilekani, Infosys's 44-year-old managing director, president, and
COO.
Upside: What is the major challenge for Infosys today?
Nilekani: Globalization is the biggest challenge we face. For example, producing where it is
most cost-effective and efficient and selling where it is most profitable without worrying about
national boundaries. Thanks to advances in technology, telecom, and data communications and
World Trade Organization initiatives, I think true globalization has come in and Indians who have
considerable expertise in the area of software services can receive their legitimate share of the
market.
We now have an opportunity to benchmark ourselves on a global scale. We can compete with
the best companies in the world and add value for our customers in the most competitive
marketplaces. The fact that the Internet and e-commerce are converging is exciting. That is an
area where Indian companies in general, and Infosys in particular, will have considerable
opportunity to show strength. Our vision is to be a globally respected software corporation,
providing the best complete solutions to our customers, employing excellent professionals, and
creating wealth for our investors.
To be more specific, these are our challenges in a global market: Creating a world-class mindset;
becoming more customer-oriented and service-oriented; going from the per-hour services model
to a product- or IPR-based model; accepting competition and competing fairly; collaborating
while competing; having a long-term orientation; enhancing investments in R&D; competing on
quality and productivity rather than on cost alone; attracting, enabling, empowering, and retaining
the best and the brightest professionals; working towards closer interaction with academia;
instilling a sense of patriotism and discipline in our youngsters; and, conducting our businesses
legally and ethically.
Upside: Is government regulation a handicap for Indian companies like yours?
Nilekani:Before liberalization began in 1991, it took six to eight months of delays and 10 to 15
visits to New Delhi to get an import license for something worth $1,500. Today, it takes less than
half a day and a single visit to the Software Technologies Park office, half a mile from our office
at Bangalore, to import a machine worth several million dollars!
In 1991, thanks to economic reform, came a few changes. Firstly, they enhanced the velocity of
decision-making. In other words, we now don't have to go to the government at all for many
things. Secondly, they abolished the office responsible for deciding at what premium you could
list yourself in an IPO. Instead, the market and the company and the lead manager would decide
the premium and whether it's a viable financing option. Thirdly, the government said you could
now hire consultants in the areas of brand equity, marketing, quality, etc., so you could
benchmark yourself on a world platform. The other thing the government did was to abolish duty
on imports used for creating export products.
On the whole, I think the government has made a lot of progress in encouraging business.
URL: upside.com |
