Overseas tech firms to lead '05 growth
By John Shinal, CBS.MarketWatch.com
Last Update: 12:01 AM ET Dec. 22, 2004
SAN FRANCISCO (CBS.MW) -- When Microsoft Chief Executive Steve Ballmer traveled to Bangalore in mid-November to announce partnerships with India's largest technology outsourcing firms, his trip marked a watershed moment for the tech industry.
Not long ago, when the world's largest software company wanted to cement deals with the world's fastest-growing tech upstarts, its executives would have hopped a quick flight from Washington to Silicon Valley.
But the valley is no longer the exclusive home of the world's fastest-growing publicly traded tech firms. As Ballmer recognized, the young companies with the fastest-growing sales and highest-flying stocks are now based outside the U.S.
Even though Google's (GOOG: news, chart, profile) meteoric rise and Oracle's (ORCL: news, chart, profile) lengthy takeover battle with PeopleSoft (PSFT: news, chart, profile) dominated the tech news headlines in 2004, the story that will have the greatest impact on the future of the technology industry was the coming of age of India and China.
"Going forward, our competitors will come at us primarily from the Asian marketplace," Cisco Systems Chief Executive John Chambers told a gathering of analysts and investors in early December.
Chambers, who runs the world's largest maker of networking equipment, (CSCO: news, chart, profile) should know.
His company faces an emerging threat in Asia from Huawei Technologies, a fast-growing Chinese upstart that Cisco sued in 2003, alleging that Huawei used stolen intellectual property in its lower-cost gear.
The suit -- which was settled in July after Huawei agreed to stop selling products that used the disputed technology - showed how seriously big U.S. tech firms view the threat from the East.
But it's not primarily a fear of unauthorized knock-offs that have U.S. tech firms taking notice. Aided by a deep pool of technical talent -- India and China are churning out more than 10 times as many engineers as the U.S. every year - young firms in those countries are competing and winning on a level playing field.
From Indian information technology service firms like Wipro Technologies (WIT: news, chart, profile) and Infosys Technologies (INFY: news, chart, profile), which are changing how companies develop software, to a slew of Internet firms and computer chip makers in China that are posting eye-popping growth rates, overseas tech firms have staked out their piece of the global market.
"The entrepreneurial genie is out of the bottle in China," said Richard Kramlich, a partner with the Menlo Park venture firm New Enterprise Associates, who was among a group of 25 top U.S. venture capitalists to visit China this summer.
"You'd have to be a fool not to recognize it," said Kramlich, whose firm had eight of the companies it invested in complete IPOs in 2004.
Indeed, investors have given a warm embrace to young Asian firms, with some of the top IPOs in U.S. stock markets this year coming from companies based offshore.
Take the Internet job search and help firm 51Job Inc., (JOBS: news, chart, profile). Shares of the Shanghai-based firm, which debuted in late September at $14 a share, have more than tripled to $52.50. Powering the surge is the company's healthy growth rate. Its third-quarter revenue rose 71 percent to $16.3 million compared to the same period a year earlier, while net income more than doubled to $3.1 million.
Other fast-growing Chinese firms whose shares debuted in the U.S. this year include Shanda Interactive Entertainment (SNDA: news, chart, profile), the largest operator of online interactive games in China. Its stock has also risen more than three-fold, to $39.78, after pricing its May 12 initial public offering at $11 a share.
To be sure, U.S.-based Internet firms saw their shares soar to similar heights before they crashed back to earth. And there are signs that the fast-growing Chinese economy has begun to overheat.
If government planners there fail in their efforts to bring the economy in for a soft landing, the fallout could be severe.
"There may be bumps in the road during any six or 12-month period, including the next six months," said Robert Grady, a partner in the San Francisco office of the private investment firm Carlyle Group.
Still, Grady's firm, which opened an office in Shanghai in April, remains bullish on China.
"But there is no question that China is one of the greatest investment opportunities for the next decade and beyond," Grady said.
The huge potential of the Chinese market means that U.S. tech firms will have to take the needs of Chinese customers into account when they're designing products, even as the emergence of Chinese startups will increase competition.
And it's not just China, but India that is producing firms capable of surpassing the innovation of their U.S. rivals.
Take outsourcing firms like Wipro and Infosys, which both count dozens of U.S. tech companies among their customers. Initially, the firms won contracts strictly because the country's pool of low-priced software engineers offered tremendous savings for companies that needed new software.
But now they are offering more-sophisticated -- and profitable -- services and moving up the technology value chain.
"This is no longer about renting people and buildings," said Vivek Paul, chief executive of Wipro Technologies and vice-chair of parent company Wipro Ltd.
The company's deep pool of engineering talent and experience on managing collaborative teams located on opposite sides of the globe has helped it pioneer an extremely efficient way to design, code and test software.
"We have industrialized software development" Paul said, in the same way that Henry Ford industrialized the assembly of the automobile.
For Wipro, being innovative has paid off. Sales for the quarter ended in September rose 47 percent to $431 million from the same period a year earlier. Net income grew even faster, rising 67 percent to $84 million.
Those are the kind of growth rates that big U.S. software firms like Oracle and PeopleSoft -- and their shareholders -- would kill for.
Wipro's stock has climbed 45 percent this year, while its chief rival, Infosys, has gained 39 percent, far outpacing the 7 percent rise in the Nasdaq composite index.
The challenge for the Indian firms now is to fend off a growing push by U.S. firms like IBM (IBM: news, chart, profile) and Accenture, which are making a major push into the market for managing global IT services.
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