How bad is IT slowdown? Techies swap e-notes

Rajesh Menon & Max Martin

Bangalore, April 30: First it was the rumours, then came the denials followed by a belated admission. Now come the hard facts about the impact of the economic slowdown in the US on the Indian infotech industry.

The latest e-mail that is doing the rounds of the infotech elite is neither a joke nor a rumour as usual, but a sector research report by a consultancy, the tenor of which is shared by similar reports etched out by global majors.

The blame has been put on Nasdaq, which they say killed the euphoria of the markets back home. According to a recent First Global India research report, we may hate ‘‘villain from yonder’’ - the killjoy that has not let our markets be - this ‘‘tango-ing along’’ is not at all unfounded.

At the same time, expectations on earnings and gross domestic product (GDP) growth are becoming much more realistic following the bad news brought by Infosys forecast. For instance, Merrill Lynch’s estimate of earnings forecast for fiscal 2002 is at 17.8 per cent, much modest than their own forecast of 24.2 per cent two months ago.

Similarly, GDP forecasts are lower at 5.7 per cent and 5.8 per cent for fiscal 2001 and fiscal 2002 respectively, as against earlier figures of 6 per cent and 6.1 per cent. Everybody seems to have come down to earth.

India had a cosy relationship with the US economy, with as much as 70 per cent of software export revenues coming from there. Now, with the slowdown dragging the US market, capital expenditure (capex) is being slashed mercilessly. And the first to be drastically cut are IT investments. Worse still, there are fears of the slowdown spreading to European and even Asian markets. It is a fact, acknowledged by the CEO of IT giant Hewlett-Packard, Carly Fiorina.

As the First Global report says: ‘‘A cascading effect of the US slowdown also cannot be ruled out. Some of the Asian economies, in particular, get a significant portion of the GDP from exports of semiconductor chips, automobiles, electronic goods and computer peripherals to the US. Indian IT companies will feel the impact in the form of some growth retardation in these markets.’’

The drag is being felt closer home. ‘‘We are in constant contact with our clients. Several of them face uncertain economic conditions,’’ said Nandan M Nilekani, MD, President and COO of Infosys. The other IT major agrees. ‘‘This is not an optimistic time,’’ said Vivek Paul, vice-chairman of Wipro.

There is still more bad news — from the telecom slowdown that has happened in the US and Europe. Indian IT companies, especially IT majors, are outsourcing partners of telecom majors like Ericsson, Lucent, Nortel, Cisco and Motorola. ‘‘When telecom service providers like AT&T, Vodafone, Level 3 and France Telecom are in trouble, they may slow down the rollout of new networks and cut spending. This in turn will affect Indian IT companies,’’ says the First Global report.

Then these telecom giants’ customers can delay payment or just go bust, ‘‘a distinct possibility among the European mobile service providers’’. Indian IT companies’ payment may be delayed scenario, the report says.

There are rays of hope, though. The slowdown in the US may throw up greater opportunities for Indian IT service providers, as they always believed. US companies carrying out IT work in-house may find outsourcing as a short-cut to cut costs. ‘‘In order to make this transition simple, fast and accurate, companies with existing track record like Wipro and Infosys will be sought after,’’ says the research report.

But there is a possibility that the billing rates companies per hour-per person could decline. ‘‘If the billing rates stagnate, it could become unremunerative for companies to carry out onsite work,’’ the report says.

The slowdown could also mean a chance and challenge to recruit quality manpower for software service — not just English-speakers. ‘‘Our estimates indicate that Infosys, for instance, would require a minimum workforce of 35,000 software professionals by 2005 to earn revenues of about $1.8 billion,’’ the First Global report estimates.

Statistically, IT majors may have to recruit 3,000-4,000 trained people from colleges, when each college might be producing 50 to 60 deserving candidates only!

Also on the positive side, countries like Japan have only now getting used to the idea of outsourcing. This may grow despite the economic slowdown in the US.