Obama, India and Making Outsourcing Acceptable

[NOTE: It's been a while since we've had a feature on Indian outsourcing, so it's about time we got back in the swing of things via President Obama's visit to the services powerhouse nation.] To many Americans, the Great White Collar Fear is outsourcing. And, nobody represents this phenomenon to many eyes than India. With its formidable array of business process outsourcing firms like Satyam, Tata, Wipro, and Infosys, the very mention of the country strikes fear into middle class hearts. Contrary to the suggestions of less perceptive individuals, the real determinant of whether American jobs are "shipped overseas" isn't skill level but the geographical transferability of the tasks performed. That is, America will still need hairdressers since you need a pair of hands and scissors at the end of the day, but it certainly might do away with computer programmers who can do these tasks more inexpensively in, say, India. Routed at home, Barack Obama thus journeyed to India to paint an image of the commander-in-chief drumming up business elsewhere. What's more, he wanted to get the point across that India's rise bodes well for the United States instead of the more conventional job-stealer stereotypes:

President Barack Obama used his first visit to India to herald the virtues of democracy and trade, telling business leaders that increased commerce was a “win- win” proposition that would create jobs in both countries. “I am here because I believe that in our interconnected world increased commerce between the U.S. and India can be and will be a win-win proposition for both nations,” Obama said in a speech to the U.S.-India Business Council in Mumbai yesterday.

Obama’s first day in Asia, at the beginning of a four- country, 10-day tour, was studded with meetings with CEOs and Indian entrepreneurs to emphasize the importance of job creation. He was greeted at the airport by Boeing Co. Chief Executive Officer Jim McNerney, who briefed the president on doing business in India as they flew by helicopter to central Mumbai aboard Marine One.

“The United States sees Asia, especially India, as a market of the future,” the president said. “We don’t simply welcome your rise as a nation and people, we ardently support it, we want to invest in it.” Obama announced that controls on exports of technology, imposed after India tested a nuclear device in 1998, will be relaxed.

Five days after his party lost control of the House of Representatives, Obama also warned against protectionism. He sought to dispel what he said were perceptions that trade leads to U.S. jobs being outsourced to India, though he acknowledged that as India’s economy continues to emerge, there will “undoubtedly” be competition between the world’s two largest democracies. The mutual benefits of trade “might not be readily apparent” to both Americans and Indians, Obama said. “There are many Americans whose only experience with trade and globalization is a shuttered factory or a job that was shipped overseas.”

In the U.S. there was a caricature of India as a land of call centers and back offices that cost Americans their jobs, he said. While in India, Obama said many see the arrival of American companies and products as a threat to the livelihood of small shop keepers. “These old stereotypes and old concerns ignore today’s reality,” Obama said. “Trade between our countries is not just a one-way street of American jobs and companies moving to India. It is a dynamic two-way relationship that is creating jobs, growth and higher standards in both our countries.”

The two countries’ ties are “not about job creation in just one place,” said Kris Gopalakrishnan, chief executive of Infosys Technologies Ltd. Obama “talked about keeping markets open for both products and services.”

All this lovey-dovey stuff had sentimental ol' me reaching for my hankie [sniff]. Such a sweet guy, that Barack Obama. Or maybe not. This dog-and-pony show aside, the truth of the matter is that Indian BPO firms are being squeezed by the US through costlier work visas for Indian workers and states banning the outsourcing of government IT projects altogether. Still, Indian firms are locating more operations Stateside and hiring Americans to hopefully dispel the notion that they're taking away work and jobs. Still, India's challenges diversifying away from the US--learning Mandarin or Nihongo is likely more difficult than learning English in this former British colony--mean that it cannot make a clean break altogether:

[Obama]'s sure to encounter some harsh words about the current U.S. backlash against Indian outsourcing firms. In August, Congress passed a law raising fees for work visas by $2,000 to about $4,300. The visas, used by foreign IT workers spending time in the U.S., could cost Indian companies up to $250 million a year, says Som Mittal, president of Nasscom, the Indian software industry's lobbying group.

Also in August, Ohio banned the outsourcing of government IT projects to offshore destinations such as India. "There's some level of concern," says P.R. Chandrasekar, chief executive of Mumbai-based Hexaware Technologies. "You don't want other states to do that..."

The worry is that protectionist measures in the U.S. could quickly change the outlook from robust to dreadful in a market that represents 61 percent of India's $50 billion in annual IT service exports. Two-thirds of Hexaware's $215 million in revenue last year came from the U.S. Bigger Indian companies rely on the American market, too. U.S. sales accounted for 57.5 percent of TCS's revenue for the year ended March 2010, and North America made up 66 percent at Bangalore-based rival Infosys Technologies, according to Bloomberg data.

Indian executives know they must diversify, yet they have had limited success generating new business in markets beyond North America and Western Europe. Their presence in Japan is insignificant, says Arno Franz, president of Asia Pacific for sourcing advisory firm TPI. Indian outsourcers have high hopes for China, where they are hiring engineers to work on projects for multinational and local customers. "They are placing most of their bets on China," says Franz. "But it takes years and years." India's major IT companies only employ around 5,000 people in China, according to a Goldman Sachs (GS) report, and generated sales of just $257 million.

That means India's IT companies have to keep building their business in the U.S. while their efforts elsewhere slowly take root. To defuse the outcry about companies shipping American jobs offshore, Indian firms are trying to build up local staffs.

Mahindra Satyam, a Hyderabad-based company that on Oct. 13 announced a contract to design a document-management system for the Kentucky state government's health and family services department, has so-called near-shore operations in 11 countries, including the U.S. It wants to be positioned in the U.S. and elsewhere to hire locally. "Firms are more comfortable with near-shore centers," says the firm's chief executive CP Gurnani. As a result, "dependence on U.S. visas is reducing." About 20 percent of employees are outside India, he says, up from zero in 2006.

The uncertainty surrounding visa rules and state outsourcing policies might accelerate the trend of Indian companies making acquisitions in the U.S. Indian outsourcers have already done $1.9 billion worth of technology acquisitions in North America over the past decade, according to Bloomberg data.

But then a next question comes on the last point: will Americans also discourage Indian acquisitions of US technology firms in the way it does Chinese ones over specious "security" grounds? While you contemplate that question, the White House also has a laundry list of projects the US is supposed to undertake together with India as well as a transcript of the Obamas speaking in Mumbai.