What Detroit Can Learn From Bangalore

A booming city's lessons for a town in decline

Shikha Dalmia from the June 2006 issue

(Page 2 of 5)

More Than Cheap Labor

The conventional wisdom in the U.S. is that companies are flocking to India because its cheap, English-speaking, high-tech labor offers compelling cost savings. India produces 200,000 or so engineers every year, about three times more than the United States. And they typically make about a fifth as much as U.S. workers doing similar jobs.

But India’s technical talent pool has been available for about half a century. Why did the world discover it only in the last 15 years? And why did sleepy little Bangalore take the lead?

Outsourcing began as far back as the 1980s, with U.S. companies contracting out low-end, noncore tasks such as data entry and medical transcription. Although the people performing these jobs were often trained professionals, American companies had little inkling of their true potential until the impending Y2K “crisis” forced them to turn to their Indian partners to reprogram the internal clocks in computers on short order. This event opened up whole new vistas for technical collaboration that are still unfolding.

For instance, Progeon, the outsourcing arm of the Bangalore-based I.T. giant Infosys, began as a call center to deal with customer queries for banks and credit card companies. But soon it began handling all kinds of sophisticated back-office functions, such as processing payrolls and insurance claims. Recently it ventured into knowledge services, offering equity research, credit analysis, fixed income research, bond analysis, economic analysis, industry analysis, and company analysis to investment banks around the world.

Far from being low-end or noncore, points out Vijay Menon, vice president of marketing and communications at Progeon, these services are high-end and essential. “Any service that does not require a direct customer interface or intimate knowledge of local culture or geography is potentially something that can be outsourced,” Menon maintains.

Detroit’s auto companies have jumped on the bandwagon too. The Big Three—Ford, G.M., and Chrysler—and many of their major suppliers have been quietly outsourcing simple computer programming jobs to India for a while. But now they are contracting with companies such as Bangalore’s Harita Infoserve to develop computer models of auto parts and run computer-simulated tests of cars. All three have opened technical centers in India for R&D. And G.M. some time ago handed Reva, a small company in Bangalore, a plum contract to design an electric car. The fastest growing Indian exports right now are not computer programs or software but automotive components, says C.K. Prahlad, an Indian-born professor of management at the University of Michigan business school.

While the outsourcing/I.T. boom that Bangalore spearheaded has spread to other Indian cities, Bangalore remains at the cutting edge of this globalization-of-work trend. It is rapidly moving up the value-added chain so that the foreign companies are now flocking to the city not for its cheap labor, as wages in India are beginning to catch up with those in the West, but for its scientific prowess and business-process know-how. “They came for the cost arbitrage but are staying for the quality arbitrage,” notes Prahlad.

But it was not just serendipity—the Y2K crunch—that caused the West to discover India’s I.T. potential. Nor can you attribute it all to India’s technical talent pool, a necessary but not sufficient condition for the I.T. boom. What was indispensable was the radical restructuring of India’s autarkic economy. Karnataka, the state where Bangalore is located, aggressively took advantage of India’s new climate of economic openness, attracting huge new investments from abroad and, as important, unleashing its entrepreneurs at home.

Lesson One: Break the Regulatory Shackles

It needs to be said at the outset that no government in the U.S., not even Detroit’s, has ever imposed the kind of crushing regulations that the Indian government imposed during the height of the notorious License Raj in the mid-’50s. Key industries—steel, telecommunications, airlines—were nationalized, but even more harmful was the Kafkaesque web of regulations that the remaining private businesses had to endure in the name of ensuring a “rational allocation of resources.”

Every move of private industry, big or small, was subject to licensing. Forget setting up a new plant or a factory. If an enterprise wanted to buy or import equipment, change its product mix, or even produce more than its allotted quota for a product, it had to first obtain permission from the Directorate General of Technical Development, a process that could take years and a small fortune in bribes, points out Gurcharan Das, author of India Unbound and former CEO of Procter & Gamble, India. “Large business houses set up parallel bureaucracies in Delhi to follow up on files, organize bribes, and win licenses,” he recalls.

Confronted with a massive fiscal crisis and the prospect of defaulting on its international debt obligations, the Indian government dismantled much of this ridiculous licensing regime in 1991. In a bid to boost exports to replenish the country’s empty foreign exchange reserves, it also eliminated all import licensing and slashed tariffs on capital goods. Both were relics of India’s import-substitution days, when manufacturers were discouraged from buying equipment from abroad in order to build the domestic industry. This jacked up production costs and made the country’s exports hopelessly uncompetitive.

Trade liberalization was a boon for the I.T. industry, which already had escaped many of the stultifying controls that other industries faced simply because the architects of India’s industrial policy had failed to anticipate its birth. Thus, while there was a ministry to regulate every other sector—steel, banks, insurance—there was no Ministry of Information Technology until 1999. (After India won several international beauty contests in a row, one politician quipped that the country had experienced an I.T. boom and a beauty boom because the state had stayed out of both.) Yet despite the availability of a crucial resource—a ready pool of English-speaking high-tech professionals—the industry was thwarted by the country’s restrictive trade laws.

Once those were relaxed, writes Infosys founder N.R. Narayana Murthy, the man who pioneered India’s I.T. revolution, it no longer took 13 months and 25 visits to Delhi just to obtain a license to purchase a computer. “Or a wait of five days,” he adds, “to get permission from a clerk at the Reserve Bank of India [the government bank monopoly] to decide whether the managing director of a software firm could travel abroad for a day.”