Dollar's fall raises costs of outsourcing to India
Indian technology industry is slowed
Like many U.S. startups, RFQConnect, a broker of shipping and warehousing services based in Santa Clara, Calif., looked to India for its software. The program that runs RFQConnect's Internet auction site was produced by a shop of six developers in Pune, a city in the western state of Maharashtra.
Now, the decision to buy Indian has suddenly gotten more expensive.
As the dollar was plunging against the Indian rupee a few months ago, the Pune programming shop raised its hourly fee from about $22 to $25, an added expense an infant company such as RFQConnect could ill afford.
"It hurts. The profit margin suffers directly," founder Sergio Retamal said. "But it's understandable."
Around the globe, the falling dollar is touching everyone in the business world, from Saudi oil princes to U.S. computer makers, making American goods and services cheaper while raising the cost of foreign products.
One effect that hasn't received much attention is how the dollar's relentless drop is throwing a bit of sand into the gears of India's vaunted technology machine. That movement of technology operations to India is a trend that has emerged as a prime symbol of globalization in recent years.
The reason U.S. companies went to India for technology in the first place was to save money. Workers there in the outsourcing sector earn roughly one-eighth as much as their American counterparts, according to experts on India business. And software development services that might cost $200 to $275 per person per hour in the United States can be bought from an Indian company for $25 an hour or less, those experts note.
The past year, the dollar has fallen from about 45 rupees to about 39. That 13 percent drop, on top of significant pay increases there, has shaved part of the Indian cost advantage, forcing buyers and sellers of technology services to adapt. Economists expect the rupee to strengthen over the long term as India's economy matures.
"We are facing some tough questions. It's not an easy process," said G.K. Murthy, senior vice president with Sierra Atlantic, a Fremont, Calif.-based business software services company that does most of its programming in India.
One ironic bit of fallout from the falling dollar: Big Indian software companies are stepping up their hiring of American tech workers, who have suddenly become a lot cheaper to employ. For example, Bangalore technology giant Wipro Technologies recently unveiled a plan for a software development center in the Atlanta area that ultimately could hire 500 programmers.
To be sure, India's tech sector is still thriving. So far, the dollar's fall hasn't appreciably curbed the readiness of most U.S. companies to use Indian technology services, experts say.
"Even a reasonably sharp appreciation of the rupee doesn't change the fundamental cost difference between the two countries," said Johan Gott, an offshoring consultant with the firm A.T. Kearney.
But the combination of higher Indian salaries and a rising currency is prompting Indian vendors to pay closer attention to their costs and push through small price increases. And U.S. corporations that set up major technology centers in India are finding that their operations there aren't saving them as much money as they expected.
"It's a challenge," said Atul Vashistha, chairman of neoIT, a San Ramon, Calif.-based consulting firm. "They have to send over more dollars than they have in the past."
The giant Indian technology conglomerates such as Tata Consultancy Services, Wipro and Infosys Technologies are hedging their bets by expanding in countries such as China, where costs are lower than in India. They're also building business with European countries whose currencies have stayed relatively stable compared with the rupee. And they're bulking up in the United States.
Tata says it's pushing for greater productivity in India while reviewing where it invests around the world.
"Over the longer period, does it make sense to incur more expenses in the United States?" asked S. Mahalingam, the company's chief financial officer in India. "If the rupee gets down to 37 or 35 to the dollar, then it would make sense to create another development center in the United States."
Meanwhile, Tata says it is imposing price increases of 3 percent to 5 percent on existing contracts and 5 percent to 8 percent on new contracts. The company feels pressure to keep those increases small, because currency movements "are not a great argument for raising prices," Mahalingam said.
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