Category Archives: business

Stray thoughts on building sustainable advantages in IT

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– McKinsey Quarterly recently published a report (unavailable without priced membership) about the comparative advantages in IT industry for India and China. The report concluded that Indian IT industry’s economy of scale, established ladership and business practices provides India with powerful advantages. Chinese IT industry – because of its highly fragmented nature – would take a long time to catch up. It seems to have gotten wide coverage in Indian media.
– I recently read news coverage of an interview with Narayan Murthy (Infosys Chairman) in which he talked about the infrastructure burdens of the cities (power, roads, water, transportation) and how these are limiting the growth of IT industry in India (I lost the link).
-International Herald Tribune has a story about how Wipro is trying to widen its talent pool:

” By hiring Prity Tewary, Wipro, India’s third-biggest software exporter, may have found the key to expanding the engineering talent pool that Indian universities produce in a year …. She and 1,100 others, many of them plain vanilla science graduates, are studying for a four-year master of science degree in software, telecommunications and microelectronics on Saturdays. Wipro is paying their tuition, providing them with classroom resources on its sprawling, university-type campuses, and giving them stipends that start at 6,000 rupees, or $137, a month. In turn, the student-workers are helping the company go beyond the limited universe of 184,000 fresh engineers available for hiring as programmers each year.
“We build our own engineers,” says S.K. Bhagavan, who oversees Wipro’s in-house “talent transformation” team of 70 faculty members. In a year, Bhagavan’s team conducts 150,000 hours of training, and that includes coaching in “soft skills” needed by a work force that interacts with clients globally.
… At an aggregate level too, India needs to convert more of its generalist scientific talent into software professionals to sustain the industry’s competitiveness. Of a total population of 7.7 million science and technology professionals in 2000, about half, or 3.8 million, were science graduates. Only 970,000 were graduate engineers, according to an estimate by the Institute of Applied Manpower Research in New Delhi. While India does need more science doctorates to carry out research, it doesn’t need more unemployed physics graduates.
Seven out of 10 employees hired in the last three years by Infosys Technologies, Wipro’s slightly bigger competitor by market value, were fresh graduates. In order to raise the quality of the talent it hires, the Bangalore-based company has released some of the course material it uses to train employees to universities under a $2 million “Campus Connect” initiative.”

– Joel Spolski gave some interesting advise to computer Science graduates in USA a few weeks back (via Kingshuk). They are as applicable for Indian developers:

Would Linux have succeeded if Linus Torvalds hadn’t evangelized it? As brilliant a hacker as he is, it was Linus’s ability to convey his ideas in written English via email and mailing lists that made Linux attract a worldwide brigade of volunteers.
Have you heard of the latest fad, Extreme Programming? Well, without getting into what I think about XP, the reason you’ve heard of it is because it is being promoted by people who are very gifted writers and speakers.
Even on the small scale, when you look at any programming organization, the programmers with the most power and influence are the ones who can write and speak in English clearly, convincingly, and comfortably. Also it helps to be tall, but you can’t do anything about that.

Communication history trivia

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It does give you a sense of proportion:

On Feb. 10, 1825, a young man named Samuel sent a letter from Washington, D.C., to his ailing wife Lucretia: “I long to hear from you,” he wrote plaintively. The next day, Samuel received word that his wife had died the day before he mailed his letter. By the time he got home to New Haven, Lucretia had been buried for three days. The man’s full name was Samuel Finley Breese Morse. He eliminated the possibility that such a tragic irony would ever darken anyone else’s life by inventing the telegraph in 1844.
And on July 14, 1846, a young U.S. Army captain was posted from Charleston, S.C., to a new base in Buena Yerba in the Alta California territory. How long do you think it took him to arrive in what we now call San Francisco, as fast as the U.S. Army could muster? The trip took six and a half months.
The captain and his wife wrote letters to each other every day. In April 1847, he finally got his first letter from her; she had written it in October 1846. When this soldier, William Tecumseh Sherman, became famous for his March to the Sea in 1865, his two priorities were to destroy the railroads in the Southeast and cut the telegraph lines. He knew exactly what he was doing.
In three breathtaking years from 1866 to 1869, travel time from the East Coast to California dropped from six months to roughly two weeks?and nearly everyone who crossed the continent survived. Suddenly, food and medicine could traverse immense distances in time to save lives. Suddenly, today’s New York Times described what happened in Europe yesterday, instead of what had happened two or three weeks earlier. Suddenly, people could learn that it was a matter of life and death for them to get somewhere immediately; and they could actually get there.
Now how could anyone claim, as one venture capitalist did in early 1999, that the Internet is “the greatest invention in the history of the world?” It’s simply an incremental improvement in the high speed at which we already share information by phone and fax and FedEx. It’s a big deal, but the telegraph and the railroad were at least as big.

From Jason Zweig’s speech to Morningstar Investment Conference in June 2001

Economic armageddon, anyone?

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Last month Tyler Cohen threw down a challenge to those painting a gloom and doom scenario for the US economy:

.. The doomsayers are not obviously richer than the rest of us. Many of them (they know who they are!) do not invest on the basis of their gloomy prognoses. And no, buying a house is not enough, I want to see at least five percent of your net worth in puts on T-Bond futures.

While not exactly that, Jeremy Grantham has gone on record on a forum this month as having 10% of his portfolio in S&P shorts.

I have 50% in hedge funds, very cautious ones. Two-thirds are run by [my firm] GMO, one-third outside, 20% in emerging-country equity, 15% in small-cap international equity, 5% in forestry, 10% in foreign bonds. I also have minus 10% in S&P contracts [in other words, he’s short]

The complete transcript is here. (It is accessible only to subscribers right now.But it should become available to all by the next fortnight. It is certainly worth reading in its entirety)
In the same panell Milunovich also noted that he is 70% cash and commodities (someone should have asked him – cash in what currencies) But then Milunovich doesnt have the sort of brand equity that Grantham has ….
They managed to scare the hell out of me!

A simpler explanation

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Tyler Cowen lists reasons for longer lines in some stores. I think there is another reason too:
8a) Some stores do a better job of dicing and slicing customer behavior data that lets them develop more sophisticated plans for the number of registers that need to remain open in a given store/location/ season/time/day. One company headquartered in Bentonville has a bit of a reputation about that! Not everyone is equally good. (In one famous example i read recently, Bank Of America researchers found that if they provide cable Television on top of their teller counters, the perceived wait time would go down by as much as 30% (I think). The cost of HDTVs per counter in that geography was much less that the cost of implementing an EAI project that would have reduced the actual wait time. Increase in revenue per branch because of the TVs were projected to to be higher than the cost for the TV purchases. The TVs were in. The EAI project was thrown out)
b) The point about impulse purchases is related to this. The success of ‘impule buy’ merchandising is not only a function of the instinct of the merchandisers / store buyers, but also (I would say more so) of the sophistication of the business analytics applications used by the retailer.
c) Some stores have buggy software or messed up user interface. We go to ‘Stop and Shop’ and ‘Shoprite’ for our groceries. Shoprite’s software has trouble reading discounts correctly and often brings lines to halt. But Shoprite managment deduced (correctly) that its price sensitive target audience in unlikely to walk away. Stop and Shop is at a slightly higer price point and (probably) made the necessary investment in more state of the art POS software
I think retail is one of the last frontiers. Regular Margin erosions and huge cost of implementations have made the majority of retailers risk averse.

A lousy tax system

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” …. Businesses in Bangalore run their own bus services, contract with private suppliers for drinking water, and install generators to protect themselves from interruptions in electricity supply. The state can’t fix the shambles because it is broke. India’s government debt exceeds 70% of GDP, so more than half its tax receipts go to paying interest.
But the debt isn’t because of excessive spending in the past. India’s government expenditures amount to about 15% of GDP, compared to an average of around 40% of GDP in the OECD. Rather, India’s financial difficulties stem from a badly designed and administered tax system. Rates and rules for personal and corporate income taxes appear reasonable by international standards. Nonetheless, India’s government collects income taxes amounting to only about 3.7% of GDP, about half that in South Korea and the other Asian tigers.
Agriculture in India accounts for about a quarter of GDP, but even wealthy farmers don’t pay taxes. Export-oriented companies in the software and other industries enjoy tax holidays on their profits, although their employees do pay taxes on their personal incomes. Despite reasonable rates, tax evasion is widespread. “

From Amar Bhide’s article on tax system in India

A follow up on my post on US dollar

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Stephen Roach‘s recent comments seem to have started another round of hand wringing (not that he is saying anything that he hasn?t been saying for some time in a more guarded way). Respected investors like Gross and Buffet had been exhibiting a similar belief either through word or deed for quite some time now. (For a gallows humor perspective read this Daniel Gross story on John Snow)
If the subject interests you, Nouriel Roubini?s web page on US current account deficit seems to be a good place for keeping track of the big picture.
The Wikipedia entry on fiat money is nice reading.

A weak dollar and the IT industry in India

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backgrounder in NYT about the impacts of the falling dollar :
“…There are at least three schools of thought on whether a dollar collapse is likely and, if it happens, what it would mean.
One group, which includes the Federal Reserve chairman, Alan Greenspan, contends that …the dollar may well decline in value,.. but the decline would be gradual and would help reduce American trade imbalances by making exports cheaper and imports more expensive. The Bush administration goes one step further, arguing that America’s huge foreign debt simply reflects the eagerness of others to invest here….(Ed: Dr DeLong demolished the treasury department argument in this post).
A second school of thought holds that foreign governments like China and Japan will continue to finance American borrowing and keep the dollar strong because they are determined to sustain their exports and create jobs.
But a third school, which includes officials at the International Monetary Fund, worries about a collapse in the dollar that would send shock waves through the global economy. ….. That group argues that the dollar needs to depreciate another 20 percent against the other major currencies but warns about a run on the dollar that could reduce its value by 40 percent.
A collapse of that size would severely affect Europe and Asia, which ave relied heavily on exports to the United States for their growth. steep drop in the dollar could lead to higher interest rates for the federal government and American private borrowers, as foreign investors demanded higher returns to compensate for higher risk. And it could expose hidden weaknesses among financial institutions and hedge funds caught unprepared.
“There is a school of thought that the U.S. can keep borrowing forever,” said Kenneth S. Rogoff, professor of economics at Harvard University and a former chief economist at the I.M.F. “But if you add up all the excess saving being thrown out by the surplus countries, from China to Germany, the United States is soaking up three-quarters of it right now.”…
For Mr. Rogoff and several other economists, the question is not whether the dollar declines – but how fast and how far the fall turns out to be.”
What does it mean for India?
Bad things obviously. We are sitting on the biggest reserve of US$ in our history. I read a few news stories that suggested that Chadambaram is looking to invest them in infrastructrue projects. (I wish we would use it to pay off part of our debt!)
The IT Industry is probably slightly better prepared for the short term. The big three have long since recognized that future holds a stronger Rupee. They may be able to buy themselves some protection fo the immediate future, . But in long run, it would obviously impact their revenue stream adversely – about half of India’s IT revenues come from USA.
Unfortunately, this is happening at a time when the effects of rising staff cost are also being felt. The bigger firms are increasingly looking towards China and elsewhere to bridge the resource gap. (I should note here that right now English speaking Chinese software engineers are more expensive. But Indian salaries should reach parity soon. On the other hand, the churn rate in China is lower. They also have a larger pool of untapped IT personnel). Add to this, increasing commoditization of many sortware support / maintenance activities.
IT sector in India is staring at serious margin erosion. I think we are looking at a shake up in the industry in the next two to three years. Obviously like all such naval gazing, this could be way off base.
This article in Outlook looked at a different set of parameters and reached similar conclusions.

Ricardo?s difficult idea

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A few days back, Amardeep Singh, (who writes a lively and erudite weblog primarily about South Asia) linked to an intriguing article on NYT describing an upcoming article by Paul Samuelson (apparently) questioning the economic arguments for free trade in services. Obviously questioning free trade is nothing new, but what is unusual about this is that an economist of Samuelson?s stature is writing it.
In the context of the article, Amardeep wanted an explanation of Comparative Advantage theory of Ricardo. A commentator has already linked to the Wikepedia entry on a comment to his post.
As a non-economist, I found this page to have the most lucid explanation. It also linked to ?Principles of Political economy and taxation? in its entirely in both html and PDF. Modern theory of comparative advantage has apparently come a long way since 1817 when Ricardo wrote it, although Ricardo remains something of a patron saint of free trade.
One the reasons people keep taking potshots at comparative advantage theory is because the argument for free trade is built on the mathematical foundations provided by it. You can?t fight the idea for free trade in respectable economic circles without at least euthanizing Ricardo (kind of like you can?t talk about creationism without taking on the elephant in that particular room, Darwin?s theory of evolution).
As early as 1994 Krugman wrote a paper entitled Ricardo?s difficult idea that anticipated and addressed most of the challenges to the comparative advantage theory on the op-ed pages. (It is a little unfortunate that Krugman?s reputation as a political commentator seems to have overshadowed his academic reputation as one of the finest economists of his generation; he is also one of the most lucid writers on political economy for laymen like us). In order to get a context, it is worth reading that particular Krugman paper when reading any critique of Ricardo.
The last prominent op-ed attacking comparative theory that I had noticed was in January 2004; written by Charles Schumer and Paul Craig Roberts. This response by Noam Scheiber in TNR to that article was particularly witty. I think it still remains relevant as a rejoinder.
However, it would be ridiculous to even suggest that Samuelson doesn?t get Ricardo. (Although I do think that Western thinkers often make certain wrong assumptions about outsourcing and Dr Bhagwati in an interview for that article suggested as much). Stanislaw Elam once asked Samuelson to name one theory, which is both true and non-trivial in the social sciences. After several years Samuelson replied that it is the theory of comparative advantage.

“That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.?

I don?t expect to get Samuelson?s scholarly article when it appears (when economists write for other economists, I suspect they take great care to ensure that it is inaccessible to those outside the fold!). Perhaps someone like Edward Hugh or Dr Delong would interpret that article for people like us!

Return of the depression society

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I finished reading Paul Krugman’s Return of Depression Economics a few weeks back. It describes the causes behind the currency crisises and the impacts of the resulting meltdowns that effected most of the South East Asian and Latin American economies in the waning years of the nineties.
At that time, I was not terribly interested in international political economy. Outside of a perception culled from cursory readings of BusinessWeek et al that the ‘paper tigers’ in South East Asia are having a tough time and it is good for them in the long run, I did not really have a clue.
Krugman’s book provides a lucid, witty and frightening perspective of the global economy at that juncture and surprisingly for a free-trader, holds IMF responsible for much of what went wrong. All of us in India and China who are currently going ga ga over our own emerging economies should read up on the emerging economy meltdown of the nineties. It is scary how fragile our national prosperity really is and how little it takes for it to go wrong.