Does Apple’s Decision Signal India Outsourcing Peak?
Business Week reported that Apple has nixed its previous plans to build a technical support center in Bangalore, India. We have commented several times on the rapid growth enjoyed by Indian outsourcing firms such as Cognizant. Does Apple’s decision spell a slowdown for these firms?
Our short answer is “no.” However, the remainder of this article will flush out some of the reasons we believe this to be the case.
(A) source familiar with the situation said the decision was mostly cost-driven. “India isn’t as inexpensive as it used to be,” the source said. “The turnover is high, and the competition for good people is strong.” The company feels it “can do it more efficiently elsewhere.”
Demand for Indian labor has been strong, which has naturally led to salary pressures. Furthermore, the Indian rupee has strengthened in response to the high demand for such service exports. However, the higher costs are still far lower than can be achieved in most locations.
Entry-level wages have climbed by as much as 13% annually from 2000 to 2004, while salaries for mid-level managers have registered increases of 30% annually during the same period, to a median of $31,131, according to McKinsey and Nasscom, India’s software industry association…. (But) while wages for software engineers and IT project managers have soared, entry level wages for call-center employees are still an affordable $2,500 or so per year.
It will take many years of 13 percent growth to change the overall cost effectiveness of Indian labor. Even the $31,131 for a middle manager is about a fifth of the salary such a person could earn in the US. So we’re not yet talking about price parity. Furthermore, this decision did not relate to IT projects but to technical support.
(Apple) never had any intention of outsourcing any high-end software development and proprietary technology research away from the company’s Cupertino headquarters or operations nearby, according to the source familiar with Apple’s operations in India.
Companies almost never outsource the source of their competitive advantage. Proprietary technology is kept under lock and key, closely watched over by managers at the company headquarters. Apple has no intention of outsourcing its software design, regardless of where the outsourcing firm is located. One of the things that has driven demand for outsourcing is that by moving non-critical support and maintenance offshore to lower-cost facilities, the local skilled labor can be redirected to higher-value projects. This shift has only begun and will take years to fully implement.
Apple had only a staff about 30 at its Bangalore operation, but “you need economies of scale, say 500,” to generate huge savings for a company, says Sunil Mehta, vice-president of Nasscom.
If anything, this suggests that demand for outsourcing providers will remain strong. Such firms have the economies of scale to serve all of the firms that don’t. If Apple has a need for fewer than 500 Indian employees they are likely to turn to an outsourcing firm rather than do the hiring themselves.
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