BUSINESSWEEK ONLINE : FEBRUARY 21, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY India Wired (int'l edition) Information technology is lifting the economy, and the politicians are backing it During his eight years in the U.S., Tushar A. Dave was impatient. The physicist and computer engineer had a successful career developing microprocessors, but he longed to ''do something creative'' in India. So in 1988, he and a co-worker from Intel Corp. started a semiconductor-design company in Bangalore. Soon, Dave was feeling the frustrations of being in a backwater of the global economy, frustrations that have driven countless other Indians to take their talents and innovations to Silicon Valley. In early 1998, his Armedia Inc. announced a breakthrough: the design for a chip that instantly decodes the vast flood of digital video in highly compressed TV signals. That way, high-definition programs can be viewed either on new digital TVs or on existing sets. Trouble was, Dave couldn't find a market: Most Indians don't even have color TVs yet. Digital TV has barely arrived. ''Everyone thought we were foolish,'' says Dave, 42. Until, that is, Henry T. Nicholas III, CEO of chipmaker Broadcom Corp., caught wind of Armedia. The Irvine (Calif.) company had the knowhow to compress video images for digital broadcast signals over satellite and cable--but not the technology to decompress them so they could be viewed on televisions. A year later, Nicholas bought Dave's company for $67 million. ''It has been a seamless transition,'' says Nicholas. ''It helped us build the world's most highly integrated HDTV chip.'' BLOSSOM. This sort of ascent from obscurity is occurring on a massive scale across India's thriving information-technology sector. For more than a decade, this giant, impoverished, and inward-looking nation has toiled in the shadows of the global economy. Despite world-class skills and education, India's army of engineers has mostly been used as cheap contract labor, performing the tedious task of writing reams of software code for foreign giants from General Electric Co. to American Express Co. Many thousands of others migrated to the U.S., staffing the labs that produced cutting-edge products for companies such as Intel, Sun Microsystems, and Cisco. Rarely, however, did companies in India generate proprietary technology of their own. Now, India's IT industry has begun to blossom. After showcasing their value by helping foreign corporations debug computer networks in time for Y2K, Indian design and engineering companies are now suppliers of everything from animation work for such Hollywood films as The King and I to the 3-D imagery used in Airbus Industrie flight simulators. Software services outfits Wipro Technologies and Infosys Technologies provide a wide range of Net-related products for foreign companies--from browsers used on new-generation wireless phones to e-commerce Web sites. Just as important, thanks to the efforts of Silicon Valley returnees, India is spawning success stories in chips, computer equipment, and wireless telephony. With the Net fast bridging the once-vast geographical gap that separated the West and Japan from India's immense pool of English-speaking technical talent, the country's IT industry is set to explode. This year, software products should account for $5.7 billion in exports and one-quarter of the growth in India's $400 billion economy, which should expand by nearly 7% this year. Within eight years, predicts a recent study by McKinsey & Co. and India's National Association of Software & Service Companies (Nasscom), India's annual IT exports could hit $50 billion--about 33% of total exports, up from 10% now. Domestic IT revenues could approach $40 billion. That could create 2.2 million jobs--and push India's growth rate near the double digits that many East Asian Tigers enjoyed before the 1997 crash. If so, India may chart a new course for development among emerging markets. Since the 1950s, Asia's dynamos have focused on manufacturing exports. India may be the first to rely on brainpower-led growth. What's more, IT may succeed despite notoriously bad roads, airports, and container terminals. Prospering in IT services ''doesn't require a lot of big capital investment in anything,'' notes Grady E. Means, who heads PricewaterhouseCoopers' global corporate-strategy practice. ''India is for real, for real, for real.'' MAJOR MOMENT. Because its strengths dovetail so nicely with the needs of the West, moreover, India could become a more influential global player. U.S. Ambassador to India Richard Celeste even argues that ''IT has become the driver for our bilateral relations'' with New Delhi. Technology ties will be high on the agenda when President Bill Clinton arrives in India on Mar. 20. Of course, anyone with much experience in India knows it has always had enormous potential--but a maddeningly difficult time living up to it. Time and again, corrupt governments and outbursts of xenophobia or communal violence have soured confidence just when India seemed ready to take off. Also, Internet Age economies require a freewheeling business environment. Although successive governments have made great strides to reduce stifling, socialist-era regulations, many officials are reluctant to relinquish power. A Net-led takeoff also requires ample telecom capacity, computers, and electricity. Yet India has fewer than 22 million phone lines and wireless phones--fewer than one per 100 households. China adds almost that many lines each year. What's more, only four Indians out of 1,000 have a computer, a dismally low rate by world standards. Power shortages are chronic. But India has a free media and democratic institutions, things China lacks. And India is moving to solve its shortcomings. In telecom, the government is dismantling curbs on foreign investment and competition. A half-dozen consortiums are building fiber-optic networks. Satellite communications and TV set-top boxes, meanwhile, will help bring the Net to households that still lack phone lines or PCs. Clearly, the politicians are starting to get it. India's ruling Bharatiya Janata Party, in power since 1998, has made information technology the cornerstone of its political agenda of generating high economic growth while surrendering little sovereignty to multinationals. The BJP also hopes that the spread of IT will unify a nation divided by cultural and economic differences. Local politicians are pushing the IT cause, too. Even before they have adequate roads, water supplies, or schools, many remote villages in India are getting connected. From craftspeople to dairy farmers, rural Indians are starting to turn to the Net to sell goods and monitor prices. The main catalyst for the wiring of India, however, is the surge in global demand for electrical engineering and software of all kinds. As multimedia takes off, the need for such services will mushroom. Indian companies are becoming proficient in chip design, Web-based services, and telecom software, among other fields. While these skills are scarce in the U.S. and Europe, India has them in profusion. The country's universities are pumping out 120,000 engineering graduates a year, and the number reaches nearly 1 million when polytechnics and the country's 3,000 computer-training institutes are included. And nearly 100 such institutes are opening every month. Many Indian outfits are also known for high-quality work. Of the 21 companies worldwide that hold the Carnegie Mellon Software Engineering Institute's highest ranking, 12 are from India--including Motorola Inc.'s Bangalore subsidiary, Citigroup software subsidiary I-Flex Solutions, Infosys, and Wipro. Thousands of India's high-tech graduates have already made it to the top in the U.S. Now, with abundant business opportunities at home, Indians from Silicon Valley to Wall Street are bringing their expertise, connections, and capital back. If this occurs on a large-enough scale, it could do for India what the reverse brain drain from the U.S. did for Taiwan's electronics manufacturing boom. The change of mind-set among bright Indian expatriates has been dramatic. Take Ashish Dhawan, 30, and Raj Kondur, 28. When students at Harvard Business School five years ago, the pair drew up a scheme to launch a venture-capital firm in India to invest in software and Net businesses. But the scene was so primitive then that they concluded ''it would have been a bad professional move,'' says Kondur. So they took New York jobs at Goldman, Sachs & Co. and Morgan Stanley. Then in 1998, Dhawan returned to New Delhi to get married--and witnessed the IT revolution. ''It was the right moment, and it was moving fast,'' he recalls. So he persuaded Kondur to join him. Before they left New York, the duo raised $65 million in commitments for IT ventures from technology hedge fund Digital Century, Microsoft, Goldman CEO Henry Paulson, and Citigroup Co-CEO Victor Menezes, a Bombay native. In November, they launched their fund, Chrysalis. Over the following three months, they visited 150 companies and saw 500 business plans. Chrysalis expects to be fully invested this year, two years ahead of schedule. The dynamism that the IT revolution has unleashed has resulted in the kind of wealth creation most Indians have never seen. By rewarding employees with stock options and then going public on Nasdaq, Infosys (market cap: $27 billion), has created several hundred millionaires. Now, stock options for employees has become the norm in the Indian IT business. India's 120 technology stocks now account for 30% of the Bombay Stock Exchange's capitalization, up from 8% a year ago. Since then, Nasscom says, the value of tech stocks has grown tenfold, to $41 billion. GOING GLOBAL. No wonder there's a gold-rush energy level in many Indian cities. In Bangalore, signs on the street advertise computer courses, while massive billboards try to lure programmers to sign up with new companies. In one office tucked in a leafy residential section, young workers at Net-solutions provider planet-asia.com race up and down the stairs of the spartan office building where they work around the clock. Planetasia is an example of the new, global-minded Indian startup. The outfit's 150-strong client roster ranges from consumer-products giant Unilever to Singapore's eComCFO, which offers Web-based business services for small companies. Its services are fast and cost clients 40% less than in the U.S. ''Their tech guys are full of good ideas, and management is committed,'' says eComCFO founder P. Bala: ''I'm hooked.'' Such homegrown Indian companies are intent on moving up the food chain. Sankhya Infotech in Hyderabad is one of three companies in the world to develop a complete software package that delivers 3-D animation for the flight simulators on which jumbo-jet pilots and crews hone their flying skills and learn new aircraft technologies. Sankhya--''knowledge'' in Sanskrit--devotes one-third of its energies to Airbus. Its specialty is compressing training programs into modules of 64 megabytes or less so they can be sent over the Net. The two-year-old company also has a joint venture with Israel's Magic Software for virtual reality software. Now, co-founder N. Srinivas is working on simulation software packages that cater to different accents and languages. The company will soon go public, and even though it expects to have revenues of less than $5 million in 2001, it already is being extolled as one of the year's hottest issues. In fact, virtually every Indian IT corporation is thinking globally. BPL, India's largest cell-phone operator, with $1 billion in annual sales, develops analog chips that go into cell-phone voice-mail systems sold by Japanese companies such as Panasonic. BPL also designs the sophisticated switching systems used in air-traffic-control systems sold by Harris Corp. of the U.S. At its helm is Rajeev Chandrasekhar, 36. He returned to India in 1991 after spending six years at Intel developing microprocessors, including working on the team that developed the Pentium chip. Under Chandrasekhar, BPL became the first Indian company to introduce e-mail access through the cell phone. The company aspires to be India's top player in the wireless Internet. ''The India-is-terrible cloud has gone,'' he says. The global push is creating India's first major multinationals. Most already have U.S. and European operations. Computer education institute NIIT even has operations in China and Indonesia, where it trains in the local languages. India's largest publicly listed software developer, Wipro Technology, is planning to move its headquarters from Bangalore to Santa Clara, Calif., since most of its customers--ranging from Cisco Systems to new dot-coms--are based in the U.S. After watching its software business grow by 59% annually since 1995, to $220 million, clients now are hiring Wipro's 6,500-strong Indian engineering staff to design or manage Web services. ''There's growing need for IT services as the U.S. goes to e-commerce, and it is not going to be met domestically,'' says CEO Vivek Paul. STARTUP BUG. Such successes are creating models for entrepreneurs. Last year, the number of new tech companies registered with Nasscom quadrupled, to 520. This year, it expects to have more than 1,000. Everyone has the startup bug. High-flying executives at petrochemical giant Reliance and the Indian offices of Cadbury Schweppes PLC and Hewlett-Packard Co. are leaving to start IT ventures. That's a major change in a country where people once aspired to spend their careers with one company or government ministry. Venture money is starting to pour into India as well. From next to nothing in 1998, more than $1 billion, bankers estimate, will flow into India's high-tech industry in the next six months. And if current restrictions on venture capital are eased as expected this month, India could see at least $3 billion in venture money annually. Longer term, the technology boom will have its biggest impact on India's domestic economy. Already, the country has 10,000 cybercafes. Within three years, Goldman Sachs estimates that the number of India's Net users will balloon from 2 million to 70 million. That spells a bright future for consumer e-commerce--and a way for old industries to transform themselves. One of India's oldest textile companies, S. Kumar, is spending $250 million to install satellite-linked Internet kiosks in its 30,000 retail outlets. The idea is to turn them into online shopping destinations. ''We are leveraging our network and our brand name,'' says Chairman Vikas Kasliwal, 43, a Harvard graduate and son of S. Kumar's founder. Some Indian politicians think that the IT revolution heralds a fundamental change in India's feudal political system. Leading the pack is Chandrababu Naidu, the ''laptop minister'' of Andhra Pradesh. He has begun computerizing government offices and local schools, and is luring considerable investment. Since October, six other Indian states have appointed IT secretaries to attract investment. New Delhi also is banking on IT to propel India. ''Our biggest challenge is to create conditions where people can live a good material life,'' says Sudheendra Kulkarni, a close aide of Prime Minister Atal Bihari Vajpayee. ''The IT revolution is central to that vision.'' In a bid to boost PC use by 25% a year, the government is eliminating taxes on hardware and software and is easing the standards for listing Net companies on the stock exchanges. The government is also at last starting to break up the logjams that have held up the telecom sector. New Delhi has restructured its telecom regulatory agency, is breaking up state monopolies, and is talking about letting foreigners own 100% of telecom companies. The changes are badly needed. Foreign telecoms have committed almost $2 billion, but local red tape has prevented them from putting it to work. India has reached a pivotal moment. Just once before, when they achieved independence from Britain in 1947, have Indians had such an opportunity to remake themselves. ''The '80s were the Asian Tigers' decade; the '90s, China's. The IT revolution will make this decade India's,'' says New Delhi economist Surjit Bhalla. Given India's many false starts, it's too early to declare success. But as the benefits of joining the global IT revolution become ever more apparent, India may be ready at last for its moment on the world stage. By Manjeet Kripalani in Bangalore, with Mark L. Clifford in Hyderabad _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS India Wired (int'l edition) ASIAN COVER IMAGE: India Is Pinning Its Hopes on Getting Wired CHART: Exporting India's Brainpower TABLE: Branching Out: Some India IT Stars INTERACT E-Mail to Business Week Online

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